Ailing, still
The Economist
August 13, 1999
EXACTLY a year ago, President Muhammad Khatami set out to salvage Iran's
sick economy by way of an ill-defined recovery programme. He promised to
improve conditions for foreign investment, increase non-oil exports, accelerate
privatisation and reduce red tape. The hope was to give people a better
life and, also, to disarm his conservative critics, who use Iran's weak
economy as a weapon to beat off political and cultural liberalisation.
So far, he has failed in both aims, frustrated by bad luck, official mismanagement
and the limits to his authority.
Iran's economy has suffered most from the fluctuating price of oil,
the source of more than 80% of its hard-currency earnings and around half
its total revenue. Last year (Iran's year runs from mid-March) the government
faced a revenue shortfall of $6 billion, or one-third of the state budget,
and was forced to suspend most of its development projects. The recent
rise in oil prices will help with current expenses, including wages for
millions of public servants, and also with the annual payments of $5 billion-6
billion that Mr Khatami's government must dish out to service the huge
foreign debts it inherited from the previous administration.
Iran's worst drought in 30 years has also taken a toll, despite the
recent rains. The damage to farming, which employs about a quarter of
the workforce, is estimated at $1 billion. Economic growth this year is
unlikely to reach 2% and anyhow will be far below the 5% average predicted
at the beginning of the second five-year development plan, which ends in
March. All this has had a disastrous effect on the country's chronic unemployment,
officially rated at 14% but believed to be much higher. Half of Iran's
60m-plus people are aged under 20, and up to 1m reach working-age each
year.
Efforts to make the government more efficient barely touch the surface
of bureaucratic mismanagement and corruption. As ever, the government pays
lip service to economic liberalisation, but has neither the courage nor
the authority to free itself of the commitment to pay billions of dollars
in direct and indirect subsidies: prices of basic goods such as fuel,
bread and medicine are ridiculously low.
There is endless talk of encouraging non-oil exports. But good intentions
are frustrated by erratic official policy, a severe cash shortage and strict
labour laws. Many factories are operating at a fraction of their capacity
because they are unable to import spare parts or raw materials. This causes
periodic shortages of essential goods. Making matters worse, the price
regulations discourage businessmen from investing. Producers find it hard
to plan far ahead since the authorities keep changing their minds and issuing
contradictory orders. Onion growers, for instance, were recently told
by the commerce ministry to halt exports at once in an effort to lower
prices at home.
But the biggest obstacle to economic recovery is political indecision,
especially concerning foreign policy. Mr Khatami and his allies argue
that economic prosperity depends on political reform. Their conservative
opponents disagree, claiming that the president is expanding political
and social freedoms at the expense of the economy. This split within the
establishment makes it almost impossible for the government to take a decision
and stick to it.
The conservatives vehemently resist any major shift from the xenophobic
outlook of the revolutionary years. Above all, they oppose any serious
easing of the laws on foreign ownership of property. This, together with
restrictive labour regulations, means that there is little non-oil foreign
direct investment in Iran, except for pilot projects in the free-trade
zones. Several European countries, encouraged by Mr Khatami's leanings,
have sent trade delegations to Iran. But most of these visits amount to
little more than tourism-and there have been none since the recent student
riots in Tehran.
There is, indeed, growing interest in investing in Iranian energy, partly
because here the state can always find a way to skirt undesirable laws.
But some would-be oil investors are held back by the half-threat of American
sanctions. Many Iranians believe that normal relations with the United
States are the key to economic recovery. Mr Khatami probably agrees but,
so far, he has not dared go beyond tentative verbal overtures.
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