The Economy: A Future Less Bright

A year ago, Iran's economic future looked relatively bright. The country's religious leadership had taken an isolationist, hard-line stance on most political and strategic issues. But its views on the country's economy have seemed more pragmatic. In fact, there's been a cautious consensus that the economy needs to be cracked open to boost growth and create jobs. Iran has 68 million people, and 30 percent are under the age of 14. That youth bulge is sure to exacerbate an already troublesome unemployment problem over the next decade, if GDP growth cannot be accelerated.

In recent months, however, Iran's gradual economic-reform movement has ground to a halt. Booming oil profits have fueled GDP growth of 6.5 percent in each of the past two years--and masked the need for liberalization. The crop of conservative mullahs elected to Parliament a year ago has turned out to be far less pragmatic than originally hoped. The new legislators have adopted a nationalistic, populist economic stance that's more hostile to foreign investors and aims to improve standards of living in the run-up to this summer's presidential election. Recently deputies ousted the reform-minded Roads and Transport minister for securing a deal with a Turkish-Austrian consortium to operate the new Imam Khomeini International Airport. Experts say Tehran is letting a golden opportunity slip away. "The current period of high oil prices... provides an opportunity to implement major reforms that would put the economy on the long-term path of high growth and job creation," the IMF said in an August 2004 report. Without more structural reform, the IMF warned, Tehran could find itself in tough circumstances when oil prices fall.

Iran's previous Parliament seemed to understand the problem. It passed legislation designed to boost foreign investment in non-oil industries, even offering majority control of Iranian enterprises. It also --passed a new five-year economic plan aimed at revving annual growth up to about 8 percent. The plan called for opening key sectors to private competition, including banking, telecoms and railways, and enhancing foreign trade. "Iran needs a more efficient and active private sector," says Howard Pack, a professor at the Wharton School at the University of Pennsylvania. "The pumping and processing of oil doesn't create a lot of jobs." The new economic blueprint received important backing from the Expediency Council, a judiciary body headed by former president Hashemi Rafsanjani that mediates disagreements between the Parliament and the powerful, nonelected Guardian Council. "[We] prefer not to have these industries remain under state monopoly," the Expediency Council declared.

Some observers thought the new conservative Parliament would continue the reform trend and bring some clarity to Iran's often ambiguous economic policies. That has happened--but not in the way many had hoped. The new Parliament is largely opposed to reform, and has actively sought to undermine the new economic plan and foreign-investment law. Last year, two days before the election, the government announced a watershed $3 billion deal with Turkcell, Turkey's largest mobile-phone company, to build and run the first private cellular network in the country. It was to be the biggest foreign investment since the 1979 revolution. But two weeks ago, a Parliament-appointed special commission, citing security threats, ordered Turkcell to reduce its stake in the telecom venture from 70 percent to a noncontrolling 49 percent. Turkcell responded by threatening to leave the country, though the firm is still reviewing its options.

A Turkcell pullout could prove disastrous for Iran's long-term prospects. "Investors can deal with difficult investment environments if they know the risks involved," says Ben Faulks, a Middle East analyst with the London-based Economist Intelligence Unit. "The problem is when the ground rules change." Adds Ali Ansari, an Iran expert at St. Andrews University in Scotland: "There's a serious problem with this new Parliament. It's got a hard-line, authoritarian bent, and its economic views are not terribly helpful."

According to the International Monetary Fund, Iran needs to overhaul its "weak" financial sector, reform its labor market, hasten the sale of state companies, enhance government transparency (Iran does not publish foreign investment figures, for example) and tighten fiscal and monetary policy, which is contributing to a 15 percent inflation rate. Yet the country lacks a clear consensus to do so. Conservatives are factionalized and generally fall into three blocs--each with a different economic philosophy. There is a traditional right-wing group--led by National Security Council Secretary Hassan Rowhani and former foreign minister Ali Akbar Velayati--whose business orientation is laissez faire, though its views might better be described as mercantilist. Its members frequently benefit from the country's many monopolies and large charitable organizations, which themselves own many firms. But they believe they would do even better in a more liberalized and open economy.

The second bloc, led by Rafsanjani and the Executives of Construction Party he founded, is more market-oriented. It favors a technocratic approach to economic growth along the lines of China or Southeast Asian countries--more foreign investment, more privatization and more integration into the global economy. The third group is the "new right," called the Abadgaran. It's a broad coalition of younger, second-generation revolutionaries, who dominate the current Parliament. Though classified as conservatives because of their allegiance to Iran's Supreme Leader Ayatollah Khamenei, they espouse populist economic policies centered on social justice and the common good. They tend to view entrepreneurs as "greedy," and are suspicious of international trade. One of the Abadgaran's leaders is Tehran Mayor Mahmud Ahmadinejad, who occasionally dons the outfit of city street-cleaners and helps them sweep the capital.

If Rafsanjani is elected president this summer, as many expect, he may clip the wings of the zealous parliamentarians. But for now, the backtrackers rule--and Iran's economic insularity mirrors its diplomatic isolation. It seems a shortsighted strategy, and one that's sure to keep Iran from realizing its economic potential for years to come.