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Iran plots cautious path to economic revolution
A new mood in a nation with mineral wealth and too few televisions

By Pete Harrison
The Times (London)
December 20, 1999

The wailing of a siren fills the Tehran night, bouncing off grey concrete and down the wide streets. But this is no air-raid warning. Car alarms are as much a nuisance in this city as in any other these days. Eventually, the owner reaches his car and silence returns.

Tehran is at peace. The only explosion of which people are warning is a trade explosion. Twenty years after its Islamic revolution, Iran is at last opening its doors to the West. It has a population of 70 million and the world's second-largest reserves of natural gas, so any meaningful opening will doubtless have a global impact. Under the revolution, Iran has failed to perform. It currently ranks about 40th in the world's league of economies.

However, the potential spoils are immense. Iran's mineral resources include copper, gold, titanium and zinc, all of which are virtually untouched. Agriculture is booming, with two to three harvests a year. Manufacturing is looking promising, with an abundance of low-cost, educated labour and cheap energy. Iran has reactivated the Silk Route, linking central Asia and Russia to the open ocean, and is now at the key point of a crucial trade corridor. When it comes,however, Iran's trade explosion will be a careful and measured one.

The forces of reform continue to struggle with Iran's hardliners. Ayatollah Mahmoud Hashemi Sharoudi, the head of Iran's judiciary, was recently quoted in the Tehran Times saying that economic jihad still "stands as the country's top priority''.

The speed of growth will largely depend on the degree of foreign investment. However, not all Iranians want a return to free trade, and investor confidence could swiftly be reversed by a single violent minority act. Egypt's GDP was severely dented by the Luxor bombing in 1997. Terrorism in Yemen has cast doubt on investment there.

Iran's President, Mohammad Khatami, is a master of easing his country forward almost imperceptibly. He has only to look north towards Russia to witness the problems caused by moving too fast, or to China to see the benefits of a controlled return to free trade.After the Iran-Iraq war, Iran had to rebuild, creating huge foreign debt. To keep this in check, imports were restricted. "The policy has always been self-sufficiency, especially of strategic items such as food,'' says A.R. Gupte, managing director of the partly state-owned Irano Hind Shipping Company. Irano Hind once ran nine refrigerated vessels, largely for importing fresh foodstuffs. With Iran close to becoming self-sufficient in food, the company is down to one refrigerated ship.

"We are absolutely sure the economy is booming, but we also recognise that it is no longer a consumer economy, but a producer economy,'' says Ahad Mohammadi, adviser to the Minister of Commerce. Not only are food imports restricted, but formidable barriers are in place to hold back foreign consumer goods and equipment. Companies wanting to import equipment must prove that it cannot be sourced domestically in order to gain clearance from their governing ministry and from the Central Bank of Iran. Although ways have been found around this legislation, the framework is both time-consuming and restrictive. Moreover, it is self-defeating.

A lack of consumer goods has allowed smuggling to flourish. It is estimated that more than half the 1.5 million television sets bought in Iran each year have entered the country illegally.

Travel guides refer to Iran as a land of contrasts. The main contrast, economically, is between hardline isolationist policy and expansionist reality. Iran's Petroleum Act states: "No foreign investment in these operations is permitted in any way.'' There can be no mistake about what that means, but since the mid-1990s, no fewer than 50 hydrocarbon projects have been put up for grabs to big foreign oil groups.

Total and Elf have both clinched lucrative buyback deals to exploit Iran's hydrocarbon reserves, and Shell recently secured an $ 850 million (Pounds 525 million) buyback deal for the Nowrooz oilfield. Iran's rich mineral resources are barred to foreigners, and yet Iranian delegations have this year visited mining companies in Canada, Australia, Britain and South Africa - presumably not to read to them from Iran's legislation.

Iran's Constitution is unclear about limits on foreign equity in local ventures. Investment has previously been capped at 49 per cent, but such is the need for capital that even this is being reinterpreted.

Iran's economic dawn remains some way off, however. The religious police, the Revolutionary Guard, retain considerable power. Anti-Western sentiment continues to run high. One building in Tehran is adorned with a mural depicting the American flag, in which the stars have been replaced by grinning skulls and the stripes are the vapour trails of missiles or bombs.

At demonstrations marking the storming of the US Embassy, the Stars and Stripes was burnt in the street. "Down with tyranny,'' yelled the crowds. Any other year and they would have been referring to America. This year the chants were aimed at the country's own conservative hardliners.

Although there may be an overwhelming sense of paranoia on Tehran's streets, there is no talk of revolution. And although it would be simple for hardliners to sabotage the road to reform, what President Khatami has set rolling is slow but unstoppable.

Pete Harrison is staff editor for the shipping weekly Fairplay


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