Geopolitics Casts Pall on Hobbled Iranian Economy

David J. Lync, USA Today:

They are young men, willing and able to work. But they spend all day, every day, sitting in a crummy city park waiting for jobs that rarely appear. "It's awful. It's almost impossible to find a job. I've been looking for six months," says 25-year-old Siamak Adyen, one of about a dozen men sitting cross-legged on a grassy strip in the Saadat Abad neighborhood.

Without a steady paycheck, their lives are on hold. Those with wives in distant provinces can't afford to bring them to the capital. Those who are single lack the money to marry and establish new households. Emptying his pockets, Adyen displays a 2,000 rial note — worth less than 25 cents. "Look! I'm a young man in this country and this is all I have," he says, shaking his head in disgust.

As Iran hurtles toward a confrontation with the United States over its nuclear program, the nation's economy remains a dysfunctional wreck. Neither wholly free nor entirely socialist, the Iranian market is a ramshackle hybrid buttressed by lofty oil prices. One year after Mahmoud Ahmadinejad was elected president on a vow to share Iran's oil wealth with the poor, Tehran's army of jobless men is a reminder of the squandered potential that characterizes revolutionary Iran. READ MORE

"We need to create jobs. Unfortunately, the government is not a good businessman," says businessman Ali Sharghi.

The official unemployment rate is 11%, although economists such as London Metropolitan University's Parvin Alizadeh say the actual total is twice that figure. Even government ministers acknowledge jobless rates as high as 18% in some provinces.

Heydar Pourian, editor of the magazine Iran Economics, says he recently advertised a janitorial opening and had an engineer aggressively pursue the $160-per-month job. "We were shocked," he says.

Geopolitics also is casting a pall on Iran's economy. For much of its 27-year history, the Islamic Republic has been under one form or another of U.S. sanctions. That's fueled a drive for self-sufficiency in industries such as pharmaceuticals and consumer goods. But sanctions prevent Iran from tapping the best U.S. technology to fully exploit its massive oil and gas reserves. So daily oil output of about 4.2 million barrels is almost one-third below its 1970s-era peak.

Foreign direct investment in the current year is expected to reach just $1.5 billion; neighboring Turkey, of comparable size, anticipates $11 billion. For the Iranian year that ended in March, the economy grew an estimated 6%, but that mostly reflects the impact of surging oil revenue and expansionary government spending, which has doubled in four years, says the International Monetary Fund.

Three years of confrontation between Iran and the U.S. over the nuclear issue have chilled domestic businesses that depend upon the outside world. Near the ancient ruins at Persepolis, about 30 miles outside Shiraz, restaurateur Rasoul Azeemzadeh mourns lost opportunities.

His "Peacock Nest" eatery once drew scores of foreign tourists with its tasty regional cuisine and poolside ambience. Azeemzadeh acquired land nearby and drew up plans to expand with a tourist hotel. But business started to sag after the terror attacks of Sept. 11, 2001, and in the last year, amid continuing tensions over Iran's nuclear program, it's plummeted 70%, he says.

"I'm just like a sailing ship. The wind comes from each direction and just drags me along," says Azeemzadeh. "An official says something somewhere, and it affects my business."

Now, the expansion plans are forgotten, and he regards the land as a place to grow crops to feed his family if the restaurant fails.

Tehran stocks decline

Likewise, in the lobby of the Tehran Stock Exchange, glum investors gather to stare at the overhead screens displaying sinking share prices. Since Ahmadinejad's election, the market has dropped 32%. Raheem Nowrouzkhani, 45, has been coming here for five years to track his portfolio, and he's learned one lesson about Iranian stocks: "In general, international politics is the most important thing," he says.

Indeed, economics has long been eclipsed by other issues in the Islamic Republic of Iran. Ayatollah Ruhollah Khomeini, who led the movement that toppled the Shah in 1979, famously dismissed economic policy by saying, "We did not make the revolution to lower the price of watermelons."

Ahmadinejad's surprise victory in last year's presidential election, however, was fueled by public dissatisfaction with the clerical regime's economic track record. During the campaign, the former Tehran mayor denounced soaring inequality and widespread corruption among Iran's clerical elite. He also attacked the "oil mafia" running the country's key industry and vowed to spread the wealth.

The new president also betrays less interest than his predecessors in knitting Iran into a U.S.-dominated global economy. Ahmadinejad's experiences in the 1980-88 war with Iraq left him deeply suspicious of the U.S., which ultimately backed Saddam Hussein in the latter stages of the bloody conflict.

