<http://www.economist.com/surveys/displaystory.cfm?story_id=9466874> IRAN The big squeeze
Jul 19th 2007
>From The Economist print edition
But sanctions are not yet painful enough to change Iran's nuclear policy
"I PRAY to God that I will never know about economics," President Ahmadinejad once said when questioned about apparent contradictions in his economic policy. The Lord appears to have answered his prayer. On his watch, the world oil price has soared from $62 a barrel when he was elected in June 2005 to $72 a barrel in recent weeks. Iran, which has a young, well-educated workforce, along with the world's second-largest reserves of both oil and gas, should be on a roll. Instead the economy is struggling. Is this a weakness the world can use to dissuade Iran from its nuclear ambitions?
Since almost all official economic statistics are suspect, measuring the performance of the economy is hard. But Afshin Molavi, an Iran-watcher at the New America Foundation in Washington, DC, calls slow economic decline "the untold story of the Iranian revolution". The economy is showing respectable growth of about 5%. But it is recording high and rising unemployment and inflation. The government puts unemployment at around 10% but private economists think it is twice as high—and that many of those with jobs have to take second ones to make ends meet. Mr Ahmadinejad's government claims to have reduced the rate of inflation. In fact it has almost certainly gone up: guesstimates by foreign embassies in Tehran put it as high as 25%. Meanwhile, foreign investment is puny—and falling (see chart 2).
Chart 2 <http://www.economist.com/images/20070721/CSR532.gif>
One reason for these economic failures is the economic punishment America has meted out since 1979, and which it has been tightening ever since. These sanctions prevent American companies from helping Iran to develop its oil resources, block most Iranian exports to the United States and restrict certain Iranian imports from there. American financial sanctions also hamper Iranian banking (foreign visitors cannot use credit cards and must stuff their suitcases with dollars).
The price of economic ignorance
But there are two bigger reasons for Iran's underperformance. One is the lopsided structure of an oil-based economy in which a corruption-riddled public sector dwarfs private business. The other is incompetent economic management, especially by Mr Ahmadinejad.
Oil revenues bring in some 80% of export earnings, but even with a high world oil price the government finds it hard to pay its bills. Tough buy-back terms have deterred foreign investment in the oilfields and hampered production: a quarter of a century after the revolution, Iran is pumping only two-thirds as much oil as before. Meanwhile the government operates a vast, price-distorting system of subsidies for food, energy, housing, bank credit and much else. According to the IMF, energy subsidies alone reached 17.5% of GDP in 2005-06, and total subsidies amounted to 25% of GDP. A Consumer and Producer Protection Organisation keeps price controls on cereals, sugar, baby milk, fertilisers and pharmaceuticals, paper and agricultural machinery. This edifice of subsidies places huge demands on public spending and would collapse if it were not for the oil revenues (see chart 3).
Chart 3 <http://www.economist.com/images/20070721/CSR924.gif>
Among the maddest of the subsidies is that on petrol. Even after a recent 25% price hike it is still the cheapest in the world, at 11 American cents a litre. That has encouraged an annual 10% increase in consumption, plus impossible traffic and choking pollution in all of Iran's cities.
Selling petrol so cheaply is hardly an incentive for domestic refiners to raise production, so Iran has to import more than 40% of its petrol and other refined products. Much of this is smuggled back out (allegedly by the Revolutionary Guards) to be sold at a higher price. In short, Iran spends a fortune subsidising cheap petrol not only at home but also for consumers in neighbouring countries, wasting money it could otherwise have spent on increasing its flagging oil production. The government's decision last month to introduce rationing provoked violent disturbances. Since many Iranians use private cars to top up meagre incomes by becoming unofficial taxi-drivers, the consequences of this measure will be widely felt.
The IMF calls Iran's economy "state-dominated". And how. Revolution and eight years of war have made for vast government. In most sectors state-owned companies or the opaque quasi-state foundations known as bonyads crowd out private businesses. Agriculture, internal trade and distribution are mostly in private hands. Even so, estimates of how much of the economy the government controls range between 65% and 80%.
