<http://online.wsj.com/article/SB117944654831706926.html?mod=googlenews_wsj> Iran Studies China Model To Craft Economic Map Nation Aims to Keep Political Control And Lift Economy By ANDREW HIGGINS May 18, 2007; Page A4
TEHRAN, Iran -- Iranian officials are looking to China for ideas on solving a riddle that has bedeviled strong-fisted governments the world over: How does a state loosen its suffocating grip on the economy without losing political control in the process? KEY TO SUCCESS?
• What's Happening: Iran is looking to China for keys to unleashing its economy without losing political control.
• The Impetus: Under pressure from economic sanctions and its own revolutionary legacy, Iran is squandering its oil revenue.
• The Quandary: President Ahmadinejad has aggravated the sense of policy paralysis.
On a tour of China late last year, a delegation of Iranian officials and members of parliament visited Shanghai and Shenzhen, two boom towns that exemplify China's approach. Adel Azar, head of the Iranian parliament's economic committee and a member of the 30-strong study mission, says he was shocked by the contrast between dynamism in China and immobility in Iran, a country with just one-eighteenth as many people as China and much more gas and oil wealth.
"We started our debate about private business about the same time as China," says Mr. Azar, referring to discussions in both countries in the early 1980s on how to best balance state and private sectors. "We argued. They just got on with it."
Tehran has grown more eager for an clear direction in recent months as international pressure to dismantle its nuclear program has heightened the sense of crisis and policy drift. Economic sanctions have squeezed Iranian banks, limited access to technology and damped foreigners' already limited enthusiasm to invest here.
Though hugely different, both the People's Republic of China and the Islamic Republic of Iran are creations of revolution -- Communist and Islamic, respectively. Both proclaim revolutionary ideologies discredited by reality. But while China has, despite periodic flurries of rhetoric, abandoned the economic principles of its 1949 revolution, Iran still clings to its own younger, Islamic revolutionary legacy.
Since the overthrow of the shah in 1979, Iran has struggled to craft an "Islamic" economic model that mixes social justice, religious values and growth. The result is a ramshackle oil-financed system that respects private property on the margins but is state dominated. The state and its affiliates control more than 75% of the economy. Subsidies for energy, food and other items amount to more than a quarter of Iran's gross domestic product, according to the International Monetary Fund.
"The economy is going to hell," says Saeed Laylaz, an economist who advised the former reformist government. "There is only one economic model here -- the oil model." Iran's economic output grew more than 5% last year, largely on the back of high world prices for its energy exports, but this isn't much better than the country's growth rate when oil prices were far lower. Economists say this shows the government is squandering the oil windfall in nonproductive ways.
Mr. Azar, the member of parliament who visited China, stands at the opposite end of the political spectrum from Mr. Laylaz, but agrees the economy is in trouble. "We are, of course, not satisfied with the general state of our economy," says the conservative legislator.
But there is no agreement on what to do about it. Some look to a Chinese-style solution with private enterprise steered by a strong state hand. A rival view -- which had the upper hand before President Mahmoud Ahmadinejad's election in 2005 -- advocates a more open, market-based approach.
On paper, at least, Iran's economic strategy is more or less a standard one for a developing resource-rich nation: trying to reduce dependence on oil and expand its nonenergy sector. The country is having the same lack of success in that endeavor as most other oil-dependent states. But Iran's hope of getting beyond this stage is further complicated by the ideological baggage of a revolution that, in theory at least, puts religion at the core of decision-making.
Mr. Ahmadinejad, who came to office promising to "put oil revenue on the dinner table of every Iranian," has aggravated a sense of policy paralysis with a mix of populist economics and anti-Western theatrics. His government reluctantly backed calls by parliament for reductions in energy subsidies -- which have made gasoline one-fifth as expensive per liter as mineral water -- but devised an elaborate high-tech, low-efficiency rationing system that seems designed to fail.
Iran's nuclear program, meanwhile, has led to a strengthening of sanctions that already limit the foreign investment and technology Iran desperately needs both to develop its biggest assets -- oil and gas -- and to expand a tiny private sector. The United Nations Conference on Trade and Development pegged nonenergy, direct foreign investment in Iran at just $30 million in 2005, the last year for which figures are available, compared with $9.6 billion for Turkey, which has about the same population but a far freer economy.
