Hossein Askari
WASHINGTON—Most non-economists who survey the Iranian economic landscape tout the regime’s recent successes. They invariably cite some of the following statistics reported by the Iranian government: rapid GDP growth of about 5.5 percent per year in the period from 2002 to 2008 (although it declined about 2 percent last year); declining unemployment, from about 12 percent to about 10 percent; declining inflation, as measured by consumer prices, from about 30 percent to less than 10 percent in the past year; and a comfortable level of foreign exchange reserves, exceeding $75 billion. Such conclusions about Iran’s economic conditions are a distorted summary and present U.S. policymakers with a false picture of Iran’s economic realities.
A country that is heavily dependent on a depletable resource, such as oil, natural gas, or diamonds, is different from other countries in at least one important way. The portion of its national output that is derived from the depletable resource is not sustainable. Simply said, when oil runs out, its contribution to GDP falls to zero. Even more starkly, imagine a country that produces only oil. When oil runs out, its GDP would go to zero. So what is a country such as this to do?
The suggested policies are intuitive. A major oil exporter should not use its oil revenues to finance consumption. If it does, it would be left with nothing in the future. Oil is a part of a country’s capital base. When oil is sold, it should be replaced by capital of another form. An oil exporter first should save at least a significant percentage of its oil revenues, resulting in a very high national saving rate. Then it can adopt one of two approaches.
The first approach is to invest the money and issue a check of equal real purchasing power to all citizens, now and in the future. The State of Alaska in the United States has adopted something along these lines. Abu Dhabi is investing so much already that it can support its population from the return on these assets, and other countries, such as Qatar, may follow suit.
The second approach is to use the oil money to transform the economy into a fast growing non-oil economy to compensate for oil depletion. This would require the government to adopt policies to diversify the economic and export base away from oil, to provide non-oil sources of government income, and to provide attractive employment opportunities for its citizens.
Iran, by default, has chosen this second approach, but not the policies that need to go with it. Iranian institutions are ineffective and corrupt. Instead of encouraging private-sector growth, the government and its various organs, such as the foundations and the Islamic Revolutionary Guards Corps, dominate the economy, accounting for 65–70 percent of the national output. Instead of saving, the government is consuming as if there were no tomorrow; wasteful consumer subsidies, as opposed to productive investment, have dominated the Iranian economy in the past decade, accounting for 20–30 percent of GDP depending on the year in question. High-quality education is limited. The Iranian rial is overvalued, discouraging non-oil exports. This list easily could be expanded. But the results of Iran’s poor policy choices are everywhere to be seen.
First, Iran’s growth rate has been dismal. During the period 1975 to 2002, annual real per capita growth rate was about zero, and over the recent period from 2002 to 2009, it was around 3.5 percent per annum. Why was growth so slow up to 2002? Iran had rapid population growth for about the first ten years after the Islamic Revolution. The Iran-Iraq war took a heavy toll. In 1975, there were high real oil prices, and 2002 was a low; and what this and more rapid growth in the recent years confirms is that Iran’s economic performance is heavily tied to oil price developments, or in other words, the government has not been very successful in achieving diversification of the economy.
The best proof of Iran’s dismal growth is life in Tehran. A young couple with bachelor degrees and a few years of work experience as schoolteachers would have a combined monthly income of about 1,000,000 tomans (the exchange rate is a little less than 1,000 tomans to $1). If the couple had a young child, they would need at a minimum 1,000,000 tomans to pay their monthly bills (food, clothing, electricity, gasoline, insurance, medical) and another 1,000,000 tomans per month in rent for a modest apartment (which also requires a big security deposit). How can such a couple survive? They earn only enough to cover 50 percent of their minimum expenses, unless they already own an apartment or take on second jobs.
Second, while official numbers say that inflation is down, life in Tehran tells a different story. The price of necessities has soared over the past year in Tehran: one liter of milk went from 480 to 850 tomans, one kilo of yogurt went from 900 to 1,650, one kilo of chicken went from 2,100 to 3,200, one kilo of lamb went from 12,000 to 17,000, one kilo of onions went from 600 to 1,200, and a container of dishwashing liquid went from 3,400 to 5,650 tomans. The price of these items varies from neighborhood to neighborhood and by quality, but the prices listed here are from the same neighborhood and of the same quality today as compared to a year ago.
At the same time, government-provided items, such as electricity and gasoline, have also increased in price. These are what Iranian families buy, and they figure heavily in the Iranian consumer basket. Contrary to government pronouncements, inflation is alive and well in Iran, and not only has it not declined to under 10 percent, but in all likelihood it has increased to over 20 percent.
Third, as bad as the first two points are, unemployment and underemployment may be the regime’s Achilles’ heel. Unemployment is in all likelihood around 20 percent. But most depressingly for the young, there is little hope of advancement through hard work in professional pursuits. And the future looks even bleaker than the past or the present, if the government continues on its present course. As a result, a significant proportion of young, educated Iranians, the brightest and the best, are emigrating from Iran. Iran is losing its most highly educated citizens to countries that promise a brighter future and some hope. While the government is only concerned about its short-term survival, the long-term prospects for Iran look bleaker by the day.
Fourth, Iran’s economy and its export sector have achieved very little diversification in the past thirty years. Although Iran says that its currency is not overvalued, it is a claim that is hard to believe. Over the past decade, Iran has kept its currency within a narrow band to the U.S. dollar, while its inflation rate has averaged well over 20 percent per year. But look at the results. Does Iran have a booming non-oil export sector? The answer is a resounding no. And while the government claims a comfortable level of foreign exchange reserves, it again is unlikely to be accurate. Some years ago, Iran set up its Oil Stabilization Fund (OSF) to smooth out its fluctuating oil revenues. Iran developed rules for operation of the OSF, but they have not been implemented, simply because of revenue pressures.
In short, the Iranian economy has structural problems that the regime has found politically difficult to address. The regime has been unable to put the economy on the path toward sustainable growth. The choices are difficult, but are unlikely to get much easier than they had been in the most recent years, which had the support of a booming oil market. Some observers may attribute much of Iran’s difficulties to economic sanctions. This is, in my opinion, incorrect. Although there are potentially damaging sanctions on the drawing board, existing sanctions have been largely ineffective. Sanctions may have slowed the development of Iran’s oil and gas reserves and limited Iran’s ability to borrow on international markets. But in the future, this may be seen as a beneficial effect of sanctions, as the government has wasted much of its oil proceeds in the past thirty years.
No matter how one looks at it, Iran’s economic problems are largely self-inflicted and are a result of bad, shortsighted, and expedient policies that the regime deems as required if it is to stay in power.