Included in the Iran “deal” is a provision that “The United States of America undertakes with regional partners to develop a definitive, fully agreed plan with at least $300 billion for the reconstruction and economic development of the Islamic Republic of Iran.”
We hope this proposal is offered in the spirit of President Trump’s Truth Social post to the Iranian people that “help is on the way.”
However, to believe this, we’d like to see provisions that assure that indeed these funds will not wind up in the Swiss bank accounts of the ruling klepto-regime and that indeed this prodigious proposed aid package (practically equal to Iran’s GDP) will indeed improve the lives of the Iranian people.
One snapshot of existing economic reality in Iran, the Economic Freedom of the World (EFW) index, published annually by the Fraser Institute, co-authored by one of us, paints a troubling picture and suggests that fundamental economic reform should and must be a pre-condition for any economic assistance.
The link between economic freedom and prosperity is well-documented — GDP per capita for countries in the top quartile of index scores is 6.2 times higher on average than the bottom quartile — and neglecting this connection kills Iran’s odds for economic growth. Critics may argue that economic reforms should not precede humanitarian assistance. However, humanitarian assistance in such an unfree economy is likely to result in little for the people – though it will inevitably further enrich the Iranian elites in charge of doling out the money.
Iran’s economic freedom score in 2023, the last year for which there are data, stands at 4.37 (out of 10), placing it 161 out of 165 counties measured – one of the worst in the world.
In spite of its massive oil capacity, with the world’s third largest oil reserves, the lack of economic freedom has resulted in poor growth and low incomes for Iranian citizens. The current regime’s near-total government control of economic life is to blame for Iran’s pathetic economic performance.
Although government taxation and spending are not terribly high in relative terms (64th), Iran’s rankings in the rest of the areas of the EFW index abysmally low: legal system and property rights (149th), sound money (144th), free trade (165th), and regulations (162th). And because it affords women fewer economic rights with respect to employment and property ownership than men, Iran’s legal system and property rights score of 3.2 is significantly lower than it would otherwise be (4.5).
Iran requires wholesale economic liberalization across all areas. It needs to improve property rights and the rule of law eliminating special privileges for the political and religious elites. It needs to print less money and stabilize prices. Inflation is now over 50% per year. It needs to open its economy to the benefits of global trade. The mean tariff rate is 20%, and black market currency exchange premiums are off the charts. And finally, Iran needs to unleash the entrepreneurial spirit of the Iranian people by eliminating the regulations that are squeezing the lifeblood out of its people.
President Trump expressed at one point hope that the peace initiative with Iran could provide a framework for expanding the Abraham Accords. However, it’s no accident that the initial signatories to Abraham Accords are among the most economically free countries in the region.
Israel stands in the top quartile, ranking 39 with a score of 7.46. Bahrain and the United Arab Emirates are in the second quartile, with scores of 7.41 and 7.25 and rankings of 43 and 52. And Morocco is in the 3rd quartile at scoring 6.38 and ranking 94.
Before its 1979 revolution, Iran exhibited moderately high levels of economic freedom—good enough to be in the top half of the economic freedom rankings.
Conditioning aid, or opening the Iranian economy, on reforms that will bring economic freedom to this beleaguered country is not just the way to assure that “help is on the way” for the Iranian people. It can open the door to prosperity, peace, and hope to the entire region.
