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The Iranian Election – An Economic View
In the next Iranian election in June former president Khatami will likely run as a candidate against the current president Ahmadinejad. The 'western' view on the differences between these two men is clouded as it is looking solely at Iran's nuclear project or its rhetoric against U.S. imperialism and Israeli zionism.
The Iranian president is simply not the one deciding about those issues. That is the prerogative of the supreme leader Khamenei and the power structures around him. (For a deeper description of the power structure and his personality this portrait – Reading Khamenei: The World View of Iran's Most Powerful Leader (pdf) may be helpful.)
But the Iranian president can direct interior and economic policies in Iran. So unless distracted by some 'shiny object' conflict the voters will naturally look at those policies to decide whom to give their votes.
I asked Moon of Alabama commentator Parviz, who is an Iranian and lives in Iran, to explain the differences between Khatami and Ahmadinejad in economic policies. Here is his response.
The Iranian Election
by Parviz
If ex-President Khatemi decides to run (which is highly probable now that his pragmatist rival Moussavi has withdrawn) he will almost certainly win the election on June 12th with about 65% of the popular vote, which is less than his astonishing 80% vote in both 1997 and 2001 but nonetheless sufficient to prevent the need for a run-off a week later.
The above prognosis assumes that the U.S. and Israel will keep very, very quiet and not take any dramatic measures to affect the outcome: Ironically, if the U.S. were to make substantial concessions to Iran during the next few months it would merely legitimize Ahmadinejad’s hardline policies of the past 4 years, while if the U.S. were to exhibit increased hostility it would scare the regime into putting its full weight behind Ahmadinejad and possibly even ‘fixing’ the election results in his favor. So any interference of any kind by the U.S., whether positive or negative, will torpedo Khatemi’s election efforts.
Khatemi’s renewed popularity is partly by default, meaning that most of the population is fed up with Ahmadinejad; and partly by design, meaning that Iranians have now come to appreciate the solid economic, social and diplomatic gains achieved during Khatemi’s 8-year presidency. When Khatemi was elected in 1997 Iran had near-zero growth, a massive short-term debt of $30 billion and only $10 billion annual oil revenues. Non-oil export revenues were a mere $1 billion. 8 years later GDP growth had risen to above 6%, Iran had become a net international creditor to the tune of $30 billion and had repaid its entire foreign debt. True, oil had risen from below $10/bbl in 1998 to around $30/bbl when Ahmadinejad was (s)elected in 2005, but the real reasons behind Khatemi’s success were the solid economic reforms he introduced, whose main features were:
- Slashing of the top income tax and corporate tax rates from 55% to 35%.
- Ratification in 2002 of the first Foreign Investment Law in Iran’s history, guaranteeing foreign corporations the right to own up to 100% of domestic companies and to repatriate not just the principal investment but all profits, including property appreciation, copyright, goodwill and other value added assets. This boosted foreign direct investment (FDI) from a 20-year annual average of $25 million to a whopping $2 billion in 2003 alone.
- Establishment of the Oil Stabilization Fund which in 2005 had reached $40 billion, to provide a cushion against falling oil prices. The Fund was plundered by the Ahmadinejad administration to pay current budget expenses despite massive windfall forex revenues of $100 billion in 2008 and is now close to zero.
- Establishment of the first private banks in Iran’s post-Revolutionary history, which within their first 2 years of operation constituted 6% of total banking turnover and which, equally significantly, placed pressure on the state banks to modernize and reform.
- Massive investment in the non-oil sector, thereby increasing non-oil forex revenues from petrochemicals, agriculture, manufacturing and the service industry (including income from overseas engineering contracts) from just $1 billion in 1998 to $15 billion in 2005.
- Issued the first ever sovereign bond (EUR 500m) in 2002, yielding 8.5%, which was so successfully received that it issued a 2nd bond of EUR 450m just a few months later at a substantially lower yield.
