Iran’s President Is Betting Billions on Economic Reform

Tehran worker

By Reese Erlich

VICE News, April 19, 2016

 

Remember the $150 billion windfall from the nuclear deal that US hawks said Iran could use to sponsor terrorism? Turns out the Iranian government has brought back $7 billion, and most of it will be used for development projects, according to Iranian officials and economists — projects that the country, reeling from low oil prices, sorely needs to restart economic growth.

 

During the height of the US debate on the nuclear agreement last year, enemies of the agreement, like Republican presidential candidate Donald Trump, argued that Iran would receive $150 billion when Western sanctions were lifted. Under the terms of the deal that was implemented in January, Iran agreed to strict inspections of its nuclear power program in return for the lifting of most sanctions — including funds seized by Western banks.

 

Iran’s central bank says lifting sanctions freed up about $100 billion, but almost all the money has stayed in foreign banks. China is holding about $30 billion to pay for future Chinese-built infrastructure projects. Iran’s national oil company is keeping tens of billions in Asian banks to facilitate future deals. The Iranian government has kept billions more as foreign-exchange reserves.

 

So that leaves about $6-7 billion that Iran plans to immediately repatriate and use to stimulate the economy, according to Iranian government spokesman Mohammad-Baqer Nobakht. Iranian authorities will likely bring back more in the months ahead but worry that too large an infusion will fuel inflation.

 

Iran continues to engage in military activity denounced by the US, Israel, and Western countries. It sends Islamic Revolutionary Guard Corps (IRGC) troops to Syria to support the regime of President Bashar al-Assad; it funds the Lebanese group Hezbollah. It also pays for Afghan and Iraqi Shia militias fighting in Iraq and Syria. Iran doesn’t reveal how much it allocates to these efforts, but there are no indications of a surge of spending in Syria.

 

In fact, Iran has decreased, not increased, its troops fighting for Assad, according to US Secretary of State John Kerry.

 

“The IRGC has actually pulled its troops back from Syria,” Kerry told Congress in February. “Their presence is actually reduced in Syria.”

 

According to Pedram Soltani, vice president of the Iran Chamber of Commerce in Tehran, the agreement’s opponents in the US intentionally distorted the impact of lifting sanctions. “They just want to magnify the threat of Iran for US citizens,” he said.

 

The government of President Hassan Rouhani plans to use the released funds to help pull Iran out of an economic recession, according to Iranian economists.

 

During the last Iranian year, which ended in March, Iran faced 10.7 percent unemployment and 9.4 percent inflation. Youth unemployment stayed at a stubborn 25 percent. The IMF projected zero economic growth for the last Iranian year.

 

Iran’s economy has suffered from Western sanctions, but also from government corruption and mismanagement. Today the country’s conservatives and reformists are waging a fierce political struggle on how to improve the economy.

 

In March conservative Supreme Leader Ayatollah Ali Khamenei, who wields ultimate power in the country, delivered a major speech implicitly criticizing the economic policies of centrist Rouhani, by naming the new year, “The Year of Resistance Economy and Action.”

 

So-called principlists, who uphold the principles of the Islamic revolution and have their biggest champion in Khamenei, have long advocated that Iran should develop a “resistance economy,” relying on the country’s own resources and minimizing foreign investment to halt the spread of decadent Western values.

 

“We do not need to retreat from our principles and our red lines to avoid American sanctions,” Khamenei said in the speech. “By following the resistance economy… we can make the country invulnerable, and the sanctions will not make us tremble.”

 

During the period of intense sanctions that began in 2010, Iran couldn’t get access to many products, from foreign auto parts to certain medicines. Under the “resistance economy,” Iran tried to manufacture its own substitutes, and imported products from China rather than Europe.

 

Mahmoud Ahmadinejad, president from 2005 to 2013, championed the resistance economy and implemented populist measures to garner support. He increased the payments Iranian newlyweds receive, boosted student stipends, and provided monthly payments of $12 to every citizen — not a paltry sum for poor Iranians.

 

But Ahmadinejad’s policies, funded by the high price of oil, proved disastrous as oil prices collapsed. Inflation soared to 40 percent and unemployment hit 12 percent, and in 2013 Iranians elected centrist Rouhani as president, largely because he promised to turn the economy around.

 

Rouhani and his reformist supporters call for an end to the resistance economy. They are scaling back government subsidies, relying more on the private sector, and encouraging foreign investment.

 

“Liberalizing the economy of Iran is not an option, it’s an obligation,” said Saeed Laylaz, a leading reformist economist and Rouhani supporter.

 

He calls for the eventual privatizing of Iran’s national oil company, and argues that the highly centralized and largely state-controlled economy, must be broken up.

 

“It’s state capitalism, which means low productivity, high corruption, waste and as a byproduct, we have had despotism,” he said.

 

The alternative model he proposes would make an American Republican proud. Laylaz cites the theories of Friedrich Hayek, who is a hero to many US right-wingers because the free-market Austrian economist taught that only profit-seeking entrepreneurs can effectively bring economic progress.

 

Ironically, in Iran it’s conservatives who favor state control of the economy, while the liberals promote free market capitalism, said Foad Izadi, an associate professor at the University of Tehran.

 

Rouhani’s cabinet is filled with economists holding doctorates from US universities, he said, who generally advocate free market principles.

 

“That means less government subsidies, more incentives for corporations, less taxes — the same things you hear from Republican candidates” in the US, said Izadi.

 

Rouhani has taken a big gamble that the removal of sanctions will pave the way for greater foreign investment and spur economic growth, according to Izadi, who warns there will be big problems if the nuclear agreement isn’t fully implemented.

 

“Who knows if the agreement is going be accepted by the people who are going to run the US next year,” he said, referring to a possible presidential victory by Republicans who have promised to revoke the deal.

 

But Rouhani and his supporters are plowing ahead with economic reform. Iran has signed letters of intent on numerous foreign investment deals, and is slowly eliminating Ahmadinejad’s direct subsidies. In April the Iranian parliament voted to cancel the cash subsidies to 24 million Iranians, a move opposed by Rouhani because it eliminated too much too fast.

 

That’s one more indication that Rouhani is not moving in a pure free-market direction. Last year, the government instituted a national health care plan that provides free coverage for the poor.

 

The government is preparing to implement a law offering companies exemption from taxes if they increase their workforce by at least 50 percent each year.

 

Soltani of the Chamber of Commerce strongly supports the new law and similar plans to lower taxes. “This policy is needed for at least 10 years so that we can have much higher investment, create jobs, and increase the size of the private sector,” he said.

 

Economist Laylaz sounds a more cautionary note. He worries that the plan will reduce government revenues and that companies can falsify records in order to eliminate taxes but not actually hire more workers. “I think this plan can accelerate corruption from many sides,” he said.

 

This new law highlights the difficulties Rouhani faces in liberalizing the economy. Ambitious solutions may appear possible on paper — but their actual impact is much harder to foresee.

 

Reese Erlich received a grant from the Pulitzer Center on Crisis Reporting for his Iran coverage. He is the author of The Iran Agenda: The Real Story of US Policy and the Middle East Crisis. Follow him on Twitter: @ReeseErlich

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