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Structural issues cloud Khamenei's economic vision for Iran

To realize Iran's economic potential, the supreme leader and the government need to take steps to allow genuine private sector expansion.

It is now an established tradition that Iran’s supreme leader travels to Mashhad on the first day of the Iranian New Year, which fell on March 21 this year, to deliver his most important annual policy speech. This year’s speech was significant as it almost entirely dealt with economic conditions, an indication that the economy, especially unemployment, is a key concern of Iran’s top leadership.

When referring to the “enemy’s” desire to depict economic shortcomings as proof that the Islamic Republic is incapable of managing the country, the supreme leader, Ayatollah Ali Khamenei, acknowledged some internal deficiencies. He admitted, “Of course, there are some weaknesses, but these weaknesses are related to our management.”

While it is true that management shortcomings have been an ongoing issue, it would be a mistake to turn a blind eye to some of the other sources of tension in the Iranian economy. To be fair, Khamenei referred to a number of structural issues. His speech, however, did not recognize that major political, structural and legal reforms will be needed to address the deficiencies.

Khamenei used the speech to lay out his vision for Iran, which includes a “strong, reliable and self-sufficient economy.” He stated, “Without such a strong economy, we will neither achieve permanent dignity nor permanent security. We should provide these things. This is the significance of the economy.” Later, he pointed to the two central issues, asserting, “So, one problem is the issue of unemployment and the people’s difficult condition. And there are various cultural and social problems which are an outcome of economic problems.”

The most clear-cut remedy to creating more jobs is to promote private sector investment. The question is whether the Iranian economy is conducive to such investment, given that it is dominated by such governmental and semi-state entities as religious, revolutionary and military foundations that make life difficult for the private sector. The actual outcome of two decades of privatization has been the massive growth of these semi-state entities, which contribute to a business climate that is characterized by unfair competition and restricts genuine private sector activity. With regard to business climate realities, in 2016, Iran was ranked 120th out of 190 economies in the Ease of Doing Business Index, which points to the depth of the problem.

Khamenei admitted in his Nowruz speech that the current negative growth in investment activity is a problem. He also underlined the significance of investment security, saying, “Another obligation is investment security. This is the responsibility of judicial officials and security forces. They should do something to ensure investment security.”

He failed, however, to pinpoint the core issues: the lack of an independent judiciary and the rule of law. In addition, he made no mention of the restrictive actions of the country’s multiple and oftentimes competing security forces, such as arresting Iranian dual nationals and entrepreneurs. The arrest and harassment of private sector investors have risen to such a degree that President Hassan Rouhani directly mentioned it at the inauguration of a petrochemical project in the western city of Sanandaj on March 25, stating clearly that such arrests and harassment impede investment activity.

Furthermore, the politicized and biased nature of the judicial system, which tends to favor economic players close to the power structure, suffocates a large segment of the country’s true potential for private sector activity. As argued two years ago in a similar assessment for Al-Monitor, the impediments to political and legal reform in Iran include opaque interest groups.

The other major obstacle to the effective operation of the private sector is the licensing of economic activity, which is a source of corruption in Iran. Authorities use the licensing process to put pressure on the real private sector and to create barriers. Furthermore, the financing of private sector projects has become a major impediment as well as an area of corrupt dealings. High interest rates and favoritism toward the more powerful semi-state organizations limit the private sector’s access to financing.

A core issue that Khamenei highlighted in his speech is smuggling. He noted, “It is said that 15 billion [US] dollars [worth of goods] is smuggled [into the country each year]! This is a minimum figure that is mentioned these days. … What I am saying is that [the responsible officials] should go and combat smuggling gangs!”

It is certainly encouraging that Khamenei admits that large-scale smuggling exists and that “gangs” are engaged in it. The question, however, is whether he and the government are prepared to pursue the perpetrators, especially if it turns out that state institutions are involved in smuggling. In this regard, in a recent interview, Industry and Trade Minister Mohammadreza Nematzadeh implicitly accused the Islamic Revolutionary Guard Corps (IRGC), which plays a role in border enforcement, of involvement in smuggling.

The overall position of the IRGC highlights the critical challenges that Iran’s power structure faces. One cannot discuss the country's economic challenges without debating the negative impact its political structure has on the economy. Moreover, despite having diverse political factions, Iran does not have a political party or a functioning faction that represents private sector interests. Meanwhile, the various chambers of commerce are overly dependent on the government and historically have tended to represent the traditional merchant class. Given this, modern private sector entrepreneurs and their interests are overshadowed by a wide range of powerful state and semi-state interests. 

In a recent study, this author and other experts engaged various actors in the private sector to gauge their perspectives on obstacles to efficient private sector activity. Their grievances could be the basis of the government’s work on improving the country’s economic conditions. They include a lack of investment security, corruption, lack of competitive structures, restricted access to financial solutions, mismatch between human resources and the needs of the economy, outdated business laws and regulations as well as an absence of government commitment to the development of genuine private enterprise. The list is much longer, but the core issue is clear: Iran’s state and political structure is not conducive to the growth of an independent and strong private sector with the capacity to create needed jobs.

In the absence of such a vibrant private sector, unemployment will rise in the next few years given Iran's demographic realities. According to the Economist, there will be 3 million new job seekers by 2020. It noted in December, “Iran’s problems run deeper: despite being more diversified than many oil-rich countries, its economy has long generated less employment per unit of growth than other emerging markets such as Brazil and Lebanon. To get the job market off the tarmac, the president will need to pull more levers.”

The lack of job opportunities will deepen the social and cultural issues that Khamenei referred to in his speech. It remains to be seen whether the supreme leader and the government will have the political courage to address the structural deficiencies that have caused economic and socio-economic bottlenecks.

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