"He says, 'If we need foreign investment, let's get it from Islamic countries, not the West. And if not Islamic countries, then we'll go to China and Russia,' " says Bijan Khajehpour, chairman of the Atieh Group consultancy. "They feel economic ties with the West always have political strings."

Looking to the East

From Tehran's venerable central bazaar, with its smells of coriander and cumin, to the Internet cafes where young Iranians gather, there is talk of a turn to the East. To many Iranians, China and India appear as both potential business partners and economic models for their country, with its well-educated population and strategic location, to emulate. That explains why some of the political "carrots" the U.S. and Europe are offering in return for a halt to Iran's uranium enrichment program may not sway Ahmadinejad.

"Membership in the World Trade Organization or trade with the EU? What does that mean? That Iranians can buy French cosmetics? His constituents don't buy French cosmetics. They don't care about trade," says Kenneth Katzman, an Iran expert at the Congressional Research Service in Washington.

In classic populist fashion, the Iranian president is pursuing policies that emphasize short-term improvements at the expense of long-term economic health. In the face of double-digit inflation, he's defied economic orthodoxy by ordering interest rates lowered to make life easier for his low-income constituents. Despite soaring unemployment, he ordered a 50% increase in the minimum wage in March. He's also introduced a new marriage fund designed to provide cash for young couples seeking to wed.

Heavy state involvement

But the government has taken only halting steps toward addressing the major obstacle to sustainable growth: shrinking the state's deadening influence over 80% of the economy.

Along with businesses owned outright by the state, up to one-third of Iran's economy is controlled by quasi-public charitable foundations, called bonyads. They enjoy preferential tax treatment and financing, which allow them to prosper at the expense of market-oriented private firms.

"They are extremely important. They have enormous assets in all sectors of the economy," says Alizadeh.

Ahmadinejad also has presided over an expansion in the economic role of Iran's Revolutionary Guard, a military unit established in 1979 to defend the Islamic revolution. A member of the guard during the Iran-Iraq war, Ahmadinejad directed a string of lucrative government contracts to the organization. In June, the Revolutionary Guard won a $2.3 billion contract to develop part of the massive South Pars natural gas field.

In July, Iran took what could be a big step forward when Supreme Leader Ayatollah Ali Khamenei endorsed privatization of most state businesses outside the politically sensitive oil-and-gas sector. But it's not yet clear exactly how the plan will be implemented. Ahmadinejad has called for privatizing state companies by distributing to poor Iranians so-called justice shares.

In June, 50 Iranian economists penned an open letter to the president criticizing his approach to economic policy. Mainstream economists now are warning that a flawed privatization proposal risks entrenching Iran's failures rather than sparking capitalist improvement. "We're trying to tell them, if you want to help people, give this (state) company to a good group of managers and distribute 100% of the income to the people," says Sharghi.

The government plans to privatize the affected companies through public offerings on the struggling Tehran Stock Exchange. A key question is the government's price for the privatization candidates. If it's too high, private buyers could shy away, leaving the purchases to the bonyads and other quasi-public organizations and rendering the process privatization in name only.

Amid chronic political uncertainty, many foreign companies have soured on Iran. But some, predominantly European companies, are thriving because sanctions have dampened competition and allowed them to raise prices. A typical European auto-parts maker may enjoy an extra 30% to 40% profit margin, says Albrecht Frischenschlager, managing director of Middle East Strategies, an advisory firm.

"Those who are still doing business are printing money as much as they can," he says.

The economic landscape may be about to darken. Following Iran's failure to comply last week with a United Nations Security Council deadline to halt its uranium enrichment effort, the U.S. is seeking the imposition on Iran of limited economic sanctions. If Iran remains defiant, tougher measures could follow.

Iran is vulnerable to a cutoff of international bank loans and gasoline imports, which make up around 38% of domestic consumption. Iranian officials insist that, given Russian and Chinese reluctance to act, real punishment may never materialize. Years of coping with sanctions leave many here professing a lack of concern, whether genuine or feigned.

Yet, Iran's nuclear defiance, coupled with an unsustainable economic strategy, means the best Iran can hope for is a sort of muddling through. And that has many ruing the country's failure to realize its impressive potential. "The basic problem this country has is economics," says economist Pourian. "Unfortunately, a lot of political issues have gotten involved."