On the evening of the 23 May 1997, Iran's then president Akbar Hashemi
Rafsanjani was patrolling the ballot boxes at the Ministry of Interior in order
to prevent electoral fraud. This, even if only a myth, is said to have taken
place after that month's presidential election. Many analysts held that moderate
Mohammad Khatami would emerge victorious only if the ballots were not
Khatami's attitude in many macro-policy issues resembled Rafsanjani's. Once sworn in, Khatami embarked on a foreign policy to improve relations with neighboring states, pursuing détente with the West and a gradual rapprochement with Washington: a continuation of the Rafsanjani policy. As for the domestic affairs, Khatami's policies were also an extension of Rafsanjani's social agenda. Khatami's higher achievements in the social sphere would not have been possible without what had happened under Rafsanjani. As for the macro-economic policies, Khatami continued the liberal policies that Rafsanjani had embarked on in the state's first five year economic development plan (1990-1995).
Today, many hold that reforms under Khatami failed due to 1) Khatami's inability to confront and overcome his powerful rivals who control Iran's main institutions and 2) the rigidity of the irreformable regime in Tehran. Based on these assumptions, some argue that only an influential person like Rafsanjani will be able to continue the modernization and democratic movement in Iran.
This article will show how the two presidents, despite their similar agendas, differed in performance and eventually came out as different stereotypes, one (Rafsanjani) as a "sly and influential politician" and the other (Khatami) as a "lame duck."
The conclusions of this article are 1) Khatami managed to change Iran's society, economy and foreign policy conduct more than his predecessor and 2) economic and political changes in Iran depend, among other factors, on a) how critical a president's attitude towards the regime structure is and b) the extent to which he is prepared to act against the interest of powerful pressure groups, rent seekers and rogue elements.
Rafsanjani, the Opportunist:
His Economic Agenda:
It was during the Rafsanjani era that the conservatives became the dominant political camp in both economic and political domains. Between the 1979 revolution and Rafsanjani's first term, Iran's economy was driven by two mindsets: 1) The leftist economic view which believed in a state-run economy similar to that of communists and socialists, 2) the rightists or the bazaari perspective which tried to reduce the government intervention in the economy to enhance the role of the private sector. However, this private sector was a monopolist and rent seeking entity which consisted of a small number of traders who were connected to the system and refuted competition. An independent private sector did not exist.
When Rafsanjani was elected president, each of these groups believed in the concentrated allocation of resources: one to the government and the other to the state-affiliated private sector.
Rafsanjani tried to change the state-run economic outlook which had fallen out of favor with the people during the Iran-Iraq war (1980-88). During his first term (1989-1993), Rafsanjani tried to reform the leftist economic structure by the support of the traditional bazaaris (mercantilists). But during his second term (1993-1997), the bazaaris had already grown too powerful to allow him to promote a competitive private sector. So, the leftist perspective was weakened, as the traditional mercantilists gained more power, without paving the way for the genuine private sector.
Rafsanjani & Factionalism:
Hence, Rafsanjani became the target of two political groups; the traditional rightists who feared losing their rents and monopolies and the leftists who had been marginalized under him. Bashing Rafsanjani was not that difficult due to his vulnerabilities, being nepotism and favoritism.
For Rafsanjani, the leftists were an easier target. First, they had lost public support due to their unpopular war time economic policies. Secondly, due to their socialist attitudes they were not in possession of too many powerful traditional institutions such as the chambers of commerce, Islamic foundations and the bazaar that were controlled by the mercantilists.
Rafsanjani's opposition to these two extremes was followed by the support of an emerging "technocratic" elitist group mainly seated in the Central Bank and the Budget and Planning Organization (BPO). He supported this mindset and created a political party called the Executives of Construction (Kargozaran-e Sazandegi) who under his second term and in the fifth Majles (1996-2000) played a major role in the Executive and Legislative.
Yet, Rafsanjani was unable to confront the conservatives and gave in to their pressures. This and the fact that his perception of a market economy was based on his own non-academic assumption were reasons why his policies are associated with around ten thousand unfinished development projects, extremely inflationary policies, biased privatization policies and unsuccessful policies to attract FDI.
Why his economic policies failed:
Rafsanjani's efforts to implement IMF and World Bank's structural adjustments failed due to the following reasons:
* The Tehran Stock Exchange was set up in 1990 with a weak, inefficient and non-expert management. Under Rafsanjani Iran's financial markets had hardly made any progress.
