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    Middle East
     Oct 15, 2008
Ayatollah's sums not of this planet
By Hossein Askari

Ayatollah Jannati, a very senior Iranian cleric, pronounced on October 10 that he was happy that America was going through economic turmoil, America was paying the price for its harmful actions and that God was punishing it. These pronouncements would be the winner of the global schadenfreude prize for 2008 if there were such an award.

Sadly for Iranians, the unfolding global economic turmoil may result in Iran's economic collapse and unprecedented economic and social pain. The ayatollah's words do not put food on the table, pay the rent or pay heating bills. The ayatollah does not realize that the regime's very survival may be threatened by the

 

unrest that is sure to follow. Why will these things come to pass and the ayatollah's schadenfreude boomerang so?

Iran is not the economic success that the ayatollah perceives. Iran's real per capita income today is about what it was 30 years go. Unemployment stands at over 20% and inflation is about 30%. There are rolling electricity blackouts of at least two hours per day for everyone. Last winter, there were shortages of natural gas. Income distribution has been deteriorating over the last fifteen years. The best university graduates are seeking better opportunities outside of Iran.

All this in a country that has the world's second-largest reserves of natural gas and third-largest reserves of oil, and with energy prices at record levels until the unfolding economic turmoil in the United States. Iran's economic grade would be a solid "F".

Iran has been a major beneficiary of recent global economic growth and the ensuing boom in commodity prices. While the country could have used its oil and gas export revenues to lay the foundation of sustained economic growth and development and to build up its foreign exchange reserves, it has instead wasted its windfall revenues with disastrous economic consequences.

The government has been increasing credit by around 25% annually while supporting an exchange rate that has moved within a narrow band to the dollar. The result has been inflation, especially in the price of things that cannot be readily imported, with real estate seeing the most rapid price increases. Speculators have in turn converted their real estate gains from riyals into dollars and have squirreled their ill-gotten gains out of the country.

With estimates of capital flight at over US$250 billion over the past six years, much of Iran's oil and gas export earnings have done a u-turn and gone out of the country (supported by Iran's ill-conceived exchange rate policy) and the rest has been used to import subsidized essentials for all Iranians and luxury goods for the wealthy.

The regime has taken such a misguided approach to economic policy because it has been afraid of a short-term domestic backlash, and high oil prices have been its crutch to afford wasteful subsidies for the poor and to make the powerful ever richer and happier.

Now what? Well, here is news for the ayatollah who believes all economic principles are hogwash and don't apply, at least not to Iran. As global economic growth has slowed, demand for oil has declined. A downward shift in demand lowers the price, with oil prices declining from over $147 per barrel to nearly $75.

As the global economic slowdown continues, with US unemployment increasing from 6.4% to possibly 10% over the next 18 months, the slowdown will become even more global and demand for oil and gas will decline further, possibly to $30 per barrel. Iran's oil export revenues, which were approaching $80 billion annually, could decline to $20 billion. Now that's simple economics that even the ayatollah cannot escape!

What will mean this for Iran? Well, there will be a dramatic economic slowdown in Iran, especially because the country's economic core is not solid, the government did not built up foreign exchange reserves in times of plenty, and Iran's isolation will limit its access to credit. Such an economic slowdown will reduce the importance of Iran's role in global energy supplies and render it more vulnerable to outside pressures.

With economic growth declining to zero and unemployment exceeding 30%, the regime's first instinct will be to increase credit even more rapidly than it has in the past, with even more disastrous consequences such as inflation possibly exceeding 50%.

The ayatollah will learn a number of hard lessons: we live in an interconnected world; the laws of supply and demand apply to all; no country can be powerful without a strong economy; and don't gloat over the misery of others as it will haunt you sooner than you imagined in your wildest dream.

Ironically, the lowly forces of supply and demand may do to Iran in a few months what the mighty US has been unable to do for 30 years!

Hossein Askari is professor of international business and international affairs at George Washington University.

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


Iran's economic self-mutilation
(Aug 26, '08)


A reality check on Iran (Jul 19, '08)


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