Chapter Six - The Economics of Counter-revolution
After the revolution, the mullahs promised the masses an end of exploitation. They asserted that justice was only possible if Iran went back to the pure Islamic heritage, the Umma model of 7th century Arabia. The Islamic Republic Party (IRP) proclaimed as its aim the Islamisation of Society, the re-introduction of the values of Islamic culture, a lowering of Iran’s dependence on oil revenues, a raising of the living standards of the general population, and a reduction of the inequalities which were the defining characteristic of the previous regime. In the twenty years since the mullahs (fundamentalists) formed the government, Iran has had only limited success in achieving its economic goals and this has resulted in widespread dissatisfaction in Iran.
In the years following the establishment of Islamic Republic in 1979, the Iranian economy experienced a relatively sharp decline in real output, a decline in GDP, a drastic reduction in average living standards of the Iranian masses; per capita GDP declined by 47 percent between 1979 and 1987 at an average rate of 5.2 percent per year. The economic crisis of 1984 was followed by a decline in oil revenues and capacity utilisation, intensification of the war with Iraq and an increase in unemployment and inflation. The per capita GDP also continued to decline to 50 percent of the 1979 figure. The economic crisis was aggravated by the corruption and inefficiency of the mullahs who were placed in charge of newly nationalised large business enterprises.
In short, economic conditions in Iran deteriorated rapidly after the revolution due to a number of external and internal factors. Prominent among the internal factors were counter-revolution, repression against the workers particularly the skilled and advanced workers, hundreds of whom were murdered by the Pasdaran (Islamic death squads), and others fled abroad. The Shah’s Savak and members of his family plundered at least one billion dollars which were sent abroad. Unemployment, inflation, and the flight of capital increased and a large number of projects undertaken by foreigners were suspended.
External factors included a prolonged and costly war with Iraq, turbulence in world oil markets, resulting in reduced oil income, the freezing of Iranian foreign exchange assets ($11 billion) following the hostage crisis and the embargo imposed by American imperialism. Despite the propaganda of the mullahs about economic growth and prosperity, Iran has increasingly become polarised into a two-class society of rich and poor. In 1987 the Khyaban Daily reported that absolute poverty had increased among Iranians and the real purchasing power of salaried people had fallen by 60 percent since the revolution. People on low wages and salaries were forced to pay for exorbitantly priced commodities by selling their homes, appliances and furniture, reducing their consumption level or changing their diet to include more staple foods offered in rationed markets at official prices; and finally by borrowing money or dipping into savings.
During the 1990s Iran’s economy continued to be characterised by sluggish growth and high inflation, averaging 31.3 percent between 1994 to 1997 and reaching a peak of nearly 50 percent in 1995. At the close of the decade Iran’s reliance on its oil revenue remains unabated, the standard of living of the population has declined both in absolute (as measured by GDP per capita) and relative terms. The government had promised people free housing, water, electricity, public transport and education, plus a direct share of the oil revenues. Such promises proved impossible to keep. But the regime spent relatively large sums on education, health, electricity and water in the rural areas. During the first 16 years after the counter-revolution, growth was almost nil, with GDP declining by 7 percent. Unemployment was estimated at 30 percent for 1993. As a result, more than 60 percent of Iranians were living under the poverty line.
Some unofficial estimates put the annual rates of inflation at 30 to 60 percent higher than the figure given by the Iranian Central Bank. The foreign press has regularly reported an annual inflation rate of 60-100 percent accompanied by 25-40 percent unemployment. After the counter-revolutionary period, annual inflation averaged about 27 percent, but in 1996 it was nearly twice that and the year before that it was seven percent a month and rising. This inflation forced Iranian workers and middle class youth to work in two or three extra jobs in addition to their official one and they often earned more from their extra jobs than their main job. For instance, a schoolteacher might also do private tutoring to pay for rental expenses. A primary schoolteacher starts off at 120,000 rails or about $25 a month whereas a two bedroom apartment costs at least 200,000 rials or about $44 a month. In a country overrun with restrictions and desperate for dollars, many people engaged in quasi-legal and illegal money making schemes in order to make ends meet. Many in typical working families have indicated that they could not afford "rice for a few days" or "sugar or sweets with their tea".