Now there is talk of large-scale privatisation to attract investment and improve productivity. Some privatisation has even taken place, though it often entails little more than shuffling assets from one state sector to another. In theory, the pace of privatisation should pick up, thanks to a new constitutional amendment that envisages moving all but 25 state-owned companies into private ownership within eight to ten years (though the government will keep a 20% stake). Ayatollah Khamenei, the supreme leader, was a critic of nationalisation in the 1980s and is said to be enthusiastic about the change. The impediment will not be an absence of political will at the top but the hesitation of investors.
Iran's rigid labour laws will make it hard for new owners to squeeze any profits out of the bloated companies coming to market. Investors may also fear that those who owned these firms before nationalisation will want their assets back; and wonder who, in the absence of an established pro-business political party, can protect them from future arbitrary interventions by the state. The likely upshot is that a fair amount of privatisation will take place, but not at prices that will rescue the public finances, and not in a manner that will do much to boost productivity.
The prospects for serious reform of the economy have been dented further by Mr Ahmadinejad's erratic management of it. In some ways President Khatami left him a decent economic legacy. The reformist period saw a dose of market-oriented liberalisation, a currency reform that moved the rial to a managed float and the passage of liberal laws governing foreign investment. By 2004 many analysts felt that the economy was heading in the right direction, provided that something could be done to reduce energy subsidies, shrink the size of the state and tackle corruption. But although Mr Ahmadinejad campaigned on a platform of economic reform, he has instead caused immense harm by an unpredictable, populist and often dotty ("heterodox", say his kinder critics) approach to policymaking.
His idea of privatisation, for example, has so far appeared to consist of giving "justice shares" to millions of citizens, without specifying how the value of these securities is to be determined. Local investors get discouraged when the president seems actively hostile to the very notion of a stockmarket: during his election campaign Mr Ahmadinejad's denunciation of "speculators" sent share prices tumbling. It is no surprise that many businessmen prefer to move their money offshore. Dubai is a favourite destination: Indian estate agents there are said to be learning Farsi, the better to sell apartments to rich Iranians seeking a haven for their wealth. Iberpress Tucking in, but with no thanks to Ahmadinejad
The president's behaviour has maddened critics and alienated former friends. He tours far-flung provinces to announce unaffordable spending plans, apparently on the spur of the moment. Some Iranians have benefited from his handouts and from the cheap loans he has ordered the banks to offer. But he has sprung expensive surprises on his country, ranging from cancelling daylight-saving time to an abrupt increase in the minimum wage (which had to be scaled back when it caused a leap in unemployment).
The president has also wrought havoc inside the economically important Management and Planning Organisation by replacing experienced technocrats with friends from his Revolutionary Guards days. Two months ago he astonished the central bank by ordering banks to slash interest rates below the rate of inflation. Some Iranian economists think this was a favour to the Revolutionary Guards, who have borrowed heavily to expand their commercial activities since his election.
Having promised to root out corruption and "put the oil money on everyone's dinner table", Mr Ahmadinejad seems destined to fail. Indeed, his mounting economic woes at home may help to explain the attention he has devoted to the nuclear confrontation with the West and threats against Israel. But hard-pressed Iranian workers and consumers have listened to nearly three decades of revolutionary slogans and are not easily distracted from worries about jobs, rents and inflation.
Ask a passer-by in Tehran about Palestine and he will express his sympathy for the put-upon Palestinians—before volunteering that Palestine is a problem for the Arabs to sort out and that Iran has more pressing troubles of its own. And so it does. Every year some 800,000 young people join the labour market, and by some accounts only half of them can find jobs. Not surprisingly the country faces a brain drain: an estimated 150,000 university graduates emigrate every year.
Iran, in short, has some serious economic troubles. Might a few well-aimed kicks persuade the regime to give up its nuclear plans? In themselves, the two sanctions resolutions passed so far by the Security Council do not amount to much: they mainly ban trade in some nuclear and military equipment. Their psychological impact on would-be traders and investors is another matter. And combined with the financial squeeze America is applying separately, the result is genuinely painful.
