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Pretend we have no oil
An economy based on taxes instead of oil

January 19, 1999
The Iranian

Four bits of economic news during the week of January 10 pointed once again to the pathetic and suicidal dependence of the Iranian economy, particularly the national budget, on revenues from oil exports. First, it was reported that the 1999-2000 budget was drawn based on export of oil at $10 per barrel. Next, on January 15, the former Iranian president Hashemi Rafsanjani called for up to 50 percent cut in output by oil exporters worldwide in order to boost prices. Third, on the same day, Reuters reported on the likelihood of Iran's drive for foreign energy investment being delayed for months or years. Lastly, on January 15, the U.S. dollar was offered by money exchangers at up to 714-718 tomans.

There is nothing national or self-reliant about an economy whose national budget has to look to receipts from international sale of a precious and nonrenewable resource at cut-throat international prices in order to finance, year after year, a huge governmental bureaucracy and its affiliated enterprises. In the long term, the continued dependence by the government on oil revenues does harm to the future economic and political health of the country for two reasons. First, the international price of oil will remain for the foreseeable future out of control of oil exporting countries. So, Iran's national budgetary priorities will remain hostage to outside factors. Second, what will the government and the economy rely on when the oil runs out or production costs exceed the price of oil on the international market?

The Iranian government should begin the process of weaning the country from reliance on international sale of oil. The first step in that direction should be for the government to make a principled commitment to finance the national budget entirely by revenue generated from sources other than the international sale of petroleum. To meet its fiscal requirements, the government ought to look at two interdependent possibilities -- cut its own expenses and institute a viable system of taxation.

Granted, in the short term, this may prove personally painful, and socially difficult and politically explosive. In the long run, however, it will transform an oil-based economy to a tax-based economy, promoting the political ideal of a tax-paying nation owning its government, instead of the other way around. The religious and cultural concept of tithe and alms (khoms and zakat) giving can serve as the ideological bedrock of such a program for those motivated by a logic not necessarily shared or understood by secular economists.

The remarks by the former president Hashemi Rafsanjani should be heeded by Iran unilaterally and regardless of what the other producers wish to do; not because Iran would then get a higher price for its oil exports, but because the measure would help Iran wean itself away from dependence on foreign oil sales.

Iran should move unilaterally and cut its own output in a disciplined and gradual move to a level required only for domestic consumption. A barrel of oil left in the ground is one saved for the future. This may induce the oil markets in the medium-term to seek substitute oil from other sources including the Caspian region, which eventuality will only enhance Iran's geopolitical standing and potential income from being the most economical transit route for the Caspian oil. The production cost of the Caspian oil being already high, exporting countries and international buyers would want to look for the cheapest way out and that, according to petroleum economists, is the Iranian route.

Relatedly, it seems Iran ought to set in place a foreign exchange policy capable of stabilizing the economy, reducing inflation, and increasing productivity. It may be instructive to look into a policy such as the one designed by the Menem administration in Argentina, which, along with complete liberalization of foreign investment rules, it pegged the Argentine currency on a one-to-one basis to the U.S. dollar. This would result in a fixed rate of one U.S. dollar for one Iranian toman. With all Iranian exports to be purchased in toman, soon dollars would have to buy Iranian tomans in order to buy Iranian exports. Even in the short-run, Iran should price the international sale of oil by U.S. dollars but insist on payment in part in Iranian tomans at fixed rates of exchange.

The idea that a national budget be paid for by the government's receipts from gross domestic product is conducive to fostering political stability. A government requiring to live within its own fiscal means and financed by property and income tax receipts may mean a smaller government, but a smaller government is better government, in any form. The tax-paying citizen's patience is not as abundant as oil reserves and that will check any extragavant impulse on the part of the government to spend. This also means that a government financed by the tax-payer citizen will be more responsible and responsive to the citizen, because it, and not the God's earthly hydrocarbon bounty, pays the salary of the public servants.

To increase the national tax-base, the government would have to allow for the private sector to make money and for the citizen to own and exploit property. This may be achieved in large part by the state through privatizing its productive assets in a competitive framework and let the private sector take them on and increase productivity.

In order to maintain the enlarged tax-base, the government would have to heed the needs of the productive sectors of the economy in terms of liberalization of the economy and citizen participation in the economic decision-making process. Cumulatively and in time, this will give rise to an expanded and politically informed middle class. The larger the middle class and in more control of its economic destiny, the more stable will become the political system which permits it, be it a system based on divine inspiration or sovereignty of the people, hardline or moderate.

The author

Guive Mirfendereski is an international lawyer and adjunct professor of law at Brandeis University.

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