Iran News ...


6/1/05

Iran's Conservatives: Anti-Americanism or Fear of Economic Restructuring?

By Amir Ali Nourbakhsh

1. Introduction            

Ever since the end of the Iran-Iraq war (1980-88) Tehran-Washington ties, which froze following the 1979 revolution, have repeatedly failed to resume mainly due to domestic political factors. A decade after the revolution, the emergence of the centrist and pragmatist government of Akbar Hashemi Rafsanjani in 1989 gave rise to hopes that Iran-US relations would at least improve, if not go back to normal.

 

Ever since, hardliners and interest groups in both capitals have played a major role in preventing this rapprochement. In Tehran, the grass-roots, xenophobic, extremist and sectarian groups have been encouraged by a group of powerful monopolists, rent seekers and partly military-affiliated pressure groups to prevent a rapprochement under revolutionary pretexts. This is while the US administrations have been forced by American pressure groups not to settle an agreement with the Islamic Republic. The fact that a political agreement between Tehran and Washington even without these interferences would have been difficult and at times impossible is an additional factor that has prevented the ice from breaking. In other words, a rapprochement would have had to wait until the domestic power struggle in Iran and the intense lobbying in the US were in an appropriate condition. Obviously these two things never happened simultaneously.

 

This article argues that for the first time since the Iran-Iraq war, the majority of forces in the Islamic Republic see the necessity to terminate the United States' security concerns i.e. Iran's alleged support of terrorist groups in the region, Tehran's opposition to the Middle East Peace Process and Iran's quest for a nuclear bomb. There are increasingly more political forces from the conservative camp-the main anti-US wing-that are realizing that easing US concerns would increase the life time of the Islamic state. This mindset is being resisted by those ideologues who are convinced that yielding to American requirements would be a prelude to regime change in Iran.

 

Among the latter group, however, is a strong faction whose opposition to the US is not founded on political concerns. These business-oriented networks have benefited from the socio-economic structure dominating the Islamic Republic since the war. It is this structure-and not necessarily the undemocratic political situation-that enables rent seekers and monopolists to make fortunes out of Iran's underground and traditional economy. Notably this social-economic structure will break if the country opens its doors to the international community be it through joining the WTO, economic liberalization, democratization or restoring ties with the US. The question today is which of the said groups is more likely to gain control over Iran's foreign policy and domestic politics after the June presidential election.

 

2. Anti-American Sentiments   

2.1. The genuine cause:

 

Against what may have appeared in the past years, the anti-American sentiments in Iran are not mere state propaganda. The following points account for part of the genuine anti-US sentiment among many Iranians.          


• Iranians historically tend to believe in conspiracy theories and are thus skeptical towards foreign powers,
• The Cruiser USS Vincennes shot down the Iran Air 655 on 3 July 1988 in the Persian Gulf,
• The Clinton Administration apologized for its 1953 coup against the popular government of nationalist Prime Minister Mohammad Mosadegh,   
• The US has changed regimes in the region in the recent years and threatens to change the regime in Tehran, if it did not comply with the international community and
• The US is asking Iran to give up its legitimate nuclear rights as a member of the NPT.


Also given that the majority of the forces that contributed to the 1979 revolution had leftist tendencies shows how intellectualism in
Iran and even political Islam had been inspired by leftist and anti-imperialistic mindsets, at least until some time after the revolution.

 

Although times have changed and the modern Iranian intellectuals and the moderate Iranian Islamists are more inclined towards liberalism, democracy and Western modernity many political activists in Iran have remained untouched by the globalization trends of the past two and half decades during which the majority of Iranians have remained more or less isolated.

 

Nevertheless, although there seems to be a general anti-US trend among many Iranians, the different political mindsets deal differently with the US-factor in Iranian politics. While the reform camp sees a chance of improving Iran's ties with the US through elevating its concerns, the conservatives are afraid that any drastic step towards modernization, democratization and economic liberalization would undermine their situation to the advantage of the reformists.

 

The reformists who were approved by the majority of Iranian voters in free elections of the past eight years seem less worried about freedoms of speech and vote than the conservatives who win elections only by massive disqualification processes. This moderate attitude among the reformists has aggregated the anti-Americanism among certain conservatives.