* Rafsanjani believed the government had to implement monetary policies to improve the exchange rate from Rls 800 per dollar to Rls 300. The result was the emergence of a multi-fold currency rate system.
* Under Rafsanjani Iran borrowed extensive amounts of loans from foreign banks through Arab intermediates at high return rates. The loans had no economic justification and were issued despite the Central Bank and BPO's objections. Iran was consequently unable to pay back its foreign debts and this led to rampant inflation. Moreover, the amount of debts was counter to the first five year plan.
* Rafsanjani did not believe that liquidity could lead to a hike in prices. He believed that the banks had to inject money into society to increase production. He tried hard to control the prices and increase the role of the government in the economy. This was an inflationary policy and eventually led to negative GDP growth. Hence the government was forced to borrow money from the Central Bank and in light of the extensive budget deficit all this led to more inflation.
* His overemphasis on certain industries and production in general irrespective of the role of the traditional mercantilists eventually led to more rents and monopolies for the said group.
The traditional traders opposed Rafsanjani's privatization policies to be able to retain their rents. Especially the ministries of industries and mines came under extreme pressure by groups such as the Islamic Coalition Society (Motalefeh). Legal cases emerged against deputy ministers that have not been resolved to this date. Eventually, fearing these mercantilists, Rafsanjani suspended his privatization and liberalization policies. Some of his economic aides were arrested by rogue elements and others even immigrated from Iran under political pressure. Similarly, many European companies reconsidered their joint ventures with Iranian counterparts.
The mercantilists made the maximum benefits from this state of affairs, i.e. the many-fold price system. The larger the gap between the exchange rates (e.g. export and floating rates, or official and unofficial rates) the more did those benefit who had the possibility of receiving special permits from the ministry of industries. This had led to huge rents among the same mercantilists.
Following continuous pressure from the right wing, Rafsanjani was reluctantly forced to establish the Market Adjustment Headquarters (setad-e tanzim-e bazaar). This was a move to marginalize the expertise-oriented BPO and the High Council of Economy.
Rafsanjani preferred to keep the title "Iran's Construction Master" to confronting the bazaaris. In the course of the 6th Majles elections he was attacked by the new generation of reformist leftists in return for his efforts to marginalize them back in early 90s. And since the Executives of Construction were politically insignificant, he was left with no choice but to side with the conservatives. Yet, many of these forces still dislike Rafsanjani for various reasons.
The current conservative-dominated 7th Majles consists of a new generation of conservatives the majority of whom are also against his candidacy and have vowed to undermine his cabinet, if he runs and wins the June elections. In short, his political career is one of making hostilities rather than allies, perhaps in contrast to what may appear to be the case.
Khatami, the Vulnerable:
Source of Legitimacy:
Khatami is the first Iranian president who has received his power and legitimacy from direct popular vote without being directly supported by a revolutionary figure. Although Rafsanjani's support was helpful, it was never the source of Khatami's power and legitimacy. Khatami was the first president who managed to attract the votes of dissidents and seculars merely by means of his democratic slogans. This wide variety of voters was difficult to satisfy and hence the disillusionment was greater in the end.
While Khatami's slogans and promises made him a legitimate president whom even the hardest line regarded as the source of the regime's legitimacy, his vows also exposed him to numerous threats. Also the fact that Khatami, unlike Rafsanjani, was not a first generation revolutionary figure increased his vulnerability as his rivals easily condemned his supporters as counter-revolutionary and disloyal to the concept of the Velayat-e Faqih, the rule of the jurisprudent. This was easy to argue because the essential part of Khatami's constituency was critical of this theocratic institution and Khatami's main slogans revolved around democratic concepts.
Rafsanjani, however, never had to deal with such issues. His reforms came under an economic title, his social freedom agenda under the pretext of making the investment and business environment in Iran more attractive to foreigners. Plus, he was a close ally of the architect of the Islamic Republic, the late Ayatollah Khomeini. In addition, Rafsanjani initially enjoyed the support of the influential right wing traditional bazaaris who had been guaranteed support by the president.
Confronting the Conservatives:
Unlike Rafsanjani, Khatami did not eschew from open confrontation with the conservatives. Khatami took a strong position when dissident intellectuals were assassinated in 1998 following the serial killings. But when his chief strategist Saeed Hajjarian narrowly survived an assassination attempt and the students fell victim to a conspiracy in the Dorm Incident of 1999, Khatami started to count the costs more cautiously. As tension escalated he was hardly capable of confronting the Judiciary and other powerful conservatives when the main reform figures were arrested under various pretexts ranging from regime overthrow to blasphemy. It was at this point in 2000, after the 6th Majles had fallen to the reformists that Khatami realized he had to slow down the pace of reforms, if he wanted the movement to survive without more casualties.
