The victors of the 1979 Islamic Revolution of Iran believed in an economic miracle and assumed they would be reaching their Utopia in no time based on Islamic fundamentalism and their motto of “neither East, nor West” Article 12 of the Constitution of the Islamic Republic of Iran sets the regime's objectives as "A fair economy based on Islamic criteria to create welfare and eliminate poverty and deprivation in the areas of nutrition, housing, employment, health and insurance."
After forty years, the dreams are gone and nightmares have remained. These nightmares are not the result of war and sanctions. It is Iran's economic as well as domestic and foreign policies that have prevented the country's modernization and hindered the flourishing of its capabilities. These nightmares include:
1.An Over-Controlling Government
A modern country needs a small, agile, rational and honest government and a legal and political system that would open the doors to freedom of business and fill any void in the market where needed. But the Iranian economy is controlled by the government, overburdened by costly operations. The government itself lacks self-confidence and suffers from a lack of popular trust. At the same time, it constantly intervenes in whatever sectors that are still not directly under its control. The Heritage Foundation has ranked Iran 156 among 180 countries in terms of economic liberties.
The government's budget comprises some 80 percent of the gross national product (GDP). Government-owned companies devour a large part of the budget, causing budget deficits. Meanwhile they claim the lion's share of the facilities that should have been put at the disposal of private investors. There are also companies that operate under the control of the Islamic Revolution Guards Corps (IRGC) and those affiliated with various state-supported foundations. All of them consume the government's resources.
2. The Curse of Oil
A large part of Iran's economic literature is about whether oil is a blessing or a misery. The past 150 years have shown that oil per se does not bring about
happiness or misery. Countries such as the United States and Norway have used oil at the service of development. On the other hand, in a large part of the Middle East and Africa oil has given rise to dictatorship, corruption and regional tensions. The curse of oil is the outcome of criminal use of oil by some third world countries to fuel their greed and ignorance.
Iran could have used its huge oil revenues to pave the way to the post-oil economy. Some resources had been dedicated to achieving progress in the decades before the Islamic revolution. But the revolution plunged the country into the quagmire of an oil-based economy. Iran has had 1,400 billion dollars in oil revenues during the 40 years after the revolution. Instead of using this huge income for its development, Iran became increasingly addicted to windfalls from oil exports and lost major opportunities to join the club of modern states.
3. Growth Running Out of Steam
The rate of growth of GDP is the most significant indicator of an economy's progress or stagnation. The GDP is the sum total of all the goods and services produced in a country during a given year. Divided by the population, it becomes per capita GDP. If the average growth of population is larger than the average annual growth in GDP, naturally there will be a decline in living standards. The reverse of this situation makes life easier and more comfortable.
Between 1961 and 1976 the Iranian economy experienced its golden era. The average growth rate in those years was over 10 percent. The economy, as a result, grew five times bigger during those years. But considering the rate of population increase, this growth was three-fold.
In contrast, during the past 40 years, the average economic growth rate has been about two percent. Considering the high growth in population, real growth has been something between nil to half of one percent. Lack of business opportunities, investment and the constant internal and international tensions are among the causes of Iran’s the economic stagnation in these years.
4.Idle Hands and Brains
The high number of unemployed individuals is one of the factors that slows economic growth. The number of employment opportunities depend on the number and size of production units. This needs extensive investment. However, Iran's political and economic situation have prevented investment. This has kept unemployment figures high during the past 40 years.
According to the Iranian Statistical Center, current unemployment rate in Iran is 11.7% which puts the number of unemployed people at 3,174,000. But the actual figure is much higher as the Center regards anyone with one hour of work per week as an employed person. The actual figure for unemployment in Iran could be as high as seven million people.
According to figures provided by the Islamic Republic, during the past 40 years, the inflation rate has fallen under 10 percent only four times; in 1985, 1990, 2006 and 2017. In all other years Iran has had a double-digit inflation rate up to 50 percent. Yet inflation rate assessments by the government are much lower than independent assessments. The government wishes to pretend that the rate is lower, in a bid to prevent price rises.
The Rouhani administration had promised to lower the 40% inflation rate of the previous government to under 10 percent and did so only twice, reducing the rate to around 9%. But official assessments forecast an inflation rate of around 50% by Match 2019. The causes of this high inflation include flaws in the economic and political structure, fluctuations in oil revenues, rise of government expenditures and an ongoing foreign policy crisis.
6. Concessions Lead to Inequality
Combating social inequality was one of the main mottos of the 1979 revolution. But the promise was forgotten soon. Gini Coefficient (an index foe inequality) for the past year in Iran's economy has been 39.8 which is lower than the pre-revolution years. But it is embarrassing for a regime based on Islam, particularly because the inequality level in Iran is higher than other countries such as Pakistan, Iraq, Lebanon and Jordan.
Among the reasons for high inequality in Iran is the idea of insiders Vs outsiders, which allocates a lot of concessions for regime insiders and those well connected to others in power.
7. Systematic Corruption
The Islamic Republic is one of the most corrupt political systems in the world. International Transparency puts Iran at the 138th place in terms of systematic corruption among 180 states.
What is most annoying for Iranian officials in this index is that it shows Iran as a more corrupt state than many other developing countries. Based on the latest reports, the Islamic Republic of Iran is 90 steps more corrupt than Ruanda and 60 steps worse than Burkina Faso. From among its neighbors, Iran is 115 steps more corrupt than the United Arab Emirates.
The reason for the widespread corruption in Iran is in the highly discriminative nature of the Islamic Republic system and the way its leader and the IRGC distribute concessions to regime insiders.
8.The Blue Gold
Economics is the science of rare resources. Iranians are surprised to realize that their fate in the near future would be depending more on water than on oil.
The rise in population and the inefficiency in managing water resources are only two of the reasons for the decline in Iran's water resources. At the same time, the shortage of water has affected agriculture and animal husbandry, adding to the number of jobless people in the villages.
Meanwhile, the significance of water for the future goes beyond the economy. The national divide over the way scarce water resources are distributed Could lead to tensions between those who dwell in dry areas and where more water has been allocated.
9.The Blackhole of Subsidies
Allocating subsidies to production units and consumer goods is a common practice in many countries to help low-income citizens. But in Iran the subsidies have led to a catastrophe because it is allocated to everyone and instead of helping to boost production and exports, their main function is to keep consumers a bit happier.
In 2017 Iran was allocating more subsidies to fuel consumption than any other country. According to the International Energy Agency, Iran allocates 45 billion dollars per year in subsidies for fuel to its 85 million population. This is seven
billion dollars more than fuel subsidies in China with a population of one billion and three hundred million.
The figure for fuel subsidies is more than seven times larger than the country's budget for development.
10.A Ruined Banking System
This is a real nightmare for the Iranian economy. A large number of Iranian banks are mired in lack of transparency, because they have stayed away from international regulations. Billions of dollars of debts to these banks might never be returned. They have bought lands and buildings that cannot be cashed in when needed. A large number of them are bankrupt. They have given loans to the government, which might never be returned. Yet, there is no effort to cleanse the banking system, and they continue to give away loans at unusually high interest rates.
During the past two years, many of the banks have failed to return money to millions of depositors, on demand. The government withdrew billions of dollars from public funds of the Central Bank to compensate customers' losses.
The Islamic Republic can be likened to the Soviet Union in many respects. When Mikhail Gorbachev began his reforms, many Soviet experts argued that if the country’s economy is liberalized the system will collapse, because the Communist party exercised power by controlling the economy.
A similar judgement can be passed on the Islamic Republic. Fundamental economic and political reforms will herald the end of the system. This is why the establishment resists every bit of pressure for change.