 

So, while the genuine anti-Americanism in Iran is partly due to historical facts, political competitions and the domestic power struggle also adds to the mistrust between Iran's conservatives and the US.

 

2.2. The factional cause:

 

Apart from the genuine concern of these conservatives, some of them use the anti-American slogans in order to prevent a major victory for the reformists. Correct or not, the reformists have managed to disassociate themselves from the causes of the US concerns while the general perception remains that it is the conservative establishment that is promoting the pro-Hizbollah, Hamas, Jihad Islami and even Al Qaida campaigns, seeks nuclear power and violates human rights.

 

This has encouraged the more moderates among the conservatives to start embarking on a more open foreign policy in their presidential campaign. The Chinese Model is the term attributed to this agenda: Iran should open itself politically and economically to the world, but keep the reins on domestic political developments and control dissidents.      

 

The problem of this conservative faction is not necessarily rapprochement with the US, but that such move would improve the political situation of the current government. Another factor is that a rapprochement with the US today-unlike four years ago-necessitates fully relinquishing Iran's rights as a member of the NPT.

 

Many moderate conservatives argue with the hardliners of their camp that "had we improved ties with the US years before, we would not be facing pressure to give up our rights as a member of the NPT."

 

2.3. The business cause:

 

The conservative camp as a whole consists of a wide array of agents with similar and opposite political and economic interests. One faction, person or strategic alliance at a given time may act in harmony on one occasion but in discord on another with the same counterpart.

 

Some conservatives may be moderate-tempered, but for expedient considerations or for the sake of the regime survival act in tandem with hardliners on certain occasions. For instance, some hardliners may harshly criticize very powerful conservatives, involved in some illicit business activity or underground economic operation, but would support the same group in a mutual effort to ambush the reformists who advocate a democratic election process.

 

The multi-layered alliance of conservatives includes moderate figures who due to their life-time or temporary positions are dependent on and thus influenced by radical and even rogue elements.     

Last but not least, this group consists of powerful traders and mercantilists who nurture on state monopolies, extremely lucrative rents and the traditional socio-economic structure. These forces have throughout the years grown powerful enough to make threats to top decision makers. They are capable of disrupting
Iran's international, domestic, economic policies and can make legal cases against their opponents including state officials.         

Oddly enough, they often control grass-roots, low-income and anti-capitalism youngsters who are dedicated to the Islamic Republic's revolutionary doctrines and the "social justice" slogans of the first revolutionary years. These grass-roots activists are often unaware of the sources that support their organizations. Mostly, they believe to be fighting the roots of capitalism, corruption, rent seeking and monopolies, while ignoring the fact that many of those responsible for these hazards are the same groups that sponsor them. These organizations usually consist of unemployed and uneducated youth who are told to be sponsored by Islamic charity organizations.

3. Anti-Americanism & the Business Cause


The Islamic Republic is aware that efforts to integrate
Iran into the international community will come as a political and economic package.         

This said, part of the mainstream conservatives see issues such as Iran's structural adjustments, joining the WTO and similar economic initiatives on the one hand, and détente with the US on the other, as the two ends of the same policy, yet with different paces and different political consequences. Some of the mainstreamers prefer a gradual economic process in order to terminate major rents and monopolies, counter money laundering and stop illegal imports of commodities to the country. The reason is simple: Some of these pressure groups are growing too powerful and are eroding the sovereignty of the state.       

These mainstream conservatives see a gradual policy to counter these irregularities, in contrast to a drastic approach, a safe way of dealing with these forces. Notably the high potential for blackmail, the common interest of opposite agents as well as family bonds make a drastic move against those in charge of illicit economic operations the last option for Iran's leadership.  

The following points shed some light on
Iran's underground economy and the interaction of these rogue elements within that structure. The termination of these activities will have positive impacts on the international community, but will disrupt the financial situation of some power centers that nurture on this complex economic structure.           

4.
Iran's Unofficial Economic Structure           

4.1. Illegal Jetties:         

Because of deficient trade regulations, many commodities are being smuggled into
Iran. Some 62 jetties in Iran have been identified as illegal and are not supervised by customs authorities. In the past, there has not been sufficient success in stopping illegal business in Iran. This shortcoming has, consequently, encouraged certain monopolists to continue importing certain commodities.

