Persian Mirrors: The Elusive Face of Iran (52 page)

So much for Islamshahr not having problems anymore.

On paper Iran is a rich country. It has 10 percent of the world’s oil reserves and is the only nation with direct access to both the lucrative oil fields of the Persian Gulf and to the untapped oil reserves of the Caspian Sea. It also has the largest gas reserves in the world after Russia and sizable deposits of coal, sulfur, gold, silver, magnesium, and phosphates. Its gross domestic product is growing (although slowly) and foreign exchange reserves and foreign private investment in gas and oil development are increasing. Iran has made timely payments on its foreign debt and has a much lower debt burden than most developing countries of its size and population.

But when it comes to the economy, the Islamic Republic faces enormous obstacles. Religious ideology has hindered the country’s integration into the new global economy. Structural barriers have scared away foreign investors. And traditional habits, including corruption, have inhibited the growth of a native entrepreneurial class. All of this cuts to the heart of the revolution itself, which promised not only to make Iranian society more pious, but also more equitable. That is one reason the reformers have so much political appeal; it is hard to fulfill the promises of a social revolution if the economy is in dangerous straits.

To an outsider, Iran doesn’t look poor. Children don’t have orange hair from severe malnutrition, as they do in parts of Pakistan and India. Beggars clog the streets, but there are no massive epidemics from bad water and there is little homelessness. Shops and restaurants have plenty of customers. Domestic airline flights, heavily subsidized, are always overbooked. The shelves of the twenty-four-hour supermarket chain are well stocked.

But there is no question that Iran’s economy is in crisis. By some estimates, inflation runs as high as 40 percent and unemployment more than 30 percent. According to the World Bank, Iran’s per capita income is just under $1,800, less than it was when the Shah left. Worse, the rial has been in free fall against the dollar. The dollar was worth seventy rials when the revolution overthrew the Shah in 1979. In 2000, the exchange rate was more than a hundred times higher. Officials acknowledged that they needed to create several hundred thousand new jobs each year to cope with the economic crisis, but they had no real plan to make that happen.

In making his revolution, Ayatollah Khomeini pledged to liberate the country from its dependence on oil revenues and to preserve the country’s oil wealth for future generations. In Khomeini’s eyes, the Shah had pumped too much oil and wasted the profits on useless weapons and grandiose projects. But Khomeini fared no better. With the exodus of foreign companies and their cadre of experts after the revolution, the government was left to develop these fields on its own, a difficult task that was further complicated by the war with Iraq, which damaged important installations in Iran’s western provinces. To finance the war, Iran came to rely even more on oil as its main source of foreign exchange, leaving the country more dependent than ever on prices set by the fickle global oil market. The 1990s were devastating; oil prices, which hit $40 a barrel just after the revolution, fell to less than $10 a barrel by 1999. The government suspended most development projects, curbed imports, and rescheduled some foreign debt. When prices rose again to $34 a barrel after OPEC tightened production quotas at the turn of the century, Iran enjoyed a windfall once more. But that price fluctuation clearly has underscored the economy’s unpredictability and dependence on outsiders that Khomeini had vowed to end. About 85 percent of Iran’s hard currency comes from oil imports. And some of Iran’s major fields, active for more than seventy years, need enormous investments if they are to maintain production.

But Iran’s problems run far deeper than unpredictable commodity prices. Structurally, the economy would not make sense to either a committed capitalist or a committed socialist. The country has a centuries-old tradition of free trade and commerce, but today, 80 percent of the economy is directly or indirectly controlled by the government. The government runs all large-scale industries and mines, banking and insurance enterprises,c power, utilities, radio and television, mail and telephone service, and the transportation infrastructure. This public sector is inefficiently run, top-heavy with bureaucrats, and incapable of stopping money-losing projects. Some of its decision-making defies common sense. When three of Tehran’s main hospitals, for example, failed to pay their electric bills, the Ministry of Energy turned off their electricity for several hours, forcing the cancellation of surgery and wreaking havoc in the emergency rooms.

