Iran's Economic Freefall

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Iran is experiencing increased economic malaise due to domestic mismanagement and foreign policy adventurism. Its dire situation fuels both a budding populist revolution and attempts to end longstanding isolation.

In early January, the worsening economy forced President Mahmoud Ahmadinejad, who has been in office since June 2005, to compromise with a hostile parliament and Guardian Council over reforming subsidies. Those subsidies had lowered consumer prices on food and fuel but cost more than 20 percent of gross domestic product (GDP) because much is imported. But state assistance to the populace is only the tip of an economic meltdown.

Iran's population grew steadily from 68 million in 2005 to 74 million in 2009 and will keep growing at an average rate of 1.3 percent going forward. It now ranks among the top 20 most populous nations, and its labor force increases by 4 percent annually. But, employment opportunities have not kept pace due to industrial stagnation. As a result, unemployment has become a major impediment to social stability, rising from 10.3 percent in 2005 to 12.5 percent in 2009 and projected at 15 percent for 2010. Unlike other Third World countries, exporting labor has not proven successful due to foreign qualms of Shiite militantism.

Unemployment is most prevalent among the rebellious youth who make up 50 percent of the population. Different from much of the rest of the Middle East, over 60 percent of Iranian university students are women. Yet, after graduation, 50 percent of women fail to find steady employment. So Iran ranks among the bottom 3 percent of the world's nations when it comes to women's economic activity.

GDP growth dropped from 4.7 percent in 2005 to 1.5 percent last year, more due to failed policies than the global economic crisis. GDP per capita purchasing power parity climbed from the equivalent of U.S. $9300 in 2005 to $11200 in 2009. But inflation has remained in double digits for the past half decade. Last year inflation peaked at 25.6 percent, placing Iran among the most-affected 4 percent of nations. Food and fuel costs rose by 13.8 percent despite state interventions while housing and utilities climbed 16.3 percent. The consumer price index has gone up from 10.4 five years ago to over 12.0 percent recently. Another double digit boost in consumer prices is expected over the next 12 months, causing per capita income to fall seriously behind the cost of living. Disgruntled citizens increasingly envy their Persian Gulf neighbors.

Unlike the United Arab Emirates just 200 miles to its south, economic freedom is nonexistent in Iran. Country measures of economic freedom regularly place Iran near the bottom. Essentially, the political and regulatory environments aren't conducive to free-market activities. Corruption has become rampant as economic opportunities have declined. Iran currently ranks 142nd out of 180 countries where the prevalence of graft is measured.

Current political turmoil there makes it unlikely that corruption will decline any time soon, especially as the 2009 presidential election is thought by many to have been rigged for Ahmadinejad. Market confidence continues to fall as quasi-state institutions like the Islamic Revolutionary Guard Corps (IRGC) take over banking, utilities, communications, and construction in the private sector.

Not surprisingly, Iranians' prosperity declined swiftly during 2009 from the 30th percentile to the 10th percentile among the world's poorest nations. Middle class women peddle smuggled foreign clothing, jewelry, and cosmetics to make ends meet for their families. Now approximately 10 percent of Iranians live below the poverty line. All this despite Iran ranking near the top worldwide in terms of oil and gas reserves.

The Central Bank's executive director, Mahmoud Reza Khavari, acknowledges the government is incapable of meeting its commitments to other financial institutions. During the recent global recession, Iran's assets in foreign banks decreased by 12 percent to $77.8 billion. Moreover, the current account balance is expected to fall to less than 3 percent of GDP by 2013 even in the absence of additional economic failures and embargoes.

Much-needed comprehensive reform is unlikely, however, under that failed state's current leadership.

Rather than tackle the financial conditions that decimated Iran's economy over the past five years, the Iranian Central Bank aims to omit 3 to 4 zeros from Iran's rial or currency during 2010 in an attempt to lower inflation to around 11 percent. Official failure to address internal problems coupled with U.N. sanctions is likely to ensure that foreign investment in hard currencies, which was a scanty $3 billion last year, will not rise much.

In response to deteriorating relations with the U.S., Ahmadinejad has long-sought, unsuccessfully, to convince members of the Organization of the Petroleum Exporting Countries (OPEC) to peg oil's value to a basket of currencies other than the U.S. dollar. He is also championing - with little success - conversion of cash reserves into currencies other than the U.S. dollar in response to U.S.-led attempts at reigning in Iran's militancy.

Despite years spent seeking an enhanced role in global markets, Iran's net foreign trade value remains under $50 billion. European Union member states, especially France and Germany, remain Iran's largest trading bloc - with transactions worth over $36 billion despite international sanctions. Trade remains a modest $9 billion with China and $2 billion with Russia. So, Iranian companies are desperately seeking international economic cooperation to boost bilateral trade and resource exploitation with South Asian, Middle Eastern, and African entrepreneurs. More ominously, the IRGC seeks cash through arms sales to Syria, Venezuela, and Bolivia in violation of U.N. sanctions.

Iran's government is attempting to break through U.S.-led sanctions on oil and gas by laying pipelines to Armenia, Turkmenistan, and India. Additionally, Tehran and Caracas have reached agreement to supply Iran with 20,000 barrels of refined Venezuelan gasoline per day. At home, dozens of new petrochemical facilities are planned to provide self-sufficiency, as is a new gas distribution grid - the latter with German assistance. Ahmadinejad's administration also seeks to circumvent U.S. Treasury imposed banking restrictions through partnerships with financial institutions in Central Asian and Latin American nations. Iran is not doing all this merely to vex the U.S.; it truly is in dire straits.

Despite these measures, in the absence of sweeping and sustained restructuring, Iran cannot bear the significant costs of its leaders' self indulgence, mismanagement, international expansionism, investment in terrorism, and pursuit of nuclear weapons without the serious risk of total economic collapse. Yet it is optimistic to suggest, as did the U.S. 2009 Annual Treat Assessment that "declining revenues may put the squeeze on the adventurism of producers like Iran." Internal despotism, foreign policy, and nuclear power have less to do with economic realities than with quests for personal fortune, nationalist ideals, and global influence.

Iran's citizens may very well succeed in ousting the bankrupt despots. But they will need astute, judicious, new leaders to truly reform and globalize their economy - and none have emerged as yet.

Jamsheed K. Choksy is professor of Iranian and International Studies and the former director of the Middle Eastern Studies program at Indiana University.  Carol E.B. Choksy is adjunct lecturer in strategic intelligence and information management at Indiana University.  She is also CEO of IRAD Strategic Consulting, Inc.

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