Iran’s long economic journey

Times of Oman | Hassan Hakimian: The landslide re-election of Iran’s president, Hassan Rouhani, reflects the by now familiar pattern of continuity and change that has characterised Iran’s major elections over the last two decades.

For starters, the result defied most expectations. While Rouhani was the favourite, few anticipated his large margin of victory (by winning 57 per cent of the vote, he precluded a runoff). Previous landslide victories in Iran – those of the reformist Mohammad Khatami in 1997, of the little-known populist firebrand Mahmoud Ahmadinejad in 2005, and, arguably, even of Rouhani four years ago – were also largely unexpected outcomes.

The second familiar feature of the latest election was high voter turnout – about 73 per cent – which has been a hallmark of elections involving popular reform-minded candidates. The highest-ever turnout – nearly 85 per cent – was recorded in the disputed 2009 election, when Mir-Hossein Mousavi seemed certain to win, yet Ahmadinejad, the incumbent, was declared the victor.

Such a surge in Iran is usually driven by the passion of women and young people, who hope to benefit from the changes promised by pro-reform candidates. Rouhani, who also benefited from high turnout when he was first elected in 2013, has the added distinction of avoiding the decline in voter-participation rates that is common for incumbents.

The third – and perhaps most significant – familiar element of the latest election is the backdrop against which it took place. When Iran is at a crossroads, a popular reformist candidate emerges, promising to end Iran’s international isolation, and his conservative rival defends Iran’s insularity as self-reliance and pledges handouts to the people.

Yet there is one important area in which the latest election stands out: the economy. Rouhani inherited an economy beset by stagflation. Despite record oil revenues, GDP contracted by nearly 7 per cent in 2012 and annual inflation rose above 40 per cent, after the near-collapse of the Iranian currency (the rial). When oil prices crashed – by some 70 per cent since mid-2014 – the situation looked even bleaker. But Rouhani worked hard to free Iran’s economy from the shackles of international sanctions. And, in 2015, he secured a deal with six countries – China, France, Germany, Russia, the United Kingdom, and the United States – along with the European Union to halt Iran’s nuclear programme in exchange for economic relief.

Even as sanctions have been eased, however, Iran’s economy has continued to struggle. Despite some progress since the deal came into effect in 2016, foreign investors have remained cautious, owing to lingering U.S. non-nuclear sanctions and banking restrictions. No one wants to fall afoul of the U.S. Treasury.

It is not easy to pursue macroeconomic stabilisation and economic growth simultaneously. The problem is accentuated when stabilisation is given priority, owing to the economic pain and social backlash that can result. In some cases, stabilisation has been accompanied by ruthless political repression. Chile was thus “stabilized” by General Augusto Pinochet’s regime in the 1970s. In the 1980s and early 2000s, Turkey, too, achieved macroeconomic stability, which required heavy doses of supply-side medicine – and the iron hand of the state to deliver them.

The Rouhani government’s continued popular support may seem surprising, given that it has pursued macroeconomic stability over growth. This is partly a reaction to the excesses of statism under Rouhani’s populist predecessor, Ahmadinejad. It also partly reflects the neoliberal credentials of his economic team. Perhaps most important, it underscores Rouhani’s hope that the “peace dividend” from the nuclear agreement would be enough to boost lagging domestic demand and offset the impact of fiscal tightening.

Though progress has been slow, Rouhani’s achievements are significant. Inflation in Iran has been reduced to single digits (around 9 per cent per year), and growth has reached 5-6 per cent.

To be sure, growth remains uneven and shaky, and mostly reflects the growth of oil output, which has attained its pre-sanctions level of nearly four million barrels a day. Iran’s lopsided GDP growth enabled Rouhani’s conservative rivals to turn the election into something of a referendum on his economic record. But the scale of Rouhani’s victory suggests that the public, though very concerned about the state of the economy, has some hope for his approach.

If Rouhani is to continue to make progress, however, he will need to look beyond current conditions to address entrenched structural challenges facing the Iranian economy, as well as the limitations of the Islamic Republic’s institutional, judicial, and legal frameworks.

The first structural challenge lies in Iran’s excessive dependence on the oil sector. Despite recent reductions in oil income, the sector still accounts for over 70 per cent of total exports. If the country is to achieve sustainable, broad-based, and inclusive economic growth, diversification is critical.

The second structural challenge is demographic. Iran’s large youth population can be a powerful driver of growth. But, to tap that potential, there is an urgent need to create jobs, thereby reducing youth unemployment, which stood at 29.4 per cent in 2014 (when total unemployment was 12.8 per cent).

But what ultimately defines the Islamic Republic is its unique institutional makeup. Arguably the world’s only theocracy, the Iranian system requires reconciling the demands of a rapidly changing twenty-first-century economy with the traditional values of spiritual leaders and aging clergymen. Given the challenges of modernising an economy within the parameters of a theocratic state, structural adjustment and global integration are likely to be prolonged processes.

In his endorsement of Rouhani, Khatami called on Iranian voters to support the president’s programme as a journey that is only half-complete. Judging by Rouhani’s resounding electoral victory, it seems that Iranians are willing to give him the chance to attempt to finish what he started. – Project Syndicate