While it is true that the Iranian people, thank to their history, human and natural resources and their hard work within a highly successful economic policy environment had already attained a reasonable and improving level of economic security prior to the Islamic Revolution, and their plight is not comparable with that afflicting a sizeable portion of humankind through hunger, poverty, draught, pandemic diseases, genocide and conflicts, the last 25 years have, nonetheless, been a period of economic mismanagement and missed opportunities that have brought about increasing insecurity to their economic life.
One can tell the story of the last quarter century through a few statistics. According to UNDP’s Human Development Report, 2002, Iran ranks 98th amongst 173 countries in terms of its human development index. The per capita gross domestic product of Iran in the year 2000 was $5884 on a purchasing power parity basis compared with $7959 in 1976, i.e. a decline of 26%. While Iran occupied the 40th place in the world in 1976, it’s ranking, in respect of per capita income, has now dropped to 76th. Since the Human Development Index is a combined measure of literacy, life expectancy and per capita income, it is interesting to note that in terms of adult literacy Iran currently occupies the 107th place in the family of nations, while its life expectancy at birth ranking, at 68.9 years, is on a par with its aggregate at 98th.
This is the performance of a country that has earned nearly $400 billion in oil exports during the last 25 years of which $270 billions have come since the cessation of hostilities between Iran and Iraq in 1988. This performance should be compared with Iran’s achievements in the 18 years prior to the Islamic Revolution during which Iran’s per capita GDP quintupled and adult literacy rate rose from 15% to around 60% in 1978. And all that was achieved with an oil income of $26 billion up to 1973, increasing to $135 billion during the 18 years.
Since the mid-1990s, the major root causes of this economic insecurity and the incessant decline in the well being of the majority of the Iranian people have been known to many in the economic team advising President Khatami. During the first year of his presidency and in a moment of unusual candor, he declared Iran’s economic structure to be sick in production, distribution and regulation. After much discussion and soul searching, his economic team produced an Economic Rehabilitation Plan which enumerated the problems as unemployment, lack of sufficient investment in productive activities, inefficiency of state enterprises, monopolies, external payment imbalances, the fiscal imbalances, the heavy reliance on oil revenue and the high rate of inflation.
But in the formulation of policies to deal with these issues, his team had to compromise with the other power centers in the country especially the office of the Supreme Leader and propose interventionist measures, ostensibly to ensure social justice, through control of wages and prices and the maintenance of subsidies. This was the first lost opportunity to take real corrective measures to adjust the structure of the Iranian economy after many years of statist policies, sacrificing growth at the expense of a misguided approach to social justice. This tilt away from economic efficiency and growth was later enshrined in the outlines of the Third Five Year Development Plan which contained several economic goals, many of which came from the two previous plans and the ERP and included items such as: 1) elimination of non-constitutional monopolies; 2) transfer of state enterprises to the private and cooperative sectors with due regard to the Constitution; 3) protection of investment and assets obtained from legitimate sources; and 4) due regard to the national interest and constitutional provisions in attracting foreign investments and avoidance of foreign dominance.
These outlines took the economic policy making again back to square one in that instead of removing the constitutional obstacles to private sector participation in the economy and emphasizing the sanctity of ownership, it revived the specter of nationalization and confiscation of property practiced by the regime since 1979 in a country where the judiciary is both ideological and arbitrary in its decisions and the rule of law is lamentably broken.
For Iran to enter on a path to sustainable growth with equity and to achieve a more economically secure future for its people, there is need for the adoption of a sound economic policy combined with considerable improvement in the governance of the country. With unemployment officially at 15% of the labor force (unofficially estimated at above 20%) and with between 750-850 thousand new increasingly educated, young and female entrants each year to the labor force the Iranian economy must undergo three fundamental changes: 1) from one dominated by the public sector to one oriented toward the private sector; 2) from one largely insulated from the world market to one integrated in the world markets; and 3) from one highly dependent on oil income to one more diversified.
With regard to the reinvigoration of the private sector, it should be remembered that the events of the last 25 years were really aberrations to an economic system that valued and encouraged entrepreneurship and private initiative prior to the Islamic Revolution. In the pre-revolutionary Iran, the private sector was the important engine of growth as exemplified by the respective shares of sectors such as agriculture, industry and mining, construction, transportation, banking and financial services, insurance, real estate, commerce and other services in the gross domestic product. It was indeed these sectors that under girded the phenomenal growth of the GDP in the pre-revolutionary period. Therefore, in addition to the elimination of arbitrary and distorted policies, an environment must be created that is private sector friendly especially its approach to property rights. The uncertainty felt by Iranian entrepreneurs in this respect is the single most important deterrent to their embarking on long-term investment that is the prerequisite to job creating activities such as export industries. In fact the only sector that has done rather well in recent years is the housing and construction sector that enjoys a short payback period. In order to further support the private sector, weaknesses in the infrastructure and the financial systems have to be removed and privatization should be accelerated.
In order to integrate the Iranian economy with the world economy, an export-oriented policy must be adopted whereby the domestic economy becomes gradually exposed to the rigors of the world markets while reasonable and effective assistance is provided to the entrepreneurs to enable them to meet the challenges. Furthermore, Iran should aim to become a member of the WTO and to participate in the global production network. This is not to say that Iran should not take advantage of the abundance of some natural resources within its borders such as energy. But in this respect it has to rid itself from the inefficient, overstaffed and corrupt organizations that unfortunately run many of such entities in the country.