The results of the above economic reforms was that the Iranian Rial strengthened 25% against the U.S. Dollar from 1997 – 2005, inflation was kept at a manageable 13%, Iran’s OECD Investment Risk rating was upgraded from 5 to 4 (with Fitch upgrading to B+) and the Silent Confirmation fee on Letters of Credit dropped from 8% to just 1.5% p.a., dramatically lowering Iran’s import costs (The a/m fee is now 14% p.a., which is what foreign banks charge to ‘guarantee’ payment of Iranian L/Cs to their domestic exporters).
The above summarizes merely Khatemi’s economic reforms. Barflies know what Khatemi achieved politically and culturally from the many posts on this subject, all of which have since been reversed by Ahmadinejad. Even the incumbent’s popularity in the provinces, generated by flooding rural areas with cash and hand-outs, has been tempered by the realization that inflation has risen from 15% to 50%, unemployment has doubled to 25% and corruption has reached unprecedented levels. Drug addiction and prostitution are among the highest levels anywhere on the globe, yet another indictment of the ‘Islamic’ Republic.
Khatemi is now very much appreciated in retrospect, which is why many Iranians disappointed that Khatemi did not change the Islamic system completely now realize that his achievements in the highly restrictive circumstances have been underestimated, and that hostility and pressure by the U.S. in the aftermath of 9/11 (for which Iran was blameless) limited his ability to achieve even more.
Undoubtedly the Islamic Republic is a 7th century anachronism that hinders Iran’s economic, social and political progress, but if the choice is between Ahmadinejad and Khatemi the populace will choose the lesser of two evils.
2. IRAN: ‘INDEPENDENCE’ VERSUS ECONOMIC DEVELOPMENT
I purposely placed the word ‘independence’ in inverted commas because it is a loaded word that means different things to different people. Cuba is politically ‘independent’ but economically ‘dependent’ on heavily fluctuating tourist receipts and transfers from expatriates in the U.S.. Economically, Cuba is where it was 50 years ago. There is ‘independence’, while education and health standards have remained high, but there is zero political freedom and the standard of living has sunk since 1991 when subsidies from the Soviet Union ceased. Per capita income is less than $ 400/month, one of the lowest in Latin America, and the population is hostage to a dynasty. Not many people envy Cuba its ‘independence’.
Let’s go closer to home and look at a nation that is both Iran’s neighbour and also a Muslim country: Turkey is a prime example of an economic backwater that advanced through foreign investment and globalization. But this didn’t stop its P.M. from walking out on Peres at Davous, from repeatedly criticizing both the U.S. and Israel, or from refusing the U.S. permission to use its air space for an attack on Iran. By becoming strong economically, by becoming economically independent, Turkey has gained enormous regional influence that wouldn’t have existed without economic progress triggered by globalization.
China should have had more to fear from globalization than any other nation, = Communist paranoia about ‘Western’ influences, social disturbance and demands for human rights. But it ‘globalized’ with a vengeance, has decoupled from the U.S.A. and now virtually ‘owns’ the U.S., to such an extent that it is now using its $ 1.5 trillion of surplus foreign exchange mountain to invest inwardly, to compensate for the fall in export revenues. Which of you considers the U.S.A. more ‘independent’ than China? (I want a show of hands on this one).
I know where you’re all coming from: You look at U.S. regional serfs S. Arabia, Egypt, Qatar, the U.A.E., etc.,. and place Iran in the same category. You’re dead wrong. These nations had to sell out to the West (especially to the U.S.) and kiss Israel’s a$$ so as to achieve a quantum economic leap, because they had no history, no varied natural resources, no security, no education, no culture and no manpower. Iran has all of these in abundance. Where the artifically created Persian Gulf states bought U.S. culture and U.S. protection with oil money, there is not a chance in Hell that an influx of FDI would transform Iran into a Qatar or a U.A.E.. The Shah tried that once and the nation rebelled.
