IRAN: New economic plan marked by incoherence

Analysis

The victory of Mahmoud Ahmadi-Nejad in the presidential elections in June has been widely attributed to his populist economic platform. Yet no more than 10-15% of Iran's population lives under the 'poverty line'. A more plausible explanation may be that he successfully exploited the widespread popular resentment about two post-revolution phenomena, namely:

• the ever-widening gulf between the rich and poor; and
• the dwindling role of merit and competence in obtaining high government positions, which have been monopolised by a few well-connected families and networks.

Campaign promises. Ahmadi-Nejad's views on the economy before the elections revolved mostly around strong criticisms of the current situation: a large public sector, the treasury's over-dependence on oil income, low overall factor productivity, public and private monopolies, corruption and nepotism, wide income gaps, unfair subsidies, economic hardship, low wages, and high unemployment (see IRAN: Ahmadi-Nejad win cements conservative control - June 27, 2005).

Although, as a conservative and a hard-liner, his profile is in sharp contrast to that of his predecessor, Mohammed Khatami, the new president's economic diagnosis and proposed cures are not very different. Like Khatami, he maintains that:

• economic development should be tempered by social practice;
• the government role in the economy should be limited to legislation and administration -- leaving ownership and management to the private and cooperative sectors;
• national resources should be owned and managed by the people themselves and not by ever-growing state enterprises;
• high employment should be assured by establishing 'rational' relations between employers and workers (his code designed to please opposing parties);
• raw material exports (including petroleum) should be replaced by domestically manufactured goods;
• Tehran, with 11% of the population, should no longer handle 60% of national economic activity; and
• more than 1,500 state enterprises and corporations headquartered in the capital should move to the provinces where their main functions are located.

Unoriginal prescriptions. Nothing in the new president's economic platform is brand new, or significantly different from Khatami's, or indeed that of his predecessor, Ali Akbar Hashemi Rafsanjani. His admonitions against conspicuous consumption, aristocratic life styles, self-centredness, and the rich ignoring the masses are also not his own, but are repetitions of Ayatollah Ruhollah Khomeini's populist sermons. With the exception of his particular focus on "excessive" bank loan rates, the middleman's "unjustified" profit cuts as responsible for inflation, and stock-market speculators as sinful gamblers, Ahmadi-Nejad's proposals contain nothing new.

Economic programme. The economic segment of the new president's overall plan presented to the Majlis on August 17 contains ten high-sounding but vague objectives, to be reached through 58 specific, but equally nebulous, strategies and policies. The ten main goals -- enumerated without any priority or sequence -- include:

• self-reliance in national production and output;
• activation of the nation's total economic capacities and potential;
• export promotion;
• equitable distribution of wealth and income;
• employment creation;
• empowerment of the disadvantaged;
• removal of discrimination;
• improving people's purchasing power; and
• higher social welfare.

His 58 policies and programmes encompass numerous areas:

• Improving the economy's international competitiveness through higher efficiency in all economic factors of production.
• Achieving self-sufficiency in basic consumer goods.
• Targeting subsidies at those in the poorer social strata.
• Reducing inflation (and bank loan rates) along with more efficient distribution of goods and services in order to increase people's purchasing power.
• Rationalising energy consumption.
• Protecting domestic industries in a 'rational' manner.
• Ensuring investment security, and protecting investments through monetary reforms and strengthening of the stock market.
• Reforming the fiscal sector (reducing public expenditure, improving the budget process, lowering dependence on oil income, better tax collection).
• Ending private monopolies and special privileges, and guaranteeing equality of opportunity for all.
• Fighting corruption and underground economic activities.
• Conducting foreign economic policies (including all commercial contracts with foreign firms) within the context of the level and quality of diplomatic relations with the country in question.
• Promoting tourism.

Outlook. Although the continued oil boom may help the new president in combating poverty, unemployment, unjust income distribution, and possibly even inflation, his other targets do not seem reachable, or even approachable:

1. Contradictions . The agenda itself suffers from internal contradictions:
   • While improvement in international competitiveness tops the list of economic objectives, self-reliance in national output, self-sufficiency in consumer staples, and protection of domestic industries are also prioritised.
   • His nominated ministers of finance and oil and the head of the Management and Budget Organisation are telling the press that the government's main economic direction is towards marketisation, privatisation, and bureaucratic downsizing. However, state controls, regulation, and protective measures in various economic sectors -- particularly agriculture, small industries, handicrafts, and 'deprived regions' -- also feature prominently.
   • Senior government officials talk about the necessity of strengthening the domestic capital market in order to increase private investment, while the president is quoted as saying that "as long as banks are allowed to operate as profit-making institutions, there is no hope for a thriving national production".
2. Deregulation aversion. Targeting subsidies, rationalising energy consumption, and value-added taxation all involve comprehensive deregulation and price liberalisation. These are not currently favoured by him or by his hard-line supporters in the Majlis and elsewhere.
3. Monopolies . Private monopolies are in many cases the source of income for the new president's individual or institutional backers.
4. Weak team . Ahmadi-Nejad's nominated economic team looks weak, inexperienced, unqualified and lacklustresee IRAN: Hardline cabinet lacks experience - August 17, 2005.
5. WTO ambivalence. Iran still apparently aspires to join the WTO. However, future foreign commercial relations are supposed to take a backseat to diplomatic considerations.
6. Tourism contradictions. Tourism is to be enhanced as a strong potential foreign exchange earner. However, Islamic moral codes are to be more forcefully enforced on all foreign tourists.
7. Opposition . Not only the reformist candidates who were barred from participation in the election, but also Ahmadi-Nejad's defeated rivals such as regime stalwarts Rafsanjani and Mehdi Karrubi, have vowed to fight the new government's 'excesses'. In addition, Majlis conservatives are divided. The supposition that for the first time in the Islamic Republic's history all three branches of government are in conservative hands and that the regime is thus unified understates the likely strains that will become apparent.