In a recent speech, Mr. Ahmadinejad boasted that Iran's foes "are worried that Iran will become a model for other nations." That's true to the extent that its nuclear program has led Saudi Arabia, Egypt and others to consider following suit. But in economics, Iran is widely viewed as a model of failure. Even Hezbollah, the Lebanese militia and social movement that ranks as Iran's keenest foreign fan, takes a dim view of its patron's economic example, says the head of Hezbollah's policy think-tank in Beirut, Ali Fayad.
While presenting itself as a beacon for the Islamic world, Tehran has hunted abroad for ideas on how to fix its dysfunctional economy.
"There has been lots of talk about economic models since the revolution. First, there was the Korean model, then there was the Chinese model, and now there is also the Malaysian model," says Shahriar Alesheikh, an economist who runs a trade-exhibition center in Mashad, Iran's second-largest city.
None of these foreign templates have really taken hold. This, says Mr. Alesheikh, the Mashad economist, is because they "separate religious issues from development issues. That is not going to happen here."
Backers of change look admiringly at atheist China's ability to get beyond revolutionary cant. Conservatives, meanwhile, take heart in Beijing's ability to resist political change.
"The thing they like about China is that they think it shows you don't need democracy to grow," says Djavad Salehi-Isfahani, an expert on the Iranian economy at Virginia Tech University in Blacksburg, Va. But, he adds, Beijing's example "doesn't apply because Iran is not a low-wage economy. Therefore, it is not able to export" at competitive prices like China.
At the root of Iran's economic paralysis is a system of leadership in which power is divided among an elected government, now headed by Mr. Ahmadinejad; an elected parliament; and the Supreme Leader, Ayatollah Ali Khamenei, a clerical appointee. This contrasts with China, where power is concentrated in a single body, the Communist Party. Iran's fractious power centers all profess loyalty to the Islamic revolution, but often disagree on what this means in practice.
Last year, Mr. Khamenei obliquely chided Mr. Ahmadinejad for his handling of the economy and called for more progress on privatization in keeping with Article 44 of Iran's constitution, which calls for a mixed economy composed of state, cooperative and private ventures. Mr. Azar, the legislator, says the Supreme Leader's intervention opens the way for a long overdue expansion of the private sector. "We have to reduce the role of the state," he says.
But the opening is likely to be very narrow. Article 44 mandates that heavy industry, foreign trade, large mines, banking, insurance, energy, radio, television, post, telephone, aviation, shipping and various other spheres all remain under government control. This leaves little room for private enterprise.
"They don't want to lose control of the economy because they believe -- and they are right -- that they will lose their political domination if there is any decrease in the government's share," says Mr. Laylaz, the economist who favors liberalization.
Indeed, Mr. Ahmadinejad's economic policies so far have been dominated by measures that increase economic dependency on -- and loyalty to -- the state. For example, he set up a national network of credit agencies called the Kindness of Imam Reza Fund, whose job is to give cheap credit to newlyweds and others in need.
Economists view the loans as thinly disguised handouts and warn that the government's largesse, made possible by a flood of oil-generated cash, is fueling dangerously high inflation, now heading toward 20%. Unemployment, meanwhile, remains stubbornly high. Official statistics put it above 11%, with the rate for young Iranians exceeding 20%.
The majority of Iranians have little interest in theoretical debate about which model might help. But they, too, often seem torn between a desire for protection from the state and a desire for more private enterprise. They curse the government as corrupt and inefficient, but also expect it to provide cheap gasoline, to shield them against foreign competition and to confront the rich, whom they view as corrupt.
After attending Friday prayers in Tehran, Mohammad Mohseni, a private trader of home appliances, grumbled that Mr. Ahmadinejad hadn't delivered on his economic promises. But his main gripe is with cheap imported goods. "I haven't heard anyone saying that they have been helped by Mr. Ahmadinejad," he says. "We have got nothing."
Write to Andrew Higgins at andrew.higgins at wsj.com -- Yoshie