Iran at the Crossroads

The election demonstrations and civil unrest has its roots in Iran’s poor economic condition as well as in the Ahmadinejad administration’s intentional grab for control over economic activities. While the street demonstrations have been subdued by brute force, the underlying issues remain, and unless a compromise is reached among the political factions, the flames of discontent may well flare up in the near future.

Iran’s economy has been dominated by oil exports, which in 2008 constituted 50 to 70 percent of government revenue and 80 percent of export earnings. Iran’s public sector (which is directed by or centrally controlled by the government) is estimated at 60 percent of the economy. Historically, the private sector, dominated by the bazaar, handled most of supply chain–related matters in the economy. This included warehousing, distribution, sales, financing, and managing the logistical matters related to imports and local production. Many of the agricultural activities and light industries relied on the Bazaar to handle their logistical and financial requirements.

One major change since the 1979 Islamic revolution is the expanding role of the religious foundations, or bonyads. Their combined budgets are said to presently make up as much as half that of the government sector. Much of the funding of the bonyads originates with the government via the assets and businesses that the bonyads have been authorized to manage or in the form of direct government subsidies. The bonyads have been actively involved in the transportation and distribution sectors; before the 1979 revolution, these logistical activities were traditionally within the economic sphere of the bazaar.

More recently, the role of the private sector and the bazaar has been further undermined by the imposition of stricter sanctions, administrative and price controls, smuggling, contraband, and widespread corruption, along with other rigidities in the economy. Much of the smuggling and contraband is controlled by the Revolutionary Guards, and this trend has rapidly accelerated during the four-year term of Ahmadinejad. In addition, many of the large contracts such as the gas pipeline to the Pakistan border, the Pars gas field, and the expansion of the Tehran metro have been given to members of the Revolutionary Guards and their companies. In essence, there has been a dramatic shift of economic power away from the traditional private sector groupings and toward the selected bonyads and Revolutionary Guards entities. An obvious effort to restrict the power of the bazaar was the attempt to impose a value-added tax in October 2008. That met with stiff resistance, violent protest, and the closing of the bazaar, which brought the economy to a halt. The value-added tax was rescinded. This was, however, also a clear signal that despite the shift in economic power, the bazaar remains a major force in the economic landscape of the country.

Simultaneous with the Ahmadinejad administration’s attempt to shift the economic power structure in Iran toward the Revolutionary Guards, there has been massive economic mismanagement of the economy, resulting in high inflation and excessive unemployment. The demonstrations in the streets have as much to do with economic mismanagement as they do with election improprieties.

Iran’s Oil and Gas Sector

Iran oil production prior to the Islamic revolution hovered around 5 to 6 million barrels a day, of which 5 million was exported. The strikes, civil unrest, and the loss of technical and managerial experts (both domestic and foreign) reduced oil production to about 3.3 million barrels in 1979. Oil production further declined to less than 1.5 million barrels in 1980 with the continued technical difficulties and the advent of the Iran-Iraq War. Oil production gradually increased to a level of 4 million barrels a day by 2008. In the meantime, however, local consumption has risen rapidly, and crude volume exports have declined gradually to between 2 and 2.5 million barrels a day. Since the Islamic revolution, the volume of oil exports has declined by more than 50 percent while the population has doubled. The recent demonstrations have not had an impact on Iran’s oil production to date. However, given the reduced level of exports and the increased local consumption, a strike in the oil and gas sector would have a much more crippling effect on the economy than that produced during the Islamic revolution of 1979.

Iran’s natural gas production has increased rapidly since 1979, but it is primarily serving the local markets. Iran exports some natural gas to Turkey and imports some from Turkmenistan. However, as prices paid by Turkey are below prices paid by Iran to Turkmenistan, the gas sector may in fact be a foreign exchange drain on the economy. Gas exports have not risen due to sanctions and U.S. policy. The Nabucco pipeline planned for construction through Turkey has been delayed, and the Iran-Pakistan-India pipeline is unlikely to undergo construction in the near future. Iran also lacks the necessary technologies to embark on a significant liquefied natural gas (LNG) operation.

