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    Middle East
     Aug 26, 2008
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Iran's economic self-mutilation
By Hossein Askari

In post-revolutionary Iran, a fundamental concern and preoccupation of policymakers has been economic justice. Social and economic justice is the slogan of any revolution. But in Iran, economic justice has taken on even more significance because Islam unambiguously asserts that poverty is the result of waste, extravagance and denying what rightfully belongs to the less fortunate members of society.

This position is illustrated by the famous Prophetic saying, "Nothing makes a poor man starve except that with which a rich person avails in luxury." The eradication of poverty and the pursuit of economic and social justice is, without a doubt, the second-most important duty for an Islamic state, second only to the preservation and propagation of the faith, whose own existence is


considered to be threatened by poverty. Yet, despite the best of intentions, Iran has totally failed in its pursuit of this noble goal.

To succeed in achieving economic justice, a country requires both significant and sustained economic growth and an economic structure that is fair and equitable. Iran has struggled with both of these. Since 1980, economic growth has been anemic, with an average real annual real per capita economic growth of around zero over a 25-year period from 1980 to 2005. During the same time, income disparity grew rapidly, a fact that is obvious to anyone who cares to just look.

While the popular media have belatedly acknowledged Iran's economic failures, they have superficially and incorrectly attributed failure to economic sanctions. In areas outside of government policy control, it must be said that the Iran-Iraq War of the 1980s had a catastrophic effect on Iran's economic progress but sanctions have had a very limited effect on the daily lives of Iranians.

The only significant effect of sanctions has been a delay in the development of Iran's oil and natural gas industry, which, in turn, has adversely affected the global energy balance and ironically and fortunately for Iran, may have preserved Iran's exhaustible energy reserves from further government waste.

Iran's economic failures have been largely of its own making. Overcome by revolutionary fervor after 1979, the government nationalized much of the private sector, handcuffed what was left of the private sector with populist regulations intended to help the disadvantaged, adopted wasteful subsidies in the name of economic justice, did not nurture efficient institutions, including the rule of law, did not strengthen the national tax system, limited foreign competition and adopted inconsistent macroeconomic policies.

The results have been predictable: slow economic growth, high unemployment, high inflation, a stagnant non-energy export sector, waste, pervasive corruption, and growing income and wealth disparity resulting in economic injustice.

While the government has adopted well-intentioned initiatives, they have been too little, too late and ill-conceived, with the end result that the disadvantaged suffer and the government's credibility in its pursuit of economic prosperity is rapidly evaporating. Six examples may illustrate the failure of government policies and efforts.

First, the government has subsidized fuels heavily to give a direct and tangible benefit to the general citizenry, all in the name of economic justice. These fuel subsidies, in some years, have amounted to a whopping 20% of gross domestic product. The government has acknowledged the numerous negative fallouts of this subsidy for the past 20 years, yet it has done little to address the problem. It is a regressive subsidy, with the rich receiving a disproportionate share of the benefit; it adversely affects the environment; it causes unimaginable traffic congestion; it results in the smuggling of fuel to neighboring countries; and it reduces Iran's export earnings.

But in addressing the problem, the government has taken two "timid" steps: it has raised fuel prices just a little in several small discrete steps and more recently it has issued "smart cards" to limit individual fuel purchases.

A second example is the functioning of Iran's Oil Stabilization Fund (OSF), established in 2000. In the 1990s, the government correctly realized it needed to establish a fund to cushion fluctuating oil revenues. Unfortunately, the government has not abided by its own legal terms for managing this fund. As a result, over the past three years with record oil prices and at a time in which it should have built up the fund, the government has instead drawn it down.

A third and related example is that the government, again correctly, noting that it should reduce its dependence on oil revenues, enacted a law to reduce this dependence over a period of 10 years, while building up non-oil revenues. Unfortunately, the government has instead increased its dependence on oil revenues.

A fourth example is the ineffectiveness of Iran's tax system, the most direct and efficient way to address economic equity. Only government employees pay their fair share of income taxes and no one pays a capital gains tax, which has allowed the rich to squirrel away their speculative real estate gains abroad (more on this below).

Fifth, and most recently (currently under way), in the correct belief that oil belongs to the people, the government has decided that oil revenues should be used in a way that supports economic and social justice. To this end, it has handed out forms to families to fill out concerning their income, family size and so forth, for the purpose of determining the size of direct payments to individual families. While the idea of addressing economic equity in this manner is noble, the approach and implementation is flawed and is thus sure to fail (again, more on this below). If nothing else, the general citizenry do not trust government intentions and from recent reports it would appear that they are not answering the questionnaires honestly.

Sixth, Iran's unemployment rate has been in the range of 14-20% over the past 10 years and inflation has been in the range of 12-25% over the same time. If anything ravages the poorest segment of society, it is unemployment and inflation; and inflation is the cruelest tax of all in that it raises the price of necessities for the poor.

Iran's disappointing economic performance and its inability to promote economic justice is evident. Still, the future could be bright if the government were to adopt a comprehensive set of policies and garner popular support for its program. If not, Iran's economic woes could worsen dramatically in a relatively short time as record numbers join the labor force seeking employment, and if oil prices decline to their level of three or four years ago.

Before discussing the policies for a turnaround, we must establish one important consideration, the role of oil and natural gas in Iran's economic future and their pivotal role in achieving economic justice.

Iran is endowed with about 11% of the world's proven oil reserves and 16% of its gas reserves. While these are large endowments, on per capita terms they are dwarfed by those of Qatar, the United Arab Emirates and Kuwait, and are significantly lower than those of Saudi Arabia and Iraq. Thus, given its larger population, Iran has to make even better use than its neighbors in the Persian Gulf of its oil and gas reserves. Oil and gas belong to the citizens (today's and tomorrow's), not to government officials, not to a select group of citizens, but to all generation of citizens. The simple corollary is that all citizens, now and in the future, should receive similar, if not the same, economic benefits from oil and gas depletion.

There is only one way to achieve this end both efficiently and equitably. The best approach, which I have discussed on this site before, is to create a sovereign wealth fund and to place all government oil and natural gas revenues in the fund (which may require a transition period of say ten years). The fund would in turn issue an annual check of the same real value to every citizen (possibly over a certain age and contingent on certain criteria) now and for all future time. By my estimate this check (for those 18 years of age and above) would be in the range of US$2,000-$3,000 in 2008 dollars, depending on the various assumptions that one makes. Professional managers who are not under

Continued 1 2  

Ahmadinejad stages a bureaucratic revolution (Aug 7, '08)

The 'down side' to an attack on Iran
(Aug 1, '08)

Talking is still on the table (Jun 4, '08)

Why Iran will fight, not compromise 
(May 30, '07)

1. Syria reaps a Russian reward

2. Militants ready for Pakistan war

3. North Korea wary of Russia's return

4. Americans play Monopoly, Russians play chess

5. The new silver - made with paper

6. Applause for Glitter's Asian exit

7. The cliff edge awaits

8. China damned over floods

9. Double-count magic 

(Aug 22-24, 2008)


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