Compounding the problem is that the Islamic Republic has not resolved a basic tension that has existed from its beginning: how to balance its ideological commitment to help the
mostazafan,
the deprived ones, with a much older impulse in Persia’s trading culture: making money. The government maintains massive subsidies, price controls, and foreign exchange allocations designed to placate the lower classes, but these eat up 20 percent of Iran’s gross domestic product. And the subsidies on things like gasoline, bread, power, water, and transportation are not restricted to the poor; all Iranians share, regardless of need.

The government has taken some steps to confront the hard times. In fact, it has become rather creative at raising money. It sells the right to leap to the top of the long list of those seeking to make the pilgrimage to Mecca. (The Saudis have strict quotas.) It allows young men to buy their way out of the draft. It sells Treasury bonds and offers 20 percent “increase on maturity” (to keep up with the officially acknowledged rate of inflation), even though charging or paying interest is considered un-Islamic. It promotes tourism for Westerners. It even speculates on the future through bonds to investors that will be paid with tomorrow’s oil revenues.

Iran began to woo back exiles with promises to return lands, homes, and businesses confiscated after the revolution, accompanied by a promise to pursue their claims. The father of a friend of mine decided to test the system to reclaim a giant piece of land, in Rasht, on which a large fruit and vegetable market had been built. After fierce court battles and enormous legal bills, the man won. The land was his. But then the city of Rasht refused to turn it over to him. And no court has forced it to do so.

Iran’s economy is further hamstrung by the tension between the need for capitalist growth and the drive for piety. As part of the campaign to curb consumerism early in the revolution, advertising billboards were replaced with ones that extolled the virtues of the revolution and later the war with Iraq. Then, suddenly and without explanation, it was acceptable to advertise again. My favorite billboard was one with a double message that was mounted at one busy intersection in Tehran in 1999. It displayed alternately an advertisement for French perfume and the slogan, “Rush quickly to your prayers.”

Of course, many in Iran’s leadership still insist that the country’s economic problems are the creation of the United States. And indeed, damaging the Iranian economy was a stated goal of U.S. policy through much of the Clinton administration. In 1995 the administration imposed a unilateral embargo, having long discouraged its allies from trading with Iran and having blocked loans through sources like the World Bank. In 1996 Clinton signed anti-terrorism legislation that imposed sanctions on foreign firms that invested more than $40 million (later reduced to $20 million) in Iran’s oil and gas sector. A mild thaw came only in 1999, when America eased the embargo to allow American farmers to sell grain to the Islamic Republic and to allow Iran to buy spare parts for its aging fleet of Boeing civilian aircraft, and again in 2000 when the ban on the export of carpets and some foodstuffs to the United States was lifted.

Even so, most of the problems in the economy are attributable to the Iranian system itself, a fact that more and more Iranians have come to acknowledge. “The economic crisis can no longer be blamed on the enemy plots or the collapse in oil prices,” said a 1998 article in the reformist daily newspaper
Sobh-e Emrouz.
“The problem is the country’s mismanagement.”

Indeed, there are few incentives for either domestic or foreign investment. Small, independent businesspeople suffer from the irrational and ever-changing rules of doing business. A middle-class Iranian woman I know who runs a small clothing factory once received permission to import a large quantity of denim from Turkey. She hired a hundred workers and signed a contract with a Turkish firm to take delivery of the fabric. Just before the delivery date, the authorities denied her the permission to import the fabric. No reason was given. She speculated that she was the victim of a broader government campaign to curb imports as a way to reduce the flow of hard currency from the country. Her company nearly went bankrupt.

Foreign firms have been wary of investing in Iran, remembering that in the aftermath of the revolution, the new regime confiscated hotels, banks, factories, farms, and countless other enterprises. The government has tried a variety of ways to woo back investors—in the late 1990s a law was adopted to guarantee the safety of investments by foreign firms— but the damage had been done. In the current global economy, with its wealth of economic opportunities, it would take a special steadiness of nerve and a special attraction to Iran to persuade foreign investors to choose it as the place to put their money. In 1999, in assigning the Islamic Republic its first credit rating, Moody’s Investor Service gave it a B2, one notch below Lebanon and one notch above Russia.

