Back in 1951 when the British put an oil embargo on Iran to punish Mossadegh for nationalizing Iranian oil, his brilliant young foreign minister Dr Hossein Fatemi came up with the idea of an oil-free economy for Iran. The thought flashed again briefly after the 1979 revolution, but fizzled because it was fed by ideological blustering not dire necessity (Iran-Iraq war something to do with it too). The planned 2012 European oil embargo may lead some Iranian economists to entertain the idea again and draft a backup plan for a worst-case scenario where Iran has no oil revenue. Will such a plan succeed and how painful will it be?
Right at the start, the Iranian government will lose about 55%of its spending money (if we use the 2009-2010) budget. Does this mean that Iran will lose 55% of its economy? Not at all! The nation does not live by oil alone; the amount of trade that Iranians do with each other is larger than what we trade with foreigners. The country’s gross domestic product (total of finished goods produced) is about $400 billion a year, whereas the total revenue from all exports, including oil and gas, is roughly $85 billion. Losing foreign trade would be a dizzying blow to the economy for sure, but not a knockout punch, if our nation had its act together (I can hear it now, “if the nation had its act together, there would be no embargo in the first place!”).
I asked about the idea of an oil free economy from a friend teaching business at one of Iran’s universities, who replied with a polite “zeki!.” Not practical, he said. If it was workable, it would have happened when Mossadegh proposed it. So why did Mossadegh’s plan fail? Turns out he tried to sell government bonds to the public to finance government operations, but no one bought them. Bonds are a way for the government to borrow money from the people. You give the governement your money to pay salaries and build infrastructure, and the government gives you a piece of paper promising to pay you back with interest a few years down the line.
The idea works very well in the U.S. For example, World Wars I and II were fought with money borrowed from the American people. And bonds are pretty safe investments because if for some reason the government can’t make enough money to pay you back, it can just raise taxes on everyone and come up with your money that way. In other words the rest of the nation insures your loan whether they like it or not.
I’m guessing Iranians didn’t buy Mossadegh bonds because they weren’t sure the government would last. Ditto the IRI. Also they weren’t sure if their money wasn’t going to end up financing European mansions instead of factories that create jobs that breed taxpayers that help pay back the money you lent the government. Ditto the IRI and Canadian mansions.Hence the “zeki!“