America is using its heft in the world's financial system to do some effective bullying. In 2005 President Bush issued an order authorising the Treasury and State Department to target "key nodes" of Iran's WMD and missile-proliferation networks, including their suppliers and financiers. Since a firm or entity that is designated under this order can be denied access to American financial and commercial systems, this makes for a potent weapon. For example, America has accused one Iranian bank, Bank Sepah, of providing financial services to Iran's missile programme and another, Bank Saderat, of providing funds for Lebanon's Hizbullah, which is treated as a terrorist organisation in America. The banks deny the allegations, but have found themselves isolated.
Chart 4 <http://www.economist.com/images/20070721/CSR528.gif>
The fate of these two banks has not gone unnoticed by financial institutions generally. America's Treasury Department says it is working with more than 40 banks around the world to "discuss the risks" of doing business with Iran and to identify customers "who could harm their reputations and business". Since in a country such as Iran it is hard to know exactly who your ultimate customer is, this has banks' compliance officers running scared. It hurts, but not enough
The Treasury Department boasts that UBS has cut off all dealings with Iran, that Credit Suisse and HSBC have reduced their exposure, and that other banks are refusing to issue letters of credit. Government export-credit programmes from Germany, France and Japan are said to have fallen sharply. Iran has responded by moving out of dollars, and many foreign banks that have cut off business in dollars continue to conduct transactions in other currencies. But the Treasury Department is now gunning for them too.
So are sanctions "working"? The punishment so far, and the fear of more to come, has scared off foreign investors and pushed up the risk, cost and inconvenience of doing business in Iran. One notable example was last year's decision by a Japanese energy group, Inpex, to abandon plans to invest $2 billion in developing the Azadegan oilfield. Raising foreign money for big infrastructure projects is becoming harder, and those European banks still operating in Iran admit privately that their business is drying up. Although some big foreign firms continue to come in, attracted not least by the prospect of a big, undeveloped market devoid of American competitors, many others have either gone home or left behind skeleton offices in the care of local employees.
Nonetheless, it is not clear that sanctions are even close to imposing the sort of pain needed to alter the government's nuclear behaviour. They have pushed down living standards, but war and revolution have taught Iranians how to muddle through. An economy like Iran's, dominated by the government budget, is better able than most to take the travails of the private sector in its stride. And since energy exports make up almost half the government's revenues, high world prices (kept high in part by the tension over Iran) have compensated nicely for much of the damage sanctions have inflicted. Besides, many powerful Iranians prosper through their control of a relatively closed economy. The openness the world proffers as an "incentive" to give up the bomb strikes at some of this group's vested interests.
A big fall in the world oil price, or sanctions aimed directly at Iran's imports of petrol or exports of oil, would have a devastating impact on its economy. Some American congressmen are talking about a ban on importing petrol to Iran, but that would be very hard to enforce. A fall in the world oil price looks unlikely, and if Iran's oil was stopped from reaching the market prices would rise higher still (except in the improbable event of Saudi Arabia pumping enough extra to fill the gap).
In the longer run, Iran faces a different sort of vulnerability. It is finding it hard to acquire the foreign technology and capital it needs in order to boost production of its fast-depleting oilfields and realise its vast potential as an exporter of natural gas. Without this investment, all of Iran's big plans for a prosperous energy-fired future would be put in jeopardy. But Iran still has a few years to sort this out, whereas its mastery of uranium enrichment may be only a matter of months away.
<http://www.economist.com/surveys/displaystory.cfm?story_id=9466776> IRAN Khomeini's children
Jul 19th 2007
>From The Economist print edition
Not happy, but probably not eager to become Westernised either
AN EXOTIC country that is viewed mainly through the filter of its foreign policy and its televised public rituals is liable to be misunderstood. So it is with America in the eyes of Iranians and with Iran in the eyes of Americans. Eyevine Not talking about a revolution
Iran took an American embassy hostage. It may have had a hand in the bombing of the American marine barracks in Lebanon in 1983 and it stands accused now of helping to kill American soldiers in Iraq. It is not surprising that many Americans consider Iran a bitter foe.
