Reaching out, if he can

The Economist
8-7-1998

SINCE Iran's would-be liberal President Muhammad Khatami took office a year ago, he has been too busy with the political battle against conservatives to spend much time worrying about the economy. Now the statistics have made it impossible to go on like that. On August 2nd the president called for sweeping economic reforms. "Our economy is chronically ill. It will not be cured unless we make fundamental changes," he said. He promised to cut the size of government, slash red tape, and try to attract more foreign investment.

Oddly, this may give him a brief respite on the political front, since his opponents have endorsed his economic programme. Even so, no one doubts the size of the task he has set himself. The Iranians have been astonishingly patient as previous governments promised prosperity but never produced it. Mr Khatami admits that his plan "may only be words on paper".

The main challenge is to create more jobs for the swiftly growing number of unemployed young people. An estimated 1m youngsters join the labour force each year. The unemployment rate is already an official 11%. With inflation at 20% or more a year, even those with jobs find it hard to make ends meet.

The sharp drop in oil prices has made things worse. Iran depends on crude-oil exports for 85% of its hard-currency earnings, and this year it faces a revenue shortfall of $6 billion, a third of its budget. Mr Khatami promises, like others before him, to boost non-oil exports, but both manufacturing and farming are in trouble, partly because of state interference. Carpet exports, the second source of hard currency, suffer from excessive regulation: earnings, $2 billion in 1994, are less than half that now.

Confusing laws and state meddling have thwarted efforts to privatise industry and attract foreign investment. The state owns around 80% of the Iranian economy. Mr Khatami says he wants to change this. But that will test the promise of co-operation from his conservative adversaries in parliament. The existing laws discourage foreign investment, by allowing non-Iranians only 49% of the shares in any venture and no right to own property. Strict labour laws, adopted after the 1979 Islamist revolution, are another deterrent to investment.

Fighting red tape is equally tough. It involves, among other things, getting rid of many of the institutions created after the revolution, which pour out a stream of meddlesome instructions. These bodies will of course fight for their lives. Past efforts to make the government leaner have been defeated by their will to survive and by the fear that abolishing them would add to the number of unemployed.

So Mr Khatami's economic hopes may turn on his ability to carry out political reform. His conservative opponents naturally want him to concentrate on economics. But his supporters have learned from bitter experience that economic growth needs political openness and better relations with the outside world. The president's main task is to get the conservatives to support his efforts to improve ties with the West, especially the United States.

American sanctions hurt Iran's economy mainly by what they do to the oil industry. Last week Iran had to postpone offering some 20 oil and gas projects for international tender because potential bidders were nervously wondering what the Americans would say. In January, Mr Khatami extended an olive-branch to the American people, and in June the American secretary of state, Madeleine Albright, responded by calling for a "road map" to better relations between the two governments. Mr Khatami's government said it would answer "when the situation calls for it". The president's proposals for economic reform might suggest that the moment has arrived. But first he needs to overcome the continuing opposition he faces at home.

There is less opposition from the conservatives to improving relations with Europe. The European Union has resumed its formal talks with Iran, cut off after a Berlin court found the Iranian government involved in the murder of Kurdish dissidents. Italy's prime minister, Romano Prodi, visited Tehran last month, and soon afterwards an Italian bank extended a $1.2 billion credit line to Iranian banks. A senior French politician is expected in the near future. But better relations with Europe are still hostage to an underlying clash of ideas between the two sides, above all the fatwa issued by the late Ayatollah Khomeini authorising the assassination of a British writer, Salman Rushdie.

An EU delegation in Tehran last month pressed Iran to abolish a $2.5m bounty offered by a religious organisation for killing Mr Rushdie. The hardliners' retort was brusque. Ayatollah Ahmad Janati, said: "No one dares to violate the fatwa. Don't argue, there's nothing more to talk about." He has a point. President Khatami has not yet dared to raise the Rushdie affair, for fear of a conservative backlash. But he must eventually deal with the issue if he wants easier relations with the West. As he delicately put it recently, "We need to have tolerance, to realise there is a price to pay for everything we want."

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