Khatami's retreat was because he feared to endanger lives of his supporters, while Rafsanjani compromised with the same opponents lest he would lose power, influence and face. Observers agree that the serial killings that were stopped under Khatami had started under Rafsanjani, and he was reluctant to challenge the hardline-dominated minister of information. But Khatami made this move without hesitation after the serial killings.
Khatami's Second Term in Office:
By the time he was re-elected president in 2001, reformists knew the following four were going to be painful years because Khatami's source of legitimacy was declining.
Khatami decided to reverse his main slogan, "political reforms before economic ones". By focusing on the economy, he was hoping to be able to ease the concerns of those who had been provoked by his bold promises about political changes. But Khatami's rivals stepped up pressure instead and sought revenge.
Khatami had failed to make use of his movement's popularity, his only power advantage vis-à-vis the conservatives. A year later, he was losing the faith of his supporters and was logistically stripped of his main weapon, public acceptance.
Yet, the achievements of the Khatami administration, though minimal in comparison to the vows he had made, have drastically changed the political and economic setting in Iran and its foreign policy behavior. This is despite the fact that only in few issues does his government have the final say in the decision making procedure. (see Tharwaproject, features, Iran's Foreign Policy and its Key Decision Makers)
Record of activities:
Khatami became Iran's president in an economically difficult time. While his government was determined to reform the pricing mechanism, expand privatization and increase non-oil exports, it was facing severe difficulties which Rafsanjani had left behind: rampant inflation rates, Iran's foreign debt crisis and a huge budget deficit. All this culminated in his second year 1998, when oil prices hit their 30 year low.
Apart from these circumstantial obstacles, Khatami had to deal with the fact that his economic team consisted of three mindsets; traditional leftists like Behzad Nabavi and Mirhossein Mousavi, modern leftists such as Hossein Namazi and Mohammad Satarifar and modern rightists such as Mohsen Nourbakhsh, and Masoud Roghani Zanjani. All this was exacerbated by the fact that Khatami himself had no personal economic outlook and made his decisions upon his own assessment of these groups' discussions. Thus, his decisions were often unstable. Nonetheless, Khatami was lucky that the decisions were often made somewhere between the attitudes of the second and third groups resulting in an open economic outlook which resembled that of say the German social democrats SPD. Yet, his team has lacked a comprehensive economic framework to this date.
However, all this had also advantages. Khatami's was the first Iranian post-revolutionary government that never accommodated the traditional bazaaris (read Motalefeh) in its setup. This may have been the reason why Iran's best organized five year plan was drafted under Khatami (the third plan).
Learning a precious lesson from Rafsanjani's mistakes, Khatami sought the Leader's opinion and eventually support for this Plan. This is while Rafsanjani had received a letter of criticism from the Leader's office only after the Majles had drafted the second plan. This was only one of the reasons why Rafsanjani's second plan was a failure and never materialized.
What further strengthened the third plan, was the 6th Majles' support. Although the plan was first submitted to the 5th Majles, the most important parts of it were rejected and had to wait for the incoming 6th Majles to convene. The reform-dominated 6th Majles supported the government's objectives to 1) reduce and make the subsidies more targeted, 2) establish a unified exchange rate system, 3) materialize article 44 of the constitution by means of which banks, the rail road, telecommunication, etc. were allowed for privatization and 4) establish an Oil Stabilization Fund to stabilize the shaky exchange rate.
Under Rafsanjani in 1994, Iran's currency severely depreciated because it was known that the Central Bank had hardly any hard currency reserves.
Another of Khatami's achievements were the reins he managed to place on the Islamic foundations. If not entirely, but bonyads are today more than ever accountable to the government and eligible for tax.
Khatami's government has also made the Executive Branch more accountable to the Majles than before. According to article 198 of the third plan, by mid September every year the government has to submit a progress report as to how much of the Plan has been materialized.
This is while Rafsanjani due to the nature of his alliance had to support the traditional right in his first term and flee accountability. The result of all this was that his privatization policies were the continuation of a trend that kept granting rents to powerful political groups. Due to the extensive pressures on Rafsanjani and his team, some of which were indirectly supported by the Leader, Rafsanjani decided to choose the easier way and give concessions to his opponents.