I’m sometimes amazed how many of you knowledgeable and concerned barflies can praise Iran’s potential so highly while calling for limits on its economic development. Whenever Iran encourages FDI it will become Turkey on steroids, economically stronger and politically even more independent as a rult. Iran will never again become an American slave, irrespective of its economic situation or the level of foreign investment. So while I (genuinely and gratefully) appreciate your concern, I advocate peace with the U.S., a rapid end to sanctions, development of the Iran-Europe gas pipeline, the Turkmenistan-B/Abbas pipeline, the IPI pipeline, massive FDI in LNG and other such projects that would make the world dependent on Iran, and certainly not vice versa. The annual outflux of 200,000 Iranian university students, Iran’s best brains, to the U.S. for want of job opportunities, would reverse with a vengeance as it did in the early 1970s.
Few of you have any idea what Iran (as opposed to some weaker Western and Asian countries) could achieve under globalization. You need “different horses for different courses”.
Posted by: Parviz | Feb 12 2009 8:50 utc | 46
Debs, re your comment
“Look at the mess the Gulf states are in. Every attempt at diversification into non-oil industry is marginally economic and will probably fail as soon as oil revenues falter and the cross subsidies disappear.”
I hope my post (46) answered your concerns. The following may convince you further: Just for the record, Iran’s proven, easily exploitable natural resources consist of the following:
Crude Oil, 135 billion barrels at $37 / barrel = $ 5,000 billion
Gas, 26 billion cubic metres at 20 cents/M3 = $ 5,000 billion
Metals, 40 billion tons at $ 120/MT = $ 5,000 billion
NATURAL (as opposed to planned) ECONOMIC DIVERSIFICATION
GDP. Main components are: Services 50 %, Industry 20 %, Agriculture 20 %, Oil 10 %.
Largest shipping fleet (IRISL) in the Middle East. Transit trade facilitated through 16 land and sea borders (= 2nd only to Russia). World’s 3rd largest dam builder (71 large dams completed in 25 years). Produces 1 million cars, 13 million tons of wheat and 8 million tons of steel annually. Has attracted $ 219 billion of long-term hydrocarbon investments from China, Japan and India despite U.S./U.N. sanctions, acc. to the ultra-Conservative American Enterprise Institute. Has crucial ‘SWAP’ agreements with landlocked Central Asia. Besides the $ 75 billion of oil revenues, non-oil exports are booming, estimated at $ 20 billion in FY 2008, giving a combined total of $ 95 billion compared with total oil and non-oil exports of just $ 6 billion in 1998.
Iran has achieved an Agricultural Top 20 global ranking by the F.A.O. in 24 categories of agricultural products. Iran produces more grapes than Argentina, Australia, Chile and South Africa, more oranges than Greece and Turkey, more wheat than Argentina, Kazakhstan and Poland, more apples than Italy and Germany, and more figs than Morocco. The Food and Agricultural Organization of the United Nations (“FAO”) has published its latest global producer statistics on its web site (http://www.fao.org), which shows Iran to be Global No. 1 in pistachio production, No. 2 in dates and essential oils, No. 3 in watermelon production, No. 5 in fresh fruit, etc.,. In high volume grain production Iran is also well represented at No. 12 globally in wheat (12.9 million tons/annum) and No. 17 in barley (3.1 million tons). Other notable global rankings are No. 7 in hazel-nuts, No. 8 in oranges, No. 12 in honey, No. 14 in potatoes (3.6 million tons) and No. 17 in rice (3.3 million tons). Iran achieves a Global Top 20 ranking in 10 other agro-categories.
(Iran also produces 70 % of the world’s saffron, curiously omitted by the FAO).
In contrast to other Persian Gulf nations the Iranian technological and labour force are both 100 % indigenous.
I don’t believe you should worry that Iran might suffer the fate of the Persian Gulf states you refer to above, other than the normal cyclical ups and downs that apply to every nation.
The alternative is for Iran to remain a ‘glorified Cuba’ in the hands of a corrupt political elite, with zero broad-based development and just enough revenues to keep the regime in power forever via a combination of subsidies and terror. We Iranians could certainly represent more than “just oil and carpets”, while remaining independent in the process.
Posted by: Parviz | Feb 12 2009 9:08 utc | 47
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