The fact that these jetties have not been closed down or that those responsible for the acts of smuggling have not been arrested indicates the extent of their power and influence as well as the state's inability to confront such obvious phenomenon.    

4.2. Smuggle:   

According to trade journals, American cigarettes go via
Cyprus to Iran through traders in Oman. (WTO, 2003) These smugglers cannot be that hostile to the US or ideology-oriented. Moreover, bringing those amounts of cigarettes to Iran would not be possible without connection to the illegal jetties or other customs or border officials.          

Local press following the arrest of the head of
Iran's Tobacco Industry in April has been arguing that his imprisonment is a tit-for-tat against the government's decision to terminate Iran's tobacco industry's monopoly. Iran has been forced by the high level of smuggled cigarettes to open its doors to international tobacco companies. Consequently, those in charge of the illegal imports have been seriously affected by the local production and legal imports that reduce the turnover through smuggle.            

Iranian press associates the smugglers with para-military armed forces. While there is no evidence as to whether the forces do really smuggle cigarettes and other commodities through the illegal jetties the following points give reason to assume so:          

* There are only as many institutions in the Islamic Republic that have access to jetties.     

* One of them, the oil industry, is already under scrutiny by the conservatives. This reduces the chances of its involvement in these illegal trafficking.

* Other institutions are either the Islamic Revolutionary Guards Corps or the ministries. Since the government and the reformists have often threatened to disclose information as to who runs these jetties, it is highly unlikely that any of the ministries or institutions under the reformist government would be in charge. Past experience shows that if the reformists had been in charge, the conservatives would have long used this as a political tool to bash the government.

* Western intelligence sources estimate the Lebanese Hizbollah's operational budget to be approximately $200-$500 million annually. Sources of funding include illegal arms trading, cigarette smuggling, currency counterfeiting, credit card fraud, and drug trafficking.
Lebanon's Hizbollah is said to be associated with segments of Iran's armed forces establishment. (Anti-Defamation League, 2004)


4.3. Parallel Works:      

The Islamic Republic is famous for being run by two parallel institutions. This dichotomy is usually the manifestation of parallel works of Islamic and republican entities in politics, society and economy. Mohammad Ali Najafi,
Iran's minister of higher education during the 80s, and head of Budget and Planning Organization for three years is quoted in a book called Iran's Political Economy as saying "the Islamic Foundation of the Deprived and War Veterans (Bonyad-e Janbazan va Mostazafan) entered economic operation which had destructive impacts on the government's decisions. [T]hey imported products that negatively impacted domestically produced goods... none of the [past] governments had the will nor the capability to counter these [bonyads]. ... Some of these entities and bonyads, so deeply rooted [in society], are more powerful than the government. The governments have always thought that countering these bonyads ... would inflict damages on the government resulting in more disadvantages." Notably, the heads of these foundations are usually former commanders of the revolutionary guards controlled by the conservatives.

The said book argues that rent seekers (the traditional mercantilists) have "always opposed the government's efforts to establish a transparent and real market economy because policies such as structural adjustments would disrupt their connections to the government and change the conventional network that provides them with rents and exclusive distribution rights of certain commodities." (Bahman Ahmadi Amoui, [in Farsi], 2003 p.380)

According to Najafi, members of the Society of Islamic Coalition (Motalefeh) which is associated with many bonyads, the bazaar, chambers of commerce and charity organizations use their pressure leverages on the government. He argues that this Society's concerns are mainly of business nature and they are often supported by a conservative clerical establishment also close to the traditional bazaar. The reason for this, Najafi argues, is that "some clerics have a rigid perception of communist values and socialism that automatically brings them closer to the opposite concept." Najafi argues that Motalefeh which has often lacked a strong position within the governments, e.g. in the cabinets of the past governments, would use leverages outside the governmental apparatus to pressure the government. (Amoui, p.371)

Khatami's government was able to shed some light on the economic operations of para-state organizations. The bonyads are today subject to tax and the ministry of information has been deprived of the right to undertake economic and trade activities. This is while certain armed forces have yet managed to flee the supervision of the government. Reformists argue that these military and para-military entities still are involved in trade activities and are not subject to any checks and balances system.            