Diversification is the only way in which the Iranian economy’s dependence on oil can be reduced. But such an approach requires the setting up of institutions and fiscal policies that can protect against oil price volatility. Moreover, the country needs to manage its hydrocarbon resources more efficiently so as to extend the blessings of oil income for the present and future generations, always keeping in mind that oil resources are bound to decline with time.
The adoption and implementation of these fundamental reforms, though necessary, are not sufficient to put Iran back on a course to economic success. What is needed is substantial improvement in governance of the country, i.e. the way the government interacts with citizens and civil society in order to promote social and economic welfare. In this respect, the regime needs to accept the concepts of people’s inclusiveness in the decision-making process and the government’s accountability vis a vis the people. To promote inclusiveness, it is essential to adopt laws and regulations that secure access to widely accepted basic rights and freedoms including equality before the law and an end to discriminatory laws and practices.
In addition to checks and balances at the national level, the government can institute a set of administrative measures to strengthen accountability including more transparency, public disclosure of government operations and greater freedom of information as well as a monitoring mechanism with indicators to measure progress. The improved oversight by parliament and a greater independence of the judiciary and other oversight agencies are essential to the establishment of an efficient accountability regime as are the invitation to civil society to participate in public debates on policies and the existence of a free, independent and responsible press
Throughout my discussion so far I have assumed gender neutrality in the way policy needs to be formulated. But we all know only too well that gender discrimination remains a very serious issue in Iran. From a purely economic point of view, the country can ill afford to forego the contribution that an increasingly educated female labor force can make to the development of the country.
Many of you must be wondering how realistic is the hope that Iran will implement such reforms given the nature of the regime and the dictates of the Islamic Republic’s Constitution. In search of an answer let me now take you back to UNDP’s Human Development Report and see how Iran fares in some other respects. At 17%, Iran’s human poverty index ranks 30th among 88 developing countries. Although no reliable statistics are available, a country Human Development Study published in 1999 by the Plan and Budget Organization and the UN Resident Office in Tehran reports that the ratio of income earned by the richest 20% to the poorest 20% of the population varied between 10 and 12 times during a period of ten years from1988 to 1997.There is, however, ample anecdotal evidence that because of the shrinkage in the size of the middle class, the enormous rent appropriated by the well-connected upper income groups and despite subsidies, Iran’s distribution of Income has worsened since the Islamic Revolution. It is important to note that the figures given in the Iranian report was not picked up by the UNDP.
UNDP does not rank Iran in its gender empowerment measure, but in the measure of seats held by women in parliament, 3.4% in2002, Iran ranks 16th from the bottom in a field of 162 countries. Female economic activity rate as a percentage of the male rate stood at 37% in 2000.
While Iran is a signatory to three international treaties namely: International Convention on the Elimination of all Forms of Racial Discrimination (1965), International Covenant on Civil and Political Rights (1966) and International Covenant on Economic, Social and Cultural Rights (1966), Iran has refused to join the Convention on the Elimination of all Forms of Discrimination Against Women (1979) and Convention Against Torture and Other Cruel Inhuman and Degrading Treatment and Punishment (1988), though it has joined the Convention on the Rights of the Child (1989).
In regard to subjective indicators of democratic governance namely democracy, rule of law, government effectiveness and corruption, Iran suffers from enormous democratic deficits and Iran’s indicators are really disheartening. On a scale of 7 to 1, 7denoting extremely bad and 1 denoting excellent, both civil liberties and political rights score a 6. On a scale of –2.5 to 2.5, again –2.5 denoting extremely bad and 2.5 representing the best, Iran’s scores are: voice and accountability,-0.36; rule of law, -0.39; government effectiveness, -0.21 and –0.64 for graft corruption. None of these indicators would be unexpected news to the Iranian people and I am sorry to have subjected you to such a depressing litany.
The sad truth, I am afraid is that the lack of socio-political liberties, the absence of good governance combined with the gross mismanagement of the economy have heightened the feeling of insecurity and hopelessness in the people of Iran, especially among the youth of the country. That is why many bright and capable young Iranian graduates try desperately to leave the country and make a life for themselves elsewhere in the world. Coming on the top of the previous wave of emigration, the country is being impoverished and denied the benefits of its most precious asset.
Nowadays, many Iranian social scientist and political commentators believe that the post-Khatami era will usher in a period of economic reform, a la Chinese, leading to growth and better standard of living and thus enhanced economic security for the people of Iran, especially if the price of oil remains around $40 per barrel for an extended period of time. I believe that without democratic governance, i.e. inclusiveness and accountability, Iran’s human and other resources will be wasted and the likelihood of a dynamic, efficient and growth-oriented economy, capable of creating jobs commensurate with the enormous wave of entrants to the labor market, will be minimal. So far the regime has not shown either the ability or the willingness to bring about the fundamental governance reforms because of its ideological and doctrinal opposition to democratic governance. How such a change may come about remains an open question. I am not ready to speculate.