At the top, split among the mullahs first emerged clearly when Rafsanjani tried to liberalise the economy, i.e. started the process of privatisation and reduced government intervention. This intensified the conflict within the clergy, because the government owns the petroleum, banking, insurance, power and most large-scale manufacturing industries, and controls access to foreign exchange. Large charitable foundations called Bonyads most with strong connections to the government, control properties and businesses that were expropriated from the former Shah and his family. The Bonyads exercise considerable influence in the economy, but do not account publicly for revenue and pay no taxes. Basic foodstuffs and energy costs are subsidised heavily by the government. Oil exports account for more then 80 percent of foreign exchange earnings. Economic performance is affected adversely by the mullahs’ mismanagement and extreme corruption, and was made worse during the years of falling oil prices.
Soon after Khatami’s election he announced a new economic programme aiming at the privatisation of state-owned industries, an improvement in tax collection and a general reduction of government inefficiency. Nevertheless, Iran still faces severe economic problems. In 1998 falling oil prices caused a reduction of $5 billion in oil revenues. According to Iran’s Central Bank, the Iranian economy grew 1.7-2 percent in 1998, compared with 2.5 percent in 1987 and 5.2 percent in 1986. However, according to the Economist, Iran’s economy was characterised by a negative growth rate of 2.3 percent in 1998. According to Iran’s central bank, Iran’s economic growth was two percent last year (1999).
To some extent, the government generally increased the living standard of rural areas in the fields of education, electricity, health, water and telephones between 1988 and 1992. But there is colossal inequality and corruption. In 1987 the bottom ten percent of the population received no more than 1.3 percent of the national income, whereas the top ten percent received 33 percent of the national income. According to the Kahyan Daily in 1986 some 5,000 bazaaris made 50 billion rials in after tax profits. These were merchants and traders who control the country’s distribution channels and construction contractors who have contacts with the regime.
A significant number of large industries and all the banks, insurance companies, the nationalised. Foundation of the Jahad-e-Sazandegi (Construction Crusade) and the Bonyads foundation for the oppressed helped expand welfare services in the rural areas and among the urban poor. Subsidies were provided for basic commodities and taxes on the rich were increased, labour laws were enacted and also laws providing for unemployment benefit, social security and a minimum wage were enacted. Social security and welfare as a percentage of total government expenditures increased from 6.1 in 1972 to 18.4 percent in 1990. The regime also attempted to control inflation, but due to high inflation has now abolished most subsidies. In order to find a way out of the mess Iran developed a Five Year Plan (1989-94) concentrating on infrastructure improvement, communication power and education. From 1989 to 1993, the foreign debt reached $30 billion, of which $8 billion was in arrears. By late 1992, Iran was becoming unable to service the debt and creditors had rescheduled a total of about $7 billion of Iranian loans. This provided a breathing space through 1995.
The second five-year plan continued the work of the first plan, aiming to expand non-oil production and exports but continuing to be driven by Iran’s oil. Since the early 1990s, based on the advice of the IMF, priorities have been placed on privatisation, deregulation, the "open market", the cutting of subsides and downsizing. Last year the government faced a revenue shortfall of $6 billion, or one third of the state budget, and was forced to suspend most development projects. Iran’s worst drought in 30 year has also taken its toll, despite the recent rains. The damage to farming, which employs about a quarter of the workforce, is estimated at $1 billion. According to the latest survey, the area of cotton farms fell 26,705 hectares or 10 percent in 1997 from 233,014 hectares a year later.
Teheran faces a serious water crisis as existing water reserves in the country’s dams were 5.3 billion cubic meters, which showed a 15 percent decline compared with the same period last year. Ten million cubic meters of water is consumed annually in Iran which mainly comes from wells and springs. The water shortage crisis in the Teheran is even greater. Dams which provide Teheran tap water have reached the lowest level in the last 33 years. Teheran, which has the capacity to accommodate two to three million people, now has over seven million permanent residents as well as three million daily commuters.
The hopes that Khatami has pinned on economic reform will soon evaporate, because the non-oil sector of the economy is on the brink of collapse. The only way to revert this would be hefty reinvestment. Iranian industry needs money, and there are two big sources of money. One is the black economy which is controlled and run by conservatives or hard-line mullahs, who are dead-set against investing in the economy which is outside state control. The second source of money is oil, on which more than 80 percent of the Iranian economy is dependent. Its exports provide 80 percent of the country’s foreign reserves. Tumbling prices of oil will soon snuff out the reformists’ hopes.
Any fall in oil prices will bring Iran’s economy to the point of collapse. Iran is the second biggest oil producer within the OPEC cartel, and it is very possible that in a short space of time OPEC will decide to increase in the production of oil, a move that could cause a sharp fall in the price of a barrel of crude. This will have a very harmful effect on the Iranian economy. There is split in OPEC on this issue. Iran is trying to convince the other OPEC members to keep any increase in production to a bare minimum, arguing that an increase in springtime cannot be justified when demand in consumer countries tends to fall.
