Agha Jaan
debunking. hahahah.
A black hole filled with oil
Iran’s economy is so inefficient, corrupt and bloated that it was heading for a fall even before sanctions. Almost all Iranians receive cash transfers meant for the poor. Last year the state spent $100 billion on subsidies, a quarter of GDP.
The economy: Melons for everyone | The Economist
The economy
Melons for everyone
A mixture of Western sanctions and bad economic management has hit prosperity
Nov 1st 2014 | From the print edition
ECONOMIC CONSIDERATIONS USED to play a vanishingly small role in Iranian politics. As Ayatollah Khomeini, who led the 1979 revolution, famously said: “We did not rise up to get cheaper melons.” For decades conservative ideologues chased Utopian visions, whatever the cost, while liberals hungered for political reforms.
That has changed in recent years. Debate in last year’s election focused on boosting the economy. Mr Rohani won because he was seen as the candidate most likely to achieve that. Conservatives used to be anti-trade, in keeping with the autarkic and socialist sentiment of the revolution. Now even the supreme leader endorses globalised capitalism. Asked why, a senior official laughs and says, “My son is in grade two and was recently standing for election as class president. I had high hopes. He is a popular guy and articulate, too, and yet he lost. I couldn’t believe it. I asked him, ‘what did you campaign for?’ ‘Justice and dignity’, he said. ‘And your opponent?’ ‘He promised the class better lunch and longer breaks between lessons.’ ”
Iranians today live much more comfortably than they did a generation ago, but the past three years have been tough. Businesses and consumers are suffering from the effects of much tighter sanctions imposed in 2011. “You literally see fewer people with shopping bags on the streets,” says a banker in Tehran. “My normally busy plumber tells me he often doesn’t get his first client until mid-week.” The merchants in the bazaar in Qazvin report a drop in revenues of between 50% and 75%. A tomato-seller reckons these are the worst times he has seen in 25 years. Merchants open later or stack and restack shelves. “The bazaar is ruined,” says one shopper. “And I feel ashamed that I can no longer afford the same food. I cannot invite anyone to my home.”
Iran’s economy is the third-biggest and most mature in the Middle East. It has a large industrial base, an educated workforce and a service sector which in 2012 accounted for 52% of the economy. That year, though, GDP fell by 5.8%, according to the central bank, and last year it dropped by another 2%. Unofficial figures are even worse.
“The bazaar is ruined,” says one shopper. “And I feel ashamed that I can no longer afford the same food. I cannot invite anyone to my home”
Over the previous decade the economy had been growing at an average rate of 5.1% a year. When it keeled over, inflation at one point shot up to over 50%, and salaries failed to keep pace. In real terms, private pay dropped by 35-40%, and government employees lost up to 50%. At least half the population suffered a dramatic loss of income. In one week in October 2012 the currency plunged by 40% against the dollar in the black market, creating panic. At its lowest point the rial was down 75%. Unemployment has rocketed. Car production, which used to account for 10% of GDP and employ 1m people, fell by about 70%, according to industry sources. A Mercedes factory in Tabriz that a few years ago was making 80 engines a day now produces just two.
All this has caused a surge of popular discontent. As former revolutionaries, the country’s leaders are aware of the dangers, yet they struggle to respond because the state has no money. In the past, thanks to free-flowing oil revenues, governments had always been able to create jobs, feed the poor, rescue banks, subsidise industry and buy off critics. But now, for the first time in a decade, the coffers are empty and the budget is in deficit. According to American government estimates, the Iranian economy is 25% smaller today than its pre-2012 growth trajectory indicated.
The proximate cause of this dramatic plunge was the launch by Western governments of one of the most stringent sanctions regimes ever, designed to force an end to Iran’s nuclear-weapons programme (see article). Iran’s main oil customers in Europe stopped buying almost overnight. America’s government banned the clearing of dollar payments, most of which go through the American financial system, by Iran’s central bank and anyone dealing with it. Iran’s government assets abroad were frozen and hundreds of state-linked firms targeted directly. Oil exports, which in 2011 had been running at about 2.5m barrels a day, declined by at least half. Imported industrial components became impossible to get hold of, fuelling unemployment and inflation.
Some non-Western states ignore the sanctions and continue to trade with Iran. The Iranian government tries to pay them in gold and turns a blind eye to smuggling, profits from which have set off a construction boom. It is hard to know how much trade still gets through, but sanctions have certainly made a serious impact.
The debate on their effectiveness has created some strange bedfellows. Western and Iranian hardliners both argue that the country’s falling living standards are solely due to sanctions—the Westerners to claim a political victory, the Iranians to blame their enemies for an ill that is partly self-inflicted.