One factor is that the Constitution and the laws are maddeningly vague and subject to manipulation and abuse. Confirmation of a letter of credit from an Iranian bank can require more than twenty procedures involving three ministries and five departments of the Central Bank. The Constitution mandates an economy “in accordance with Islamic principles,” but fails to spell out what that means.

An Iranian economist who had been a cabinet minister under the Shah told me an illuminating story about the government’s efforts to induce investment in the early 1990s. “The government told investors to build high-rise buildings because land was becoming so expensive,” he said. “So a number of people connected to the regime borrowed money from the banks at low interest rates. They made tremendous amounts of money. Suddenly the leftist press started screaming about all these leeches and profiteers. The investors were brought to court. The judge ruled that many of them had earned their money illegally. Some of them ended up in prison; one was executed. All they had done was what the government encouraged them to do.”

The one area where the potential for foreign investment is high, and the competition intense, is in gas and oil. Iran continues to discover new oil fields; foreign companies are vying for dozens of projects. But Iran has been slow to award the contracts—a result of bureaucratic bungling and opposition from conservative factions who still want to keep out foreign influences. When Royal Dutch/Shell signed a contract in late 1999 to invest almost $800 million in Iran’s oil industry, for example, the ultra-conservative daily newspaper
Jomhouri-ye Islami
complained that the contract with the Anglo-Dutch firm will “once again allow Britain to secure a foothold in Iran.”

Perhaps the largest, and strangest, of the structural problems in Iran’s economy is the vast system of foundations, or
bonyads,
that were set up shortly after the revolution to promote broad economic justice. The
bonyads
confiscated billions of dollars in assets ofthe former royal family, banks, and ordinary homeowners. They even confiscated the personal belongings of some American diplomats seized as hostages in 1979.

Two decades after the revolution, the foundations are among the biggest economic complexes in the Middle East, operating as tax-exempt state-protected organizations that enjoy financial benefits, award contracts to the favored few, and confuse the distinction between public and private. The foundations, for example, can borrow money from the Central Bank at less than half the rate offered to private businesses. Most of them are the individual fiefs of powerful clerics, and their size crowds out smaller private competitors who might be more efficient, even as their corruption fuels resentment. There are foundations for the “oppressed,” for housing, for refugees, for victims of the war with Iraq, for the cinema, for Islamic propaganda. One foundation administers the enormous shrine of Imam Reza in Mashad with an annual budget of $2 billion (according to some estimates), and owns or controls much of Khorasan province.

The Foundation for the Oppressed and War Veterans, by far the largest of the
bonyads,
controls an estimated $12 billion in assets, including thousands of factories employing some 400,000 workers. Established in March 1979, just a month after the Islamic revolution, this foundation was given the responsibility of managing the land, property, and possessions confiscated from the Shah, his family, and the country’s fifty-one largest industrialists. The foundation owns global shipping lines based in London and Athens; chemical plants, construction material factories, soybean, wheat, and cotton farms near the Caspian Sea; the former Hilton and Hyatt hotels in Tehran; Zam Zam, the country’s largest softdrink company; and thousands of apartments. It even exports nonalcoholic beer. Its subsidiaries import Japanese cars and trade crude oil through London. “We touch the life of every Iranian,” Mohsen Rafiqdoust, then the head of the foundation, once told an interviewer from the
Christian Science Monitor.
He was not exaggerating.

Perhaps nowhere is the rule of law touted by President Khatami so flagrantly violated as by the foundations. They ignore laws that require them to submit their balance sheets to the court in charge of auditing. They ignore tax, tariff, and currency laws. I know a French businessman who imported spare parts for the Iranian oil industry for nearly twenty years, but when he ran afoul of one of the foundations, no threats were necessary to eliminate him from the scene. He just stopped getting visas.