What makes life more difficult for Iran is that it is very close to oil production capacity. According to the International Energy Agency’s January 2000 figures, Iran is producing 3.4 million barrels of crude a day, or not far off it, whereas full capacity is 3.7 million. So it will be unable to take advantage of an increase in oil production if this is decided by OPEC, while suffering from the ensuing fall in revenue. Iran has only just came out of a budget deficit caused by two years of falling oil prices that cost the country about 5 billion dollars a year. The five year plan which has just begun assumes revenues of $112 billion, of which $58 billion is meant to come from oil export revenue.
The third source of money is the IMF, which will impose conditions like privatisation, cutting more subsides, devaluation and downsizing. If Khatami started an economic reform on these lines, that could mean the possibility of civil war. Already the process was shown in outline with the attempted assassination of a leading reformist, shortly after the election. It will not be so easy for Khatami and his reformist parliament to introduce economic reforms. So the president and the new reformist parliament face not only resistance from the hardliner mullahs but differences are also growing amongst its own supporters. Even Khatami has to be very careful on this issue. The Economist writes that the reformists pay lip service to economic liberalisation, but have neither the courage nor the authority to free themselves from the commitment to pay billions of dollars in direct and indirect subsides. The price of basic goods such as fuel, bread and medicine are ridiculously low, from the bourgeois point of view. The Economist further writes: "There is endless talk of encouraging non-oil exports. Many factories are operating at a fraction of their capacity because they are unable to import spare parts or raw material."
If Khatami introduces economic reforms and its first attack will be on the workers, there are already signs of what he can expect. Discontent amongst workers was expressed in demonstrations in February against a new law that exempts small workplaces from labour laws, so giving employers more power to sack workers and cut wages. And one of the biggest demonstration for the first of May shows the changing mood in the Iranian working class. On the other hand, if he fails to introduce economic reforms, capitalist analysts are warning that he will be unable to create an economic recovery. Great masses of the population will be unemployed and disenchanted with the clerical regime’s repressive policies. Demands for jobs, reforms and westernisation will develop into criticism and rebellion against the government. This will be a much more intense version of the current "culture wars" as the elite attempts to hold on to power and justify the regime at the same time as the potential intensities for conflict, ranging from street protests and repression to near civil war.
The Iranian economy is now in a state of crisis. The black economy’s share of the total steadily increased after the counter-revolution. The majority of the Mafia is backing the hardliners. Some sections are backing ex-mayor Ghulam Hussain Krbasni, one of the Khatami’s close associates. The currency, the rial, is near collapse. The official rate is still 3,000 to the dollar but the black market rate—the one generally used—has fallen in the past weeks from 6,000 to the dollar to 8,600. Inflation is 30-40 percent, unemployment more than 30 percent, the foreign debt has reached more than $30 billion. As the economy plunges ever deeper into recession, there will be no hope left for the masses. The reformists will soon lose their support. Their promises will soon be proved impossible to keep, particularly in the midst of an emerging economic slump.
1. Hooshang Amirahmed, Revolution and Economic Transition, the Iranian Experience, State University of New York Press, 1990, p. 194.
2. The Kayhan Daily, 27 October 1987.
3. Hassan Hakimian, Institutional Change and Macro Economic Performances in Iran, Two Decades After the Revolution (1979-99), The Economic Research Forum Working Paper Series, University of London (1999).
4. Hoosang Amirahmad, Revolution and Economic Transition, the Iranian Experience, State University of New York Press, 1990, p. 198.
5. Wall Street Journal, 30 April 1987 and 12 May 1990.
6. The Economic Bulletin 6. No. 41 (27 October 1987), p. 5. Economic Bulletin 6. No. 39 (October 1987), p. 5.
7. The Irani Time, 28 June 1994, p. 4.
8. The Ettalaat-e-Siasi-eqteesadi. No. 8 (29 April 1988), p. 3.
9. The Kayhan Daily, (13 August 1988).
10. The World Bank, World Development Report 1992. Oxford University.
11. The Economist, 14 August 1999, p. 37.
12. The Kayhan Daily, 17 January 2000.
13. The Kayhan Daily, 6 January 2000.
14. The Kayhan Daily, 15 February 2000.
15. The Economist, 14 August 1999.
16. Stratfor’s Iran’s Strategic focus, 7 March 2000.