Ezatollah Sahabi, the first head of
Iran
's Budget and Planning Organization after the revolution, says Motalefeh's members who in the first years of the revolution controlled the ministry of commerce placed their people in distribution centers. They believed the government was not supposed to make any profits. So, they imported all commodities at the subsidized exchange rates and placed them at the disposal of bazaaris and their affiliated merchants at a slightly higher exchange rate. This is how they gained control over the state's distribution networks and made huge profits. (Amoui, p.23)

Masoud Roghani Zanjani, head of the Budget and Planning Organization in 1995, argues that today the debate over parallel institutions is still a crucial issue 26 years after the revolution. "Every minister or head of an organization believes that his decision making sphere is eroded by external forces because unofficial entities surround and influence him. ... This has reduced the power of the government and the state in dealing with crises and has also been an obstacle to the decision making procedure. Often the government makes correct decisions, but is unable to implement them. This leads to loss of resources and backwardness. It also gives rise to more and more disappointment of effective human resources. This issue [parallel institutions] also adversely impacts the legitimacy of the system. (Amoui, p. 187)

Zanjani also refers to the harsh opposition of the bazaari associates to his and Rafsanjani's policies to promote real privatization and economic liberalization. Zanjani says that the head of Motalefeh as head of the parliamentary commission believed these concepts (privatization and economic liberalization) to be equal to full capitulation [to the West]. (Amoui, p. 228)

All this may serves as a small example as to why parallel institutions, the deficient economic structure and lack of transparency would benefit certain power centers. It also shows why any efforts to terminate this state of affairs, make the economy more transparent and reduce the rents are fought back under the pretext of anti-Americanism and liberal economy. This also explains where part of the resistance towards
Iran
's interaction with international financial organizations such as IMF and WTO comes from.     

4.4. Money Laundering:

According to Hossein Heshmati Moulai, a member of the financial research centre of the Central Bank of
Iran, the amount laundered in Iran rose from about 6% of GDP in the mid-1970s to close to 15% in the 1980s. In 2003, a prominent Iranian banking official estimated that money laundering encompassed 20% of Iran
's economy.   

One area where money laundering is extensively used is in drug deals, to which
Iran is highly exposed. There are two main illicit opium-producing areas in Asia, the Golden Crescent (Iran, Pakistan and Afghanistan) and the Golden Triangle (Burma, Laos and Thailand). Iran has central strategic significance in the former but also serves as a transit route to the latter as a gateway to Europe, Turkey and Russia
.                  

The procedure for money laundering in
Iran is different from that in the West. For example, the international criminal networks in the Golden Crescent and Golden Triangle transfer the sums received from drug smuggling from local currencies to different types of commodities. These commodities are then transferred to their registered companies in the UAE, Hong Kong or Singapore. These firms place these products at the disposal of Iranian operators who then use the illegal jetties to import them into Iran. These commodities or drugs are sold in the Iranian market. The amounts raised from these transactions are transferred to the traditional "interest-free funds" which transfer these monies out of Iran
.    

4.5. Interest Free Funds:

Another aspect of
Iran's underground and traditional economy are unofficial institutes, known as Sandoq-e Qarzolhasaneh. Many of them work parallel to the country's official economic infrastructure. Their activities have reduced the government's control over liquidity and financial and monetary markets. Many of these "interest-free funds" lack any operation permit from the Central Bank of Iran
and are run by forces close to the para-military and bazaari establishments. This state of affairs has seriously undermined the government's monetary policies to contain inflation just as it has prevented the government from making efficient use of the people's savings. Especially, the rising inflation rate has been a source of concern for international financial institutions such as the IMF.                    


One instance are reports from US institutions such as the US Postal Inspection Service. This is
America's oldest federal law enforcement agency, which fights criminals who attack the US nation's postal system and misuse it to defraud, endanger, or otherwise threaten the American public. The service has been focusing on illicit proceeds such as money gained through narcotic sales, the smuggling of illegal aliens, tax evasion or the selling of counterfeit merchandise. Postal inspectors arrested an Iranian national on 5 October 2001 for conducting an illegal money transmitting business and violating the International Emergency Economic Powers Act and money laundering laws. They reported that from January 1997 to October 2001, this Iranian national transferred more than $19 million to Iran. Examples like this have been among the many reasons why Iran
at this point feels it necessary to address concerns of the international community, such as money laundering.