The Other Economic Sectors

Despite these difficulties, the GDP growth rate has ranged between 4.5 and 7.8 percent. This has much to do with the rising price of crude oil. In fact, 2008 was a record year for revenue generated by oil exports. As oil prices hit a record $147 per barrel, Iran managed to generate an estimated $85 billion in oil exports. Yet despite this massive increase in oil revenue, GDP growth rate declined from 7.8 percent in 2007 to a much lower 4.5 percent in 2008. This is the lowest growth rate in the past few years and is directly related to the rising subsides and import bill as well as the monopolistic nature of much of the industrial economy (which became more and more under the control of the Revolutionary Guards and preferred bonyads). The net result has been rising inflation, which in 2008 was 26 percent according to central bank figures. The inflation rate may have dropped to 15 percent due to the decline in oil prices and a global recession in 2009, but it still remains very high. Housing prices in Tehran quadrupled from 2004 to 2008. The excessive subsides and handouts have made Iran dependent on agricultural imports. Wheat imports rose from near zero to more than 6 billion tons in 2008. The growth rate in manufacturing and agricultural value added has also declined from 2002 levels. In the meantime, the lack of investments by the private sector along with the unique characteristic of Iran’s demographics have brought about major unemployment.

Unemployment and Implications for the Future

The official unemployment rate is in the teens, but given the very large portion of the population in the 15- to 30-year range, it is very likely that the unemployment rate is hovering at twice the official rate. I estimate the unemployment rate at above 30 percent. (There are 25 million Iranians employed, of which a third are women. The working age population is estimated at 45 to 50 million. Therefore, even assuming all women who want jobs are employed, the unemployment rate is at 30 percent.) The Fourth Development Plan optimistically calls for the creation of 700,000 jobs per year. This number is unlikely to be achieved. In any case, the number of jobs necessary to prevent unemployment from rising is estimated at 1 million. For those of us who remember the misery index discussed during the Carter/Reagan era (at worst around 25 percent) and the equivalent index in today’s U.S. economy of about 13 percent, we should appreciate a misery index in Iran that is in the range of 40 to 50 percent. We should not be surprised that despite threats, intimidation, and beatings, the Iranian pubic was so willing to demonstrate in the streets of many of Iran’s cities. While members of the Basij and Revolutionary Guards benefit from subsidies, the public has seen its purchasing power decline.

This may be a reason why the Revolutionary Guards and the Basij have been so ruthless in handling the demonstrations. They are not just protecting the Islamic revolution; they are also protecting their income and economic position. It is during Ahmadinejad’s term that the economic power of the paramilitary (Revolutionary Guards and Basij) has grown rapidly. Maj. Gen. Mohammad Ali Jafari, commander of the elite military branch of the Revolutionary Guards, stated that the Revolutionary Guards’ recent control of the country has put them “in a new stage of the revolution and political struggles,” and “because the Revolutionary Guards were assigned the task of controlling the situation, [the Guards] took the initiative to quell a spiraling unrest. This event pushed [the Guards] into a new phase of the revolution and political struggles and we have to understand all its dimensions.”

At the same time, Iran’s other hard-line forces have also been emboldened. Ahmadinejad’s spiritual guide, Ayatollah Yazdi, said “elected institutions are an anathema to a religious government and should be no more than window dressing.” However, with the lower oil revenue, if Ahmadinejad’s administration, Basij, and Revolutionary Guards continue to feed at the trough without consideration for the general public, unrest will accelerate. Many of the old guard economic powerhouses view this trend with serious concern. Many influential religious leaders have kept silent or offered only faint criticism about the elections of Ahmadinejad and the supreme leader’s comments. It is clear to them that the role of traditional political leaders vis-à-vis business activities is being seriously challenged, resulting in an open power struggle between Rafsanjani, Khatami, Moussavi, and Karroubi against Ahmadinejad, Yazdi, Jannati, and Revolutionary Guards. The backing of the latter group by the supreme leader causes one to wonder if the he has already lost control of the reins to the Revolutionary Guards and the conservative clerics who support them or if he is simply in their camp. The old guard understands that another four years with Ahmadinejad and his pro-Republican Guards policies will diminish their role to such an extent that they will in fact be at risk of losing their livelihood and even their lives. This brings us to the question of compromise. But can the disparate forces reach a compromise? What kind of compromise will make the reformist/bazaar/Rafsanjani/moderate clerics trust the Ahmadinejad/Republican Guards/Yazdi/Khamenei faction? If no compromise is achieved, this economic time bomb will continue to tick. But the fuse is short. If Ahmadinejad and the Revolutionary Guards are not controlled, we will see the Iranian economic and political structure evolve into a dictatorship of paramilitary thugs and oligarchs controlling a monopolistic and corrupt economic system.

Fariborz Ghadar is a distinguished senior scholar at the Center for Strategic and International Studies in Washington, D.C., and the William A. Schreyer Chair of Global Management and director of the Center for Global Business Studies at Pennsylvania State University.