A black hole filled with oil
Iran’s economy is so inefficient, corrupt and bloated that it was heading for a fall even before sanctions. Almost all Iranians receive cash transfers meant for the poor. Last year the state spent $100 billion on subsidies, a quarter of GDP. Until recently diesel cost the equivalent of two American cents per litre. Turkey, which has a population much the same size as Iran’s and is more industrialised, consumes about 60% less fuel. Iranian government offices are vastly overstaffed. The oil ministry has expanded from 100,000 employees in 2005 to 260,000 today. Many abuse their position. Transparency International, a Berlin-based lobby, classes Iran as “highly corrupt”. Officials routinely use public funds to invest in foreign property deals. According to one well-placed observer, “politics is a distraction from making money.” Parliamentary investigators have given warning that if the full extent of political corruption were revealed, it could cause “social shock”. Imports of luxury cars increased fivefold between 2011 and 2013, whereas sales of modest Iranian-made cars halved.
The misallocation of funds on a gargantuan scale has hurt the private sector. It accounts for only about a quarter of corporate revenues, and many firms are teetering on the verge of bankruptcy. The official figure for non-performing loans, at 18%, may be far too low. “The lack of investment capital is the country’s biggest problem. We’re $300-400 billion short every year,” says Mr Laylaz, the economist. Since 2006 investment in industry has fallen by 10-15% a year.
The banking sector is dysfunctional. Banks lend almost exclusively to state-affiliated firms. Small and medium-sized enterprises cannot get loans. The dearth of finance has spawned some ingenious solutions. For example, private landlords use apartments as collateral to borrow from tenants in lieu of rent.
Management of the Iranian economy had been poor since the revolution, but under Mr Rohani’s predecessor, Mr Ahmadinejad, it got even worse. During his eight-year tenure oil revenues more than tripled, thanks to steep price increases, and more money flooded into government coffers than in the preceding century, $800 billion in total. He spent all of it, shovelling vast sums into construction projects. Provincial towns are littered with unnecessary bridges and bypasses. His prestigious Mehr housing project created 200,000 apartments throughout the country without access to water, gas or sewerage, most of which now stand empty.
In theory some of Mr Ahmadinejad’s policies were sound. He tried to boost the private sector by selling state assets. Nine of the ten biggest companies on the Tehran stock exchange were listed in the past decade. Boards and shareholders are no longer toothless. Directors increasingly demand proper accounts, and annual general meetings can be contentious. The boss of the Asia Insurance Company was recently told by a shareholder: “A donkey could run this company better.”
But the privatisation programme still leaves much to be desired. Majority stakes were regularly sold to entities close to the state, including public pension funds, which in some cases received their stakes in lieu of money owed to them by the government. Although asset sales were open to anyone, private investors at home lacked the capital to buy large stakes and foreigners were put off by sanctions. Analysts speak of the rise of a semi-private sector.
Devaluations have made some parts of the economy more competitive. For years, Iranian goods were expensive in Iraq because of Iran’s overvalued currency. When sanctions caused the currency to slide, Iranian products almost overnight became cheaper than those from neighbouring industrial countries such as Turkey. At home, sanctions have also kept foreign competitors out; Iranian boutiques and supermarkets are full of domestic products for the first time in a decade.
The charms of self-sufficiency
Bad economic management apart, Iran’s government also inadvertently boosted the effectiveness of sanctions in two other ways. First, it had been keeping taxes too low for decades, allowing the country to become too dependent on oil revenues. Now it has to cut spending and raise taxes at the same time. Second, when Mr Ahmadinejad came to power a decade ago he abandoned the country’s long-standing policy of economic autarky. At the time Iran was almost self-sufficient. Seeing an opportunity to boost growth, the new president brought down tariffs and struck up new trade relations. The policy was a great success, but it made Iran much more vulnerable when sanctions hit home.
The government might have foreseen this. As Mr Zarif, the country’s foreign minister, wrote in an article in a Western policy journal a few months ago, “The ongoing process of globalisation, however conceived and defined, whether lauded or despised, has brought inescapable weight to bear on the foreign policies of all states, whether large or small, developed or developing…Today most nation states, regardless of their size, power, influence or other attributes, have come to realise that isolationism, whether voluntary or imposed, is neither a virtue nor an advantage.” It is the source of the article rather than the sentiment expressed in it that is remarkable. Iran has realised it has been hit by a triple whammy of oil dependency, sanctions and inefficiencies covered up by years of reckless state spending.
In his first year in office Mr Rohani has managed to stabilise the economy. The currency has levelled out and the trade surplus has gone up. Inflation is down from 45% to 15%. The president’s team of capable technocrats expects the economy to start growing again this year, perhaps by 1.5%. Cuts in subsidies have improved government finances, though they pushed up fuel prices by 75% overnight.
Yet there is a long way to go. Most energy prices continue to be subsidised by the state; petrol still costs only 28 cents a litre. Unemployment remains stubbornly high. Further reforms are needed to accelerate growth. Experts say these should include reducing cash transfers to the poor, reining in the generous welfare state, cutting industrial subsidies and firing hundreds of thousands of government employees.
Iranians have endured greater hardships in the past. American sanctions in the 1980s caused fuel and food shortages. For now, Iranians are not going hungry and the economy is nowhere near collapse. But in the longer run something will have to give. Reforms will become inevitable, but if Mr Rohani can cut a deal with the West to ease sanctions, they could be introduced more gradually and less painfully.
