Iran Is Reeling From Sanctions

Article Summary
Facing international sanctions, crashing currency and rampant inflation, Iran's economy is in trouble. But Rotem Sela writes that sanctions could, in the near term, strengthen the regime's grip on a society already blighted by soaring rates of prostitution and drug addiction.

Iran's Central Bureau of Statistics recently published a rather gloomy month-by-month report summarizing consumer price index (CPI) fluctuations over the past year. From March 2011 to March 2012, the general CPI soared by roughly 20%; in the food and beverage category, there was a 25.3% hike; in the clothing category, 15.5%