Hossein Askari on the Current State of Iranian Affairs

Hossein Askari on the Current State of Iranian Affairs

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Dr. Hossein Askari is Iran Professor of International Business and International Affairs at Elliot School of International Affairs at George Washington University. Askari served on the Executive Board of the IMF, consultant to the OECD, the World Bank, the IFC, the UN, and a number of multinational corporations. Askari’s views are sought after by governments around the world.

Reza A: I’d like to start off by talking about the still relatively new post-election administration in Iran. It has proved to be an increasingly militarist administration with sporadic blunt outbursts of Persian nationalism that have pitted Ahmadinejad and his inner circle against the clergy. Domestically, they’ve demonstrated an increasing sense of insecurity marked by continued harsh treatment of dissidents while becoming seriously challenged internationally. On a related note, in a recent New York Times Op-ed piece, Ray Takeyh of the Council for Foreign Relations remarked that “the Islamic Republic is heading relentlessly yet uneasily to history’s junkyard”. Do you think Iran’s post-election administration represents a change in the ideological make-up of the Islamic Republic or you concur with Takeyh’s assessment on where this system is heading to?

Hossein A: Let me start by emphasizing an important point. I don’t think that the Iranian regime is Islamic by any reasonable measure. One of the main principles of an Islamic society is the ability and the necessity to provide for social and economic needs of the society. The regime in Tehran has failed to provide a decent standard of living and jobs for many Iranians. In fact, the regime’s misguided economic policies coupled with endemic corruption have led to decline in the standards of living in Iran. Moreover, their policies have failed to create a vibrant private sector and a decent infrastructure. As for the use of Persian nationalism by the administration of Ahmadinejad, I think the extent of economic mismanagement and brutal repression of dissidents and journalists far outweigh the regime’s efforts to revive legitimacy for itself by appealing to Iran’s past and to nationalism. The suppression of the Green Movement by force does not mean that the regime has succeeded in eliminating dissent because it was done through the use of force and fear. The regime’s survivability boils down to whether its leadership is willing to rule by the barrel of the gun. And I think they have clearly demonstrated that they are willing to do so. Therefore, with regard to the regime’s survivability and where it is headed, I think Takeyh’s assessment might be correct. The question is how many people will the regime kill in order to stay in power and how much violence will Iranians tolerate?

Reza A: One of the most heated topics in current Iranian affairs that rivals in importance the nuclear dossier is the phase-out of energy and food subsidies. The political economy behind it has captured the imagination of many Iran analysts and pundits. Do you think the removal of subsidies could be the harbinger of meaningful economic reforms similar to what most emerging economies have already implemented? What are the power plays behind the removal of subsidies? The above developments appear to suggest that the administration of Ahmadinejad could be well on its way to introduce a full-fledged national tax system similar to what we have in the West. Is economic efficiency the goal here with resulting accountability and transparency in how state funds are used and spent?

Hossein A: The removal of subsidies has not been easy in any country. It is easier to give than to take away. But subsidies are only a part, although a big part, of Iran’s economic woes. However, to implement such a significant economic turnaround requires the presence of certain conditions and complementary policies.

First and foremost, I should emphasize the importance of institutions that provide the grounds for implementation of long-term economic and industrial policies. Good institutions are a prerequisite for sustained economic growth. The presence of democratic institutions, transparency and the rule of law ensure a safe environment for investment. Moreover, in places like Alaska and Norway, where such institutions existed when oil was discovered, depletable resources, namely oil and natural gas, have been used as a means to provide for long-term social and economic development and growth. But in countries where good institutions did not exist, corruption becomes more entrenched, oil revenues are used as a crutch and oil resources are wasted.

In countries with depletable natural resources and no such institutions, the state uses the revenue, which is essentially easy money, to consolidate its power with little or no accountability and transparency.

The removal of subsidies in Iran is taking place under an administration that is known for its haphazard economic policies and widespread corruption. The goals behind subsidies removal in Iran are in my opinion more political than anything else. They are intended to control people and buy their support, the lower middle class in particular, but it is also clear that the regime is under increasing financial pressure and finds itself unable to afford massive subsidies. These pressures are compounded by international sanctions, which in my view have become serious only in the last two years. The same logic goes for developing a national tax system. In Iran we don’t have a transparent economic system with a competitive private sector. The problem of corruption is too pervasive to allow for the development of a comprehensive national tax system that could function in a fair and equitable manner. A similar case to Iran would be Saudi Arabia. The Saudis have not developed such institutions either. However, there is a significant difference between Saudi Arabia and Iran; and that is the amount of oil and oil revenues that the Saudis have. Their enormous wealth has enabled the Saudis to continue to simultaneously enrich the royal family relentlessly; to feed the people and provide for their education and at the same time develop a truly world-class infrastructure. But they still don’t have an economy that is on a sustainable growth path with the ability to create the needed jobs for Saudis.

