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Iran Interview: The State of the Economy (Kaveh Ehsani)

The new website Muftah features an interview with Professor Kaveh Ehsani about the state of the Iranian economy amidst political tensions and international sanctions:

Ali Ahmadi Motlagh: How would you characterize the state of the Iranian economy? What are the most significant challenges currently faced by the government of Mahmoud Ahmadinejad?

Kaveh Ehsani (KE): The economy of Iran is in a deep recession, which has only been exacerbated by the recent round of sanctions passed by the United Nations, the European Union and the United States. Aside from more immediate concerns, the Iranian government is also grappling with several deep-rooted problems. First, it is dealing with the burden of a highly politicized, hybrid economic system that combines state, private, and semi-private ownership. The state exerts substantial control over the economy both directly and through semi-private entities such as foundations (bonyads), mutual funds, pension funds and companies linked to military organizations. Estimates vary as to exactly how much of the economy is under state control, partly because the semi-private sector doesn’t operate in a transparent fashion, but it is safe to say that these institutions dominate the economy. Since they are run by politically affiliated appointees, as opposed to managers hired according merit and competence, their activities tend to be highly politicized. Ideally, these institutions should be run according to transparent social and with economic rather than factional political aims, but any major changes will require resolute decisions by a government that is currently not prepared to pay the political cost of unpopular policies.

Another major challenge is reforming the multi-layered and burgeoning welfare system, which is administered through various state and semi-private organizations (such as Sazman-e Ta’min-e Ejtema’i, the Imam’s Rescue Committee, and other organizations supporting the veterans and the poor, etc.), all with access to substantial resources. While the welfare system has functioned fairly well, especially in regards to healthcare and population control, it is too politicized and will not be sustainable in the future if it is manipulated for short-term factional political expediency. Mohammad Khatami’s administration (1996-2005) tried to rationalize the welfare system and unify it under one administrative umbrella, the Ministry of Welfare, but it was not successful due to factional resistance. The main problem was and continues to be the politicization of debate surrounding reform, which tends to center mostly on the control and distribution of resources, rather than on the viability of possible long-term solutions.

The banking sector is equally politicized. One of first things Ahmadinejad did during his first term was to change a number of the directors of stateowned banks. Later he changed the manager of the Central Bank and pushed through measures to artificially lower interest rates, thus easing the flow of credit to selected segments of society.  Historically there are good reasons to have a highly regulated financial sector while making sure that the Central Bank remains independent of political intervention. It is all too easy for the political administration of the day to run untenable deficits by borrowing from the banking system without the ability to pay it back through taxes or other means, or to award cheap money to favored segments of the population in exchange for political support. This is a sure formula for high inflation and the long term impoverishment of the vulnerable sectors of society who are on fixed incomes or who are not politically privileged enough to receive handouts.

Finally, there is a growing problem of acute poverty. Figures vary widely regarding the true extent of poverty, but Iran’s Department of Statistics recently announced that 10 million Iranians live under the absolute poverty line while 30 million live under the relative poverty line. How do we maintain the safety net? Instead of fighting over control of assets, the government needs to focus its efforts on creating jobs.

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