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    Middle East
     May 14, '14

Dark outlook for post-sanctions Iran
By Hossein Askari

It is widely assumed that sanction relief and their eventual repeal will lead to Iran's economic resurgence. Oil and gas exports will jump. Investment, both domestic and foreign, will boom. And Iran's resulting stellar economic growth will earn it the moniker "oil tiger". This may all turn out to be largely wishful thinking.

Economic sanctions on Iran prior to about 2006 were porous and ineffectual. Still, Iran's economic performance after the Iran-Iraq war, from 1988 to 2006, was at best very average. In the aftermath of that war, Iran modified its constitution and resorted to foreign borrowing to jump start economic growth, borrowing in excess of US$30 billion with little to show for it. It bought the regime

domestic support but then left the country with a debt hangover that was painful to repay.

After 2006, sanctions, especially financial ones, began to reduce Iran's foreign exchange availability. Growth slowed and unemployment and inflation soared. Yes, tightening financial sanctions made matters worse but Iran's fundamental economic impediment has been and continues to be its ineffective institutions.

The legal system is corrupt. Economic rules and regulations and their supervision and enforcement are arbitrary. Direct and indirect consumer subsidies and the "purchasing" of domestic support, through autonomous foundations and economic contracts and other benefits for the Revolutionary Guards and the security and intelligence services, constitute an enormous economic drain. Financial, goods and labor markets are highly regulated and inefficient. Corruption is all-pervasive.

The rich do not pay even minimal income and capital gains taxes. Fairness and equity are not considered and addressed. Iran's oil and gas sector are in bad straits, requiring over $300 billion in investment that has to come from foreigners in the form of debt or foreign investment. Essentially, economic policies are targeted to insure the regime's short-run security.

Iran has needed and needs fundamental reforms. These reforms require political courage as they will adversely affect the economic interests of important power groups inside Iran - the Revolutionary Guards, the security and intelligence services, the religious establishment, the regime's hard core supporters such as the Basij and the family of martyrs, and the business establishment - and in the short run may require even more sacrifice on the part of the less fortunate segment of the population.

It is not that the regime has not known what it must do, but it has not had the courage and the Hassan Rouhani administration is not likely to do so either. Conditions facing Rouhani are made more difficult by the high expectations that he has generated after running for election on a reform and economic prosperity platform. Expectations have been heightened. He must now deliver and deliver fast.

So what's the likely outcome? When the sanctions get peeled back, foreigners will see an almost unlimited pent-up demand for certain imports. Foreigners' greed will trump their better judgment and they are likely to finance much of Iran's demand. That demand includes commercial planes and plane parts, oil service equipment, medical equipment, construction equipment, cars and electronic goods, state of the art refineries and much more - imports that require financing and foreign investment that could run into several hundred billion dollars.

Rouhani and his administration, feeling the pressure to deliver and lacking the courage to adopt difficult reforms, are likely to resort to massive external financing (an option unavailable to Tehran under sanctions) and concessions to attract foreign oil companies in the rush to upgrade oil fields and natural gas development (liquefaction and piped exports).

Repeal of sanctions will fuel economic activity and buy the regime short-run respite. Yes, there will be a mini "boom" with many signs of economic resurgence, but a boom fueled by external borrowing on a foundation of clay. Corruption will deteriorate even further. Economic injustices will be exacerbated, with the chasm in wealth and income getting deeper and wider.

Iran will once again find itself with a much heavier debt hangover and still without the sustained economic growth to generate the millions of jobs that it needs. All because reforms are likely to be sidestepped for short-run security, but reforms that are essential and that will become more painful to adopt the longer they are avoided.

No matter Tehran's transgressions, sanctions will not be re-imposed as Western banks will in time have significant financial exposure to Iran and Western businesses will have billions of orders tied up to improved relation.

Western institutions will pressure their governments to compromise with Tehran, as the regime in Tehran becomes increasingly reliant on the West to fulfill its domestic economic agenda and thus, ironically, less independent as it tries to satisfy domestic expectations. At the same time, the US will be more disposed to compromise with Tehran to protect its own growing economic interests and financial exposure.

All along, average Iranians are likely to be the losers as the regime continues to avoid desperately needed reforms.

Hossein Askari is Professor of Business and International Affairs at the George Washington University.

(Copyright 2014 Hossein Askari)

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