Reza A: Let’s turn our attention to Iran’s private sector: The state of the private sector in Iran could arguably be termed as miserable at best. As we have seen over the past 50 years, Iran has failed to produce an industrial elite class. Are misguided economic policies to blame for the state of private sector in Iran?

Hossein A: I would have to go back to my earlier statement: developing a thriving private sector requires long-term policies and a secure environment for investment. In Iran, due to political instability and lack of democratic institutions, absence of sound policies as well as easy flow of income from oil, private sector growth has been stunted. After the end of the Iran-Iraq war in the late 80’s, Iran had a great opportunity to start a gradual phasing out of subsidies and revive its private sector. And with the globalization of trade gaining speed, the country could have gradually integrated into the global economic system and helped its economic development. In Iran, the focus of policy makers is not long-term development of the country; short-term survival is the order of the day. And as you must have noticed, there is a get-rich-quick business culture in Iran that is characterized by the purchase and sale of land and real estate property. In Iran, businessmen generally do not take long-term investment decisions, for example, with a ten-year return on investment in a new plant.

Whereas in South Korea, despite corruption and geopolitical uncertainties, its leaders managed to implement economic and industrial policies that resulted in the country’s rise as a global industrial and IT powerhouse. South Koreans also put in place institutions that provided the foundation for their economic success. Today Samsung is a global brand with revenues larger than Iran’s entire economic output and today’s South Korea, which had an economy about half the size of Iran’s in 1979, now has an economy four times the size of Iran’s. South Korean businesses are active in long-term infrastructure projects on a global basis; yet Iran is still struggling to develop a decent infrastructure within its own borders with stagnant standards of living and high unemployment.

Reza A: You have remarked before that the Iranian government is only concerned about its short-term survival and that the long-term prospects for Iran look bleaker by the day. Also, in your writings you have somehow suggested that Iran’s technocrats are resistant to change and meaningful economic reforms, leading to your well-publicised statement that “in today’s Iran there is no politics, there is only political economy”. Can you elaborate on this? Do you think the Iranian government—and Iranian technocrats for that matter— do not take into account long-term interests of the country?

Hossein A: That is true. Iran’s economic and industrial development has consistently demonstrated that for the country’s rulers one thing matters most: enriching themselves and those in their inner circles. After the Iran-Iraq war this situation became exacerbated by the Revolutionary Guards’ growing and, in some cases, full control of key aspects of the Iranian economy. With few or no management skills and a lack of access to modern technology and investment due to sanctions, the Guards have caused the economy to plunge into a deeper crisis, while financially benefiting from it. It is interesting to point out that in recent years Qatar and Dubai—countries that Iran has historically looked down upon both culturally and economically—have turned themselves into major trade hubs and a destination of choice for Iranian tourists as well as lovers of art and culture. So this is a significant reversal of fortune and a clear demonstration of Iran’s decline on the world and regional stage. Using Western technology, management and investment tools Qatar is the world’s largest exporter of liquefied natural gas (LNG), tapping into the same gas field shared by Iran. And Iran is nowhere. So what I mean by the “political economy” statement is that for the Iranian regime and its leaders everything revolves around creating individual wealth for themselves with nepotism and cronyism; this is at the center of all their decision making.

Reza A: In the current sanctions regime against Iran, you have indicated that there is something called the “Nuclear Option”. This option involves choking Iran’s Central Bank and initiating a run on the Iranian currency, leading to its collapse. This measure has not yet been exercised. Do you think that exercising this option will have a serious impact on the Iranian government’s domestic and/or foreign policy conduct?

Hossein A: Financial sanctions are the sanctions that bite Iran today. They have become ever more effective since the US started imposing significant fines on institutions that violated US sanction policies. For example, Credit Suisse was fined over 500 million dollars because of its dealings with Iran. With such a stiff fine, institutions take notice and think whether it is worth doing business with Iran. As a result, Iran has become increasingly isolated from the international financial system. This has increased the cost of Letters of Credit for Iran, in turn increasing Iran’s cost of trade. However, the Iranian Central Bank, the Bank Markazzi, has stepped into the breach and is doing some of the activities previously done by Iranian banks. So if the US wants to squeeze the regime even more, it could sanction the central bank, something it has been reluctant to do. Additionally, the US could put even more pressure on Iran by adopting policies to cause a run on the Iranian currency, the rial.

Reza A: Fresh into 2011, what is your take on the global economy and the Iranian economy in particular?

Hossein A: Western developed economies will continue to have slow economic growth, especially jobs growth, and will need to tackle reforming their financial institutions, the United States included. There is still a significant process of deleveraging that will continue in Western economies. As for Iran, Ahmadinejad’s government does not seem able to turn the economy around. There will certainly be a higher rate of inflation that could lead to some internal instability. The regime’s haphazard subsidy phase-out, without the complementary policies to put Iran on a path of sustained growth, will put significant pressure on average Iranians.

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