Private sector hampered by regulations, clout of bazaar merchants

By Colin Barraclough
The Christian Science Monitor

Tehran
April 09, 1997

Valentine's Day may not be marked with much of a flourish in the Islamic Republic of Iran, but for Iranian flower producers, the lovers' day has become a high point in the year.

"The demand from Europe at Valentine's Day is enormous," says Hossein Ajayebi, whose company, the Rose Agricultural Unit, sells flowers all over the world. "Women's Day in Armenia is big as well. Our business revolves around these festivals."

New Mideast airline routes and rail links to central Asia allow Iranian horticulturalists to cater directly to international markets. For the first time, entrepreneurs such as Mr. Ajayebi are selling high-quality Iranian orchids and roses to Europe, the Gulf states, and the former Soviet Union.

But the blossoming of Iran's private sector has far to go.

The government, under pressure to diversify the economy beyond oil exports, has long promised support for private business. Yet entrepreneurs and free-market advocates complain that, in practice, government controls do more to hinder than help their businesses.

"Government procedures are tedious and should be removed," says Ali Shams Ardekani, secretary-general of the Iranian chamber of commerce. "Tax incentives are not good enough. It's no wonder the Iranian economy is 85-percent controlled by the government."

In 1995, President Hashemi Rafsanjani banned the export of potatoes and livestock to curb rising food prices.

He also forced non-oil exporters to repatriate overseas earnings at the official exchange rate, which, in effect, taxes exporters about 33 percent. Entrepreneurs say they are also bewildered by a flurry of changes to customs regulations over the past two years.

"It's not so much that the rules are harsh - although they are - but more that they change all the time," complains one Iranian entrepreneur. "They change on the whim of ministers and customs officials."

Iran's economy has traditionally favored trade over production. But the 1980-88 Iran-Iraq war also distorted the economy by promoting a black market that enabled businessmen to make large profits through trade.

Moreover, the United States imposed an economic embargo on Iran in 1995, creating an uncertain business climate in which few private entrepreneurs are prepared to invest.

In this atmosphere, say disgruntled businessmen, the only winners are the bonyads and the bazaaris.

The bonyads, Islamic charities created during Iran's 1978-79 revolution, are ostensibly charged with assisting the poor and the victims of Iran's eight-year war with Iraq. But they have grown to assume enormous economic and political importance.

The largest, the Bonyad-e Mostazafan, or Foundation of the Oppressed, controls 20 percent of Iran's textile business, 43 percent of the soft drink industry, 73 percent of the glass industry, and 90 percent of farm produce. With assets estimated at $12 billion, it has become the main economic force outside the government.

Iran's traditional import-export merchants, the bazaaris, have also retained influence through their support for Iran's Islamic regime.

Mr. Rafsanjani has tried to usher in change.

Two years ago, amid popular anger at rising prices, the president unveiled a 1,000-store discount chain intended to break the hold of bazaar merchants.

"Our distribution situation dates back centuries," Rafsanjani said at the time. "The leech-like elements standing between production, distribution, and consumption [must] be eliminated."

The move angered the bazaaris but did not curb their influence.

The president also tried to revitalize stagnant state-owned industrial firms by selling them to the private sector. But the conservative-controlled parliament ordered a temporary freeze on public offerings in 1994.

In 1996, Iran applied for membership of the World Trade Organization. Conditions of entry - deregulation of the economy and the abandonment of a fixed exchange rate - would disarm the bazaaris and the bonyads. But the US strongly opposes Iran's bid, making quick entry unlikely.

Meanwhile, Rafsanjani leaves office at the end of August. A front-runner to succeed him is Ayatollah Ali Akbar Nateq-Nouri, an ally of the bazaaris.