Also the nature of the illicit business demonstrates how unlikely it is that
Iran
's official sources in the government-the Executive Branch-are behind the operations. The main point of disagreement in this respect remains between the Central Bank and the traditional Islamic banking system run by big fish close to the mercantilist and para-military establishments.            

The channels that facilitate all this-the jetties, the smuggling, the funds and customs apparatuses-are clearly in the hands of influential power centers. It is difficult to believe that these operations are run only by criminals without access to strategic centers of the state.

5. What a Break of Structure May Imply         

5.1. Oil Revenues & Rents:        

Discovery and exploitation of oil has always been the main factors to make regulations in
Iran
. Oil revenues have always been used to encourage production and services sectors, whereby the traders with good links to the system have successfully explored rents.     

The subsidized prices of certain commodities have not only translated into rents through favoritism, but this system has considerably disrupted the country's pricing mechanism as prices have hardly been determined by the market. Obviously, any attempt to change this state of affairs will face resistance.

Similarly, the national currency rate is also determined outside the market system and according to bureaucratic regulations. Consequently, the Rial has often been overvalued. This has been possible through the country's only cash cow, oil revenues. One of the downsides is obviously that the overvalued Rial makes investments in national projects only look financially justified while they are nothing but mere loss.   

This façade encourages certain pressure groups to advocate the oil-run economy and support the subsidized commodities. This economic structure, makes the country look economically progressive (due to high oil prices Iran has enjoyed a nominal economic growth rate of over 6% in the past years), while the oil revenues subsidize more and more commodities paving the way for more and more rents for those who have access to them.        

This situation puts the government and many of the said interest groups at cross purposes.            

5.2. Privatization & Rents:         

Privatization without deregulation can hardly pave the way for the operation of a genuine private sector.
Iran
's resistance to deregulate its economy is obviously, as explicated above, a political matter and a precaution to avoid the attack of those who benefit from the regulated economic structure.

Hence, all efforts to privatize
Iran
's economy will only lead to development and growth if private units are forced to reduce their costs and increase efficiency through competition. As for now, privatization outside a real competitive environment has lead to creation of rents. Efforts in the past years to create a competitive environment have been regarded by many monopolists and rent seekers as an attempt to break the current economic structure.

5.3. Taxation & Rents:   

Until 1999, hard currency was put at the disposal of seemingly "production units" at a favorite subsidized rate. Taxing these units was like taking back only a small portion of the gains made through the rents given to them. But since 2000, these allegedly production units-who used to sell their currency at the black market-have to purchase their dollars at the official rate. This means less profit for some of those groups that could make a fortune out of the difference between the two exchange rates. Ever since, they have not only lost their side-business-which was making more profit that the actual production business-but these rent seekers are forced to even pay more tax which makes their entire business less lucrative.    

All in all, in a monopolistic economic environment, interest groups can impose higher prices on consumers and considerably increase profit margins. With it, the potential for corruption and bribery increases as well.         

This system logically appeals to a small but very powerful and extremely well-connected minority in
Iran
. Notably, the economic reforms of the past eight years have started signaling alarms to many of these forces. However, their integration in the socio-economic structure of the country is so deep that it remains a dangerous challenge for the establishment-itself involved in many of these affairs through direct and indirect channels-to fight this phenomenon.

Resisting change under the revolutionary slogan of "down with the
US
" has created a taboo that only few political forces dare to challenge cautiously.

6. Conclusions            

Estimates in 2003 pointed to between $2 and $4 billion of smuggled imports a year, some $3billion a year of capital flight to foreign safe havens and about $5 billion of illegal drug trade. Moreover, the contribution of
Iran's underground economy to the GDP is a frightening figure to both those who thrive to establish democracy in Iran
and to the conservative leaders who intend to terminate rents without losing power or endangering the entirety of the regime.   