Nor is it surprising that Iranians return the favour. America organised the coup against Mossadegh, supported the shah, helped Saddam in the Iran-Iraq war, invaded two of Iran's neighbours and imposes sanctions on Iran. The Iranian regime considers America an implacable foe and routinely denounces it, in political speeches and organised rituals such as those fiery Friday prayers, as the Great Satan or "the Global Arrogance".
And yet, as this special report has already noted, many of the smartly dressed young people of Tehran seem quite unmoved (some are amused) by the official hate-mongering. They do not admire George Bush. But to judge by dress, behaviour, viewing and consumption habits—and even more by the regime's terror of a creeping "Westoxification"—they do admire at least some of America's ways.
Not surprisingly, the attitudes of the young are a source of anxiety to the revolution's managers. Young people and especially university students played a significant part in bringing down the shah, and now there are many more of them. The population has doubled since 1979, which means that two out of three Iranians are under the age of 30 and fewer than one in three can remember the revolution. Young Iranians are also much better educated these days: literacy is near-universal and the student population has soared. The demographic surge has been accompanied by rapid urbanisation: seven out of ten Iranians now live in cities.
The young suffer disproportionately from the regime's failures. In 2006, by the government's own reckoning, nearly every other Iranian between the ages of 25 and 29 was unemployed. A lack of jobs is no doubt one reason for the prevalence of heroin addiction and other social ills. In this nominally austere society, alcohol is consumed widely, even though it is illegal for Muslims. Prostitution is widespread.
Will the disaffection of the young bring down the regime? That is what those outsiders who see the Islamic Republic as a crude despotism lacking popular support sincerely hope. But how many Iranians see their regime that way? It seems highly likely that if the government continues to thwart the aspirations of young voters, they will punish it at the next election. Yet it would be a terrible mistake to assume that every youthful, fast-urbanising country facing economic hardship must be eager to throw off its regime and embrace Western values.
Iran remains a strongly religious society. Though the proportion of city-dwellers has soared, they are different from the atomised individualists of Europe or North America: the extended family and traditional social networks have survived even in teeming Tehran. And though the government is not popular, most Iranians seem to accept its right to govern. One sign that millions continue to have faith in the country's institutions is that more than 60% of eligible voters turned out in the presidential elections of 2005, at a time of deep cynicism following the blocking of President Khatami's political reforms. The difference a year makes
A year ago an American firm, Zogby International, polled Iranians on a range of issues by phoning in from abroad. At that time 41% of those polled said the country's top priority should be the economy, 27% thought developing nuclear weapons was more important and only 23% put more freedom at the top of their list. Those who wanted Iran to become more religious and conservative (36%) outnumbered those who wanted it to become more secular and liberal (31%). However, in a similar poll last month by "Terror Free Tomorrow", an American think-tank, 88% saw the economy as the top priority, compared with 29% who listed nuclear weapons. And 79% said they would prefer a democratic system in which all leaders, including the supreme leader, were elected by a direct popular vote.
Given that Iranians are naturally wary about what they tell strangers on the phone, these are striking results. They underline the regime's economic vulnerability. What they do not prove is that Iran is ripe for counter-revolution.
President Ahmadinejad may not be much of an economist, but he is a shrewd politician. He may not appeal to the gilded youth of north Tehran, but he was able in 2005 to scoop up the votes of the traditional lower and middle classes. Many of his policies, such as cheap home loans for new couples, are aimed at consolidating the support of this group. For millions of young Iranians in the Revolutionary Guards, the Basij militia or government service, the revolution remains an economic provider as well as a moral compass.
For how long? Iranians gave the reformists two terms before deciding that they could not deliver. If President Ahmadinejad fails them, he too will eventually have to go—and his failure may inflict collateral damage on the supreme leader and the conservative establishment that backed him. In the longer run, Iranians may conclude that the whole theocratic system might prove unworkable. But one thing that could help to save it would be a military attack by the West. Young Iranians may grumble, wear jeans, drink Pepsi and watch football. But they are nationalists whose instinct in the face of external attack will surely be to rally around their leaders, no matter how flawed. -- Yoshie
