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Emerging Markets

IRAN: Battle lines drawn

While international attention has focused on Iran’s disputed election, the state of the economy remains at the heart of the nation’s crisis, argues <b>Ali Ansari</b>

The political turmoil after the disputed presidential election of June 12 has overshadowed the underlying economic problems that confront the Islamic Republic of Iran. International attention has reverted to the issue of human and civil rights and the distinctly political problems facing the regime.

Yet the state of the economy has been at the core of the crisis facing the Islamic Republic, and the election campaign was shaped and dictated by the belief that the electorate would ultimately vote for the candidate with the best managerial and economic record.

It was this fundamental belief which resulted in former president Mohammad Khatami conceding his position as the leading Reformist Movement challenger to the dour but effective Mir-Hussein Mousavi, the man famed for having steered the Iranian economy through eight years of war with Iraq.

Iran’s economic problems are of long standing and known to most of the political elite, though they each offer different solutions. Mahmoud Ahmadinejad, the winner of the presidency again, is probably unique among the post-revolutionary elite in offering solutions and to have effectively claimed to have solved the problems.


His populist style incorporates severe criticism of his predecessors, while reassuring Iranians that under his management, all is now well. This fiction has been reinforced by the extraordinary oil revenues he has enjoyed during his first term (until indeed the dramatic collapse in oil prices in the autumn of 2008), and which has remained consistently higher than those enjoyed by his predecessors. Ironically, this has meant that fundamental reforms of the economy have been avoided if not neglected altogether.

Indeed one of the major charges levelled against Ahmadinejad is that he has squandered an oil windfall and failed to take the opportunity to institute some serious structural changes to the economy.

By this, critics do not mean the incremental reduction in subsidies, or the rationing of petrol consumption, both of which are important but remain at best symptoms of a wider malaise. Ahmadinejad has in fact sought to tackle both of these issues with mixed results. Rather, it is the fundamental structure and nature of the economy which is at issue, and in this respect Ahmadinejad’s approach has been to reinforce those aspects of the economy which many observers consider to be its greatest flaws.

To appreciate the depth of the problem one must recognize the dominant mercantile ethic which defines the Iranian economy. In many ways this was the product of a political settlement reached by the real bete noire of the Ahmadinejad administration (and curiously his Reformist Movement predecessor), Akbar Hashemi Rafsanjani. Here, the post Iran-Iraq War political establishment came to an arrangement with the mercantile elite of the country, many of whom had funded the revolution and were eager to see a return on their investment. This mercantile elite was focused on trade and sought quick returns from a dynamic, or alternatively volatile, economic environment.

Transparency and long-term stability – required for investment – were eschewed in favour of a flexible legal environment that asked no questions and facilitated easy profits. Oil money fuelled this process, and for the beneficiaries of this arrangement – and they were not few – times proved good. But for those who had launched a revolution and fought a war to bring a measure of social justice, the growing disparities in wealth proved galling.


The initial response to this was the Reform Movement under the then leadership of president Mohammad Khatami. Khatami acknowledged that the economy was sick, required major restructuring to make it more transparent, accountable and legal, and he looked to raise more revenue from taxation and avoid dependency on oil revenue.

For the Reformists, economic restructuring went hand in hand with political development. They argued that taxation revenue would increase the more people felt connected to their government and the political process – hence the need for more transparent elections.

The main problem with this approach is that it also targeted, by extension, the revolutionary organs of government, symbolized by the office of the supreme leader – who were unenthusiastic about any push for greater accountability and openness.

The reaction which set in crushed the Reform Movement and sought to replace it with a new political movement called Principle-ism. The public face of this new movement was Mahmoud Ahmadinejad, and much to the disappointment of many Iranian economists – including those who were not sympathetic to the Reform Movement – the new president proceeded to approach Iran’s economic problems in an idiosyncratic manner.

Armed with burgeoning oil revenues, Ahmadinejad proceeded to spread the wealth in a manner which brooked no scrutiny and appeared to have neither rhyme nor reason – other than to boost his own popularity.

Interest rates were cut by presidential edict; money was diverted from ministries into revolutionary organizations; the revolutionary guard were abruptly awarded lucrative contracts; and economic populism was matched by the distribution of largesse to political allies.

Economists who warned that the growth in liquidity would fuel inflation were dismissed as ignorant. Majlis deputies – largely from the same broad coalition – who saw it as their duty to scrutinize the various budgets he submitted, were likewise ignored and treated with contempt.

The coup de grace of this retreat into opaqueness was the president’s sudden decision to abolish the independent Plan and Budget Organization in 2007 – an organization which had been in existence since the days of the Shah and which was meant to provide a technocratic framework for long-term economic development.

As weak as it became, it remained the last institutional bastion of scrutiny. Ahmadinejad now decided to amalgamate it into the presidential office. There were now no serious balances or checks outside the Majlis – though he continued to ignore that body – on his spending and perhaps more importantly on his generosity in the international arena.

Indeed, two of the main beneficiaries of his largesse, outside his new-found friends in Latin America, were China and Russia, which were integrated into the complex web of contracts and commissions in part to ensure their loyalty on the UN Security Council.

For many, the cost of purchasing these UN votes has been far too high, even before the debacle of the presidential election. During his election campaign, for instance, Mousavi noted the destruction of Iranian agriculture wrought by the importation of cheap produce from China, and questioned the rationale which facilitated the importation of goods Iran could easily produce itself.

Mousavi’s candidature was in large part encouraged because of the widespread fears about the state of the economy. He was regarded as the one person who could effectively manage an economy in a crisis, and it was felt, mend some of Iran’s broken relations.

The election fiasco ensures more of the same from a president who is dismissive of basic economics, but further accentuates the difficulties on account of the real political instability that continues.

The short-termism and desire for quick gain so characteristic of the mercantile ethic will be further encouraged by political uncertainty, while at the same time Ahmadinejad and his allies will seek to accumulate as much patronage around themselves as possible.

An already flawed system will become more fragile still, and with further sanctions on the horizon, it is a matter of debate whether political or economic realities will be the first to bite.

Ali Ansari is director of the Iranian Institute at the University of St. Andrews

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