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
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
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.
Irans 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
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 Ahmadinejads 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,
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.
CALL FOR CHANGE
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
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 Irans economic problems in an idiosyncratic
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
presidents 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
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
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
Mousavis 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
Irans 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
Ali Ansari is director of the Iranian Institute
at the University of St. Andrews