The distribution of certain goods such as iron, sugar, cheese and flour by means of the coupon system (ration system, known in Iran as the coupon economy) was on the surface opposed by the traditional right. However, they were the sole distributors of these goods and made fortunes of their monopolized rights to distribution. Rafsanjani was unable and reluctant to confront these forces who were concerned about his privatization, liberalization and deregulation policies.
Eight years after Khatami was elected president, presidential contesters from both ends of the political spectrum do not sound all that different on political, economic and social issues. If nothing else, the Khatami years seem to have demonstrated to the conservatives the nature of the people's requirements:
1) The pro-democracy discourse is unexpectedly also resonating among the die-hard opponents of reforms. Unlike in 1997, none of the conservative candidates is advocating loyalty to the Velayat-e Faqih or his divine right to rule.
2) Unlike the past, the only xenophobic inclination audible among political activists concerns the nuclear issue and Iran's right to enrich uranium which has oddly enough become a national pride. The nuclear issue has turned to the common denominator of many pro- and anti-regime mindsets.
3) All parties concerned agree that change is inevitable and essential if the system intends to survive. This is a political development that is due to more transparent governance of the past eight years.
While the majority of political forces seem to agree that reforms are necessary, they seem perplexed over how these changes should come. Any major change requires a restructuring of socio-economic-and not necessarily political-system. The reform movement signaled a dangerous warning to monopolists and rent seekers not necessarily because the political system could have changed, but because the trade monopolies and distribution networks could have become subject to accountability, because the rents might have been terminated, and because healthy competitive environment would have undermined the monopolies and rents. This is the same system that even Rafsanjani was initially unable and later intimidated to change.
Those who possess the rents and monopolies are least interested in governance unless it could serve as a guarantee to secure their interests.
Between 1989 and 1997, Rafsanjani tried to change this structure. Many of the business ventures he and his affiliates were involved in were undermined by the traditional trade network, especially as Rafsanjani was willing to change the focus from trade to industry and production. Billions of dollars were registered as loss as politicized cases, initiated by the traditionalists, jeopardized joint ventures with foreign companies.
The Khatami era was more triumphant. He successfully tried to improve the private sector to a more dynamic sector. The emergence of six private banks, better laws for FDI, a single exchange rate system are among Khatami's real achievements. This is while Rafsanjani's favoritism inflicted a great loss on the nation. Again, the mercantilists used their economic influence to halt both political and economic developments that would have posed a serious threat to the trade-oriented and rent seeking activities.
Khatami's movement was more daring and genuine than Rafsanjani's. For instance, Khatami managed to make the foundations accountable to a checks and balances system. Under Khatami light was also shed on the underground economy through the activation of the press and revival of civil society. The transparency promoted by the Executive Branch may have also backfired in its own face and Khatami has certainly failed to live up to all of his vows. But Khatami's reform agenda at least intimidated the rent seekers and monopolists as it contained, if not stopped, their operations.
This is while Rafsanjani stopped his efforts to weaken the bazaari network because he was easily threatened and undermined due to his susceptibility to blackmail and his reluctance to lose face.
Eventually, Khatami lost his reputation, popularity and legitimacy as his rivals kept bashing him and his team. Intentionally or not, every single failure for Khatami revealed more about the power and nepotistic attitudes of his rivals. Thus, until his last days, Khatami will remain a demonstration of how difficult the Islamic Republic can change as long as the influential bazaaris keep their reins over Iran's unelected political and economic institutions.
Today, the question should not be which presidential candidate has the golden remedy to Iran's political and economic malaise. The question is which candidate is less vulnerable, least exposed to blackmail and more democratic by nature. The power to carry out reforms, however, remains subject to the same conditions: oddly enough, in a country like Iran where democracy is not yet entirely in place, only a president with a strong public support will be able to challenge this corrupt structure.
Some analysts' argument may be justified that the Islamic Republic under Khatami has proved to be hardly reformable. However, there seems to be no other options for change as the regime change proponents fully lack an understanding of the social and economic structure of the Iranian society, let alone a viable solution. While a radical break of Iran's socio-political structure could lead to a fracture in society and threaten Iran's territorial integrity, a reform still seems the most peaceful and feasible alternative to democratization.
The examples of Rafsanjani and Khatami show that reforms are possible even if they form a slow medium for change. Moreover, they also indicate that the position of the president is a key institution if not the main decision making body. Most importantly, the similarity of the slogans of the numerous running candidates today should be regarded as a positive signpost that with the rise of transparency in society, radical discourse and with it violent actions are on decline in the Iranian society. These are among Khatami's political and social legacies.
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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