outlook should be optimistic. Iran is energy rich?holding the third largest oil reserves and second largest natural gas reserves in the world; the populace includes a well educated, sizable middle class, living in a modern, urban environment.. Indeed, economic indicators present a positive outlook: real GDP growth is strong, the current account is in the black, and investment and private consumption levels are rising (source).
Yet, critical problems exist within the Iranian economy. Iran is plagued by high rates of unemployment and inflation, foreign investors have eschewed Iranian markets, and the stock market has plummeted (reaching its nadir nine months into President Mahmoud Ahmadinejad?s presidency) (source). Furthermore, fear of foreign meddling in domestic affairs?a legacy of the revolutionary ideology–encourages the government to look inward for solutions to its economic woes. The government under Ahmadinejad consistently promotes a statist economic policy, even though the state is bloated, corrupt, and inefficient (source). Moving forward, the government will continue to avoid making difficult, but critical, decisions on the economy for fear of popular repercussions.
Unemployment, Inflation, and the Military
In response to an 11% unemployment rate, Tehran sponsors numerous manpower-intensive projects, which predictably have proven to be overmanned and inefficient. To address income disparities, the current government has also promoted public-sector wage increases. These policies have failed to reduce unemployment and have had the adverse effect of increasing workers? reliance on government job programs. Moreover, increased cash flow among job recipients has driven up demand for consumer goods and services, leading to inflation rates as high as 14%.
The Islamic Republic?s reliance on government spending to stave off unemployment has further entrenched the military?specifically the Islamic Revolutionary Guard Corps–in the economic sphere. The military?s inclusion originally served an urgent need, employed thousands of young, ideologically committed soldiers returning from the Iran-Iraq War. However, the military?s subsidiary companies have remained the predominate recipients of the government?s no-bid largesse at the expense of more qualified firms. These construction and technological projects are marked by inefficiency and corruption and are often rewarded in exchange for political loyalty to the governing elite.
Debate
The election of Ahmadinejad brought forth a renewed emphasis on state intervention in the economy. The president-elect ran on a populist platform that promised the underprivileged more opportunity and a greater share of Iran?s growing oil wealth. It was a philosophical departure from the two previous administrations, which had preached a reduction of government interference in the economy and an expansion of the private sector.
Ahmadinejad?s economic initiatives, in conjunction with polemic rhetoric that scared off investors and rattled the stock market, amounted to a failed policy. In its wake, a high level debate on Iran?s economic direction has ensued. Fifty prominent Iranian economists protested with a June 2006 open letter that accused the President of ?unsettling the investment climate, pursuing inflationary policies, opening the floodgate to imports and implementing misguided interventionist policies? (source). More importantly, Ahmadinejad?s own hard-line element within the conservative movement has likewise called for a reduction in government spending. Supreme Leader Khamenei publicly countered Ahmadinejad, urging a ?change in the role of the government from one of ownership and direct management to an agency for supervision and policymaking? (source).
Dangers Ahead
The Iranian government?s dependence on oil revenue is a distinct economic vulnerability. According to a recent report by the National Academy of Sciences (source), Iran?s yearly oil production is decreasing while its domestic demand is increasing significantly. Oil exports are predicted to shrink by 10-12 percent per year due to the dilapidated state of the oil industry infrastructure, a product of the government?s failed economic policies, neglected foreign investment, and international sanctions. Moreover, domestic consumption of oil grew six percent; that, according to some analysts, is the highest consumer demand growth for oil in the world. To meet domestic demand, Iran is forced to subsidize imported fuel heavily, as it lacks a domestic refining capacity. These compounding trends are a microcosm of what ails the Islamic Republic economy.
At $0.09 per liter, the subsidized price is second lowest in the Middle East behind Libya (source). For the economy?s sake, the population must be weaned off oil consumption through a gradual price increase. Yet ruling over a restive populace already suffering from high unemployment and inflation rates, the government fears the popular reaction to such a decision. Instead, it supports government-run programs and subsidies by raiding the Oil Stabilization Fund, which was designed to channel oil revenue toward investment in the energy sector (source). Tehran?s failure to address the long-term issues of gas subsidies and sluggish state-run programs is an acknowledgement by the governing elite of its tenuous hold on power.