What does Iran's Supreme Leader really expect from nuclear negotiations? Does he expect them to fail or he is preparing the country for necessary economic reforms?
As Iranian diplomats negotiated the terms of final agreements with their European and American counterparts in Vienna last week, Iran's Supreme Leader, Ayatollah Ali Khamenei, ordered government heads to embrace “economy of resistance” measures. Given the timing of these orders, it's important to pay attention to what this actually means.
The “economy of resistance” is a relatively new phrase in Iran's political vocabulary. Ayatollah Khamenei used the term in summer 2010 when he addressed Iran's business community, calling on them to assume an entrepreneurial spirit and prepare for an economic leap forward, while at the same time warning them to resist pressures from the Islamic Republic's enemies. Since then, the term has broadened, pulling in a range of economic theories and policies that are not necessarily connected to one another. So the Supreme Leader’s recent proclamation reads as an odd blend of economic initiatives and political rhetoric. One cannot help wondering if this rhetoric is masking the real crisis Iran’s economy faces.
The order, sent to the heads of executive, legislation and judiciary, includes a list of 24 policy recommendations. Among the points raised are the importance of a knowledge-based economy, improved productivity and measures for creating employment and combating inflation. Elsewhere, there is a call for international trade infrastructures to be strengthened, barriers to commerce to be minimised, a diversification of Iran's trade portfolio, as well as an expansion of the country's free economic zones that offer tax incentives. In an economic environment facing an unemployment crisis and inflation rates close to 40 per cent, few economists would advise otherwise.
The recommendations also call for a reduction in government dependence on oil revenues, and a move towards increasing the amount of revenue deposited in the Economic Development Fund annually. By diversifying the list of oil clients, exploring oil and natural gas fields and creating strategic reserves, it is argued, the economy will become more immune to volatile oil markets.
Rebranding Plans for the Economy
The thrust of these new policies couldn't be clearer: reorient the economy to emphasize exports and to expand Iran’s position in the international oil and natural gas markets, as well as in other markets.
But some items on the list are not new. Just a few weeks ago, International Monetary Fund (IMF) experts made similar recommendations when assessing Iran’s economy. After re-iterating that “large shocks and weak macroeconomic management over the past several years have had a significant impact on macroeconomic stability and growth” in the country, an IMF report noted that policies such as “reforms to improve the business environment”, “proceeding with the subsidy reform”, “steps toward adopting a fiscal rule” and “containing the general government fiscal deficit” would be significant steps towards improving the health of the economy. While IMF experts use a general language, Khamenei’s recent decree calls for specific actions to achieve similar goals.
It is odd to consider this as a package aimed at resisting sanctions. If they remain in place, very few of these policies could succeed. The only item that specifically refers to sanctions is the call to create strategic reserves of basic necessities and commodities. Last summer, Iran’s grain reserves ran low and some cities had enough flour for only a few weeks. Measures should be taken so that this does not happen again.
Many of the proposed action points include recognizing the efforts of business activists and entrepreneurs. And the Supreme Leader has also introduced a new decoration, the Medal of Resistant Economy, to be bestowed upon those who ensure that the goals of the new policies are met.
Iran cannot expand its export markets, absorb the necessary international investment and improve market dynamics if its banking sector remains isolated and its access to its oil revenues continue to be limited. One cannot expect the private sector’s entrepreneurs to perform a miracle when, for the past few years, the Iranian government's involvement in private business has steadily grown. Since the introduction of “economy of resistance” measures to combat the impact of sanctions, Iran’s economy has become more dependent on oil revenues. It's clear to any outside observer that sanctions have already damaged Iran’s economy and many would make very different recommendations.
Recovery in a Volatile Environment
The truth is that Iran’s economy is in dire need of economic reforms. Unemployment is on the rise. Over the last year, the economy has shrunk. Many experts expect zero economic growth, or something close to that. Iranian banks face the largest volume of default debt in their history and have no hope of getting back the loans they paid out under the provisions of the previous administration. Under Ahmadinejad’s administration, Iranian currency was drastically devalued and the country now faces a liquidity crisis. Markets that show the remotest sign of a promising future are prone to short bursts of recovery followed by sudden drops. It is hard to imagine that such a volatile economy can survive any further upheaval. The country's bureaucratic systems are crippled by corruption and politicking and many Iranian economists have cautioned not to expect too much from Hassan Rouhani’s administration.
Some of these reforms demand a complete reverse of policies implemented during the previous administration. One must not forget Ahmadinejad was not alone in his populist approach when it came to the economy. The Supreme Leader supported his programs to distribute oil revenues and to support underprivileged sections of society. His excesses and lack of fiscal discipline went unpunished, leading to further corruption and irresponsible leadership across the government officials and their departments. In order for “economy of resistance” measures to succeed, the new government needs to consult an educated and experienced technocrat and support enterprises that have a viable chance of success. It has been some time since the Iranian government has actually supported the business ideas of competent individuals without political connections.
To pay for the populism of the last eight years, Iran’s Supreme Leader needs a solution that does further damage his already depreciating political capital. It seems he has found a way, by presenting a desperate solution for a desperate situation as a valiant effort of defiance. It is not the first time that the Iranian government has used foreign enemies as an excuse to adopt a series of domestic policies.
There might also be domestic motives for this recent set of initiatives. If the order to open up the economy comes from the Supreme Leader, then he is well disposed to benefit politically from any economic gain Iran might make under any extensive nuclear deal.
Still, Ayatollah Khamenei's 24 points for economic advancement is quite a different thing. The official line will be that these are new principles, establishing a foundation for a new understanding of the economy. But this is simply not true. An “economy of resistance” sounds like another name for the Free Market Economy. The new name might have had more impact at a time when the market-based approach to economic policy was still publicly and scorned by officials, and when populism was still the fashion of the day.