Economy
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.
