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The Iranian economy, a new start or a continuation?

By Thierry COVILLE in Paris
Translated by Simone KOSHIMIZU and Victoria BRYAN
Source: (October 23, 2005)

The election of Mahmoud Ahmadinejad as President of the Islamic Republic of Iran in June has led to numerous concerns within the private sector in Iran, as well as within the economic sectors working, or planning to work, with Iran. The question facing the new government when it comes to economic policy is can Ahmadinejad’s Iran strike a balance between economic liberalisation and ‘populist’ measures?

The former mayor of Tehran based his presidential campaign on social justice and the fight against poverty, unemployment, corruption and the Mafia-style organisations within the oil sector. Such aims have provoked fears that the process of gradually opening up the Iranian economy, a policy that has been in place since 2000, will be halted.

Furthermore, the fact that the new President subscribes to what can be described as the Iranian extreme right, added to his desire to re-establish the ideas of the Islamic Revolution could presage increasing isolation on the international stage, thereby damaging economic liberalisation in Iran. These fears have resulted in an outflow of Iranian capital to Dubai and in falls on the Tehran Stock Exchange since the election.

Between populism and Realpolitik

Faced with this situation, what will the government do? Within the political families surrounding Ahmadinejad, there are obviously groups prepared to carry out populist policies, which will favour social justice over the laws of economics, if necessary. We must also remember that the Iranian Hezbollah was originally influenced by the ideas of Shariati, who was one of the major ideologists of the Shah opposition. Shariati proposed a version of Islam that was Marxist and Third-World.

In addition to this, the current authorities are enjoying a favourable political and financial situation and can always use reserves from the Oil Stabilisation Fund to finance social measures. Such moves would, however, contravene the regulations on the Fund. But who today is going to protest against the conservatives, who control all the institutions?

Finally, some MP’s who are close to the President ideologically-speaking, such as Ahmad Tavakoli, believe that the government should take measures to reduce the banks’ interest rates. He also wants contracts with foreign investors in the oil, petrochemical and telecommunications sector to be reviewed.

However, we can see that the people within the government who hold positions in the economic sector, such as Danesh Jafari, the new Minister for the Economy, are not revolutionaries, but experts who are in favour of continuing with the policy of economic liberalisation. It is important to realise that the Iranian conservatives do not make up a homogenous political party. Moreover, before the presidential elections, Hashemi-Rafsanjani, the losing candidate, had gained the support of nearly 180 MPs (out of a total of 290) and he was in favour of maintaining the policy of economic liberalisation.

Similarly, the upper echelons of the Iranian technocracy, who have run the country since the Revolution and who managed to convince the majority of those heading the regime of the need to modernise the economy, are also doing all they can to prevent this economic policy from ‘derailing’.

Many experts have also taken action since the election of the new President, by highlighting the dangers of maintaining subsidies and, in more general terms, of following lax budgetary policies that could lead to an increase in inflation and therefore worsen social tensions.

Foreign investments are needed

In addition, we must not overreact to the reluctance raised in Iran in relation to foreign investments. Firstly, it represented, in certain cases, a legitimate issue – especially in such a nationalistic country! – on the impact of such and such a joint venture project on the Iranian economy. In other cases, the problem originated from the foreign investor’s choice of an Iranian partner. After all, we must not forget that all measures taken to open the Iranian economy in the past few years were based on a consensus in which all minorities expressed themselves. This means that the Iranian far right and the Guide accepted this economic opening. Therefore, they will not refuse it today. The system is pragmatic and it is aware that its industries cannot be modernised without foreign technology.

The first weeks of the new government reflect this continuity. Rumour has it that members of the “Rafsanjani” network – especially his children – were forced to quit the management positions they held in the public sector. But this is a normal practice in Iran. Each time there is a new leader of the country, those close to the former government leave public organisations and the new leader’s network settles in. And these changes in the organisational chart do not mean in any way that corruption will disappear, as certain conservative networks have proved it.

Secondly, according to Iranian authorities, the project on the creation of a second mobile telephone network in partnership with Turkcell, a Turkish company, was abandoned. Nonetheless, this fact does not necessarily mean a refusal of foreign investment since negotiations with South African company MTN have been settled for the same project. Finally, the comments concerning possible economic and oil sanctions (embargo) in relation to European countries (France, Germany, United Kingdom) who wish for Iran’s nuclear project to be presented to the UN’s Security Council also led to fears of an excessive economic politicisation. Nevertheless, even though the nuclear issue has not yet been settled, it is but with difficulty that we see the pragmatic Iranian authorities becoming involved in economic policies of ruptures with the European countries.

However, the main issue of the present government is most essentially to remain true to their campaign promises. Thus, the cost of subsidies for public finances becomes more and more unbearable. This fact has forced the Parliament to present a draft law that aims to cut down on the amount of subsidised petrol that motorists can consume. If approved, many voters would consider this law as a betrayal to the campaign pledges. Similarly, the pursuit of privatisation policies and the opening to foreign investments, which began during the former government, could cause a rise in the unemployment rates.

The present government risks being trapped in its pre-electoral speech and the need to reform the structures of the Iranian economy. In this context, the economic policies to be pursued in the next few months will possibly be a mix of liberal economic policies and populist measures financed by oil revenues. The government’s capacity not to disappoint its electorate and to regain the private sectors’ confidence will depend on the balance between these two types of policies.

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