The gradual privatization of the tobacco industry to fight smuggling, the slow campaign to counter unofficial Islamic banking, the small changes to the parallel institutions dilemma as well as the failure to deal with the illegal jetties indicate two points: 1) The state has realized the necessity to change the economic structure of the Islamic Republic as an effort to maintain the regime and 2) the system is unable or, for whatever reasons, reluctant to counter monopolies and rents at a faster pace.          

At the same time, the continuous efforts to liberalize Iran's economy and the developments of governments of Rafsanjani and Khatami (read Khatami and Rafsanjani: Similar goals, different legacies) support Najafi, Sahabi and Zanjani's arguments that the rent seekers and monopolists can disrupt the state's macro-policies, despite determination on the highest level to counter these forces.            

Should the state for whatever reason have come to the conclusion that these forces are eroding the state's authority and sovereignty, it would still have difficulties containing these forces.       

Note the following hypothesis: The state for whatever reason has come to the conclusion that an agreement with the EU and the
US
on the nuclear issue is unattainable for the following reasons:   
• The US does not trust the Islamic Republic. In addition to its reluctance to approach
Iran, Washington is under extreme pressure by anti-Iran lobbyists not to reach an agreement with Tehran
.   
• This reduces the Europeans' bargaining power to convince
Iran
to give up its legal right to have nuclear energy.            
Tehran will hence not have the necessary confidence in the US
and will refuse to give up its nuclear power. 
• The ever intensifying regime change discourse pushes
Iran
towards more defiance.

This state of affairs leaves
Iran
with two possible policy decisions.

Option 1.
Tehran adopts a defiant policy vis-à-vis the US
, announces its resumption of uranium enrichment activities, steps out of the NPT, etc.

Option 2.
Tehran tries to ease other US concerns such as issues related to regional terrorism and disruptions in the Middle East Peace Process. This would necessitate Iran to revamp its economic structure both to create incentives to the US and also to demonstrate that Iran
's traditional economy is not clandestinely supporting Hamas, Hiszbollah and Al Qaida.      

In the unlikely event that the US accepts Iran's full compliance with the international community, Tehran would have to reconsider its relations with these militant groups, reconsider its approach to international organizations such as the IMF and WTO, and accelerate its efforts to implement structural adjustments and liberalize the economy.

To do all this,
Iran
has to undermine the rogue elements who are not accountable to the government and who are accused of para-military activities against the interests of the West.  

Theoretically,
Iran would even give up its nuclear ambitions if it were guaranteed regime security by the US. Iran observers have long come to the conclusion that Iran's hostility to the US is not a matter of ideology, nor is Iran
's opposition to the "Israeli statehood" an irrevocable decree.  

Irrespective of whether or not
Iran
will make such decision, the implementation of such policy is more difficult than reaching an agreement as to do so.

It takes no expert opinion to deduct which of the groups discussed in the article would be most opposed to a rapprochement with the
US. It goes without saying that option 2 would endanger the business interest of certain rogue elements, those anti-American forces that have an economic incentive in their hostility to Washington
. This is while the first two groups (those with genuine and political incentives) who at the same time see a future for their presence in an Islamic Republic-which is less hostile to the US-are less likely to act defiantly.   

6.1. Prediction:

Despite all threats, opportunities still exist. The situation of the said rogue elements has deteriorated in the past eight years. At this point, the mainstream conservatives seem also to have come to the conclusion that the radicals of their own camp are posing a threat to the integrity of the system, especially as external pressure increases on
Tehran. The only factor that still makes the mainstream conservatives think twice before offering an attractive deal to the US, is Washington's persistence Iran should give up its nuclear capabilities in a time when the pro-regime change lobbyists in the US
have never been more vociferous.     

One thing seems certain, the coming year, irrespective of who will be
Iran's next president, will witness a new wave of anti-corruption campaigns. This will have in store the arrests of some big fish. Although some other bigger fish may flee accountability, these policies will mark the beginning of a new way of dealing with state officials in the Islamic Republic. A signpost would be to see whether this anti-corruption campaign would endanger the position of those anti-US forces that are less concerned about Iran's national interest.


About the author:
Amir Ali Nourbakhsh is a frequent contributor to many publications and conference on social and political issues in Iran. He is the editor of the political and economic monthly, Iran Focus, published by the London-based Menas Associates. Mr. Nourbakhsh wrote this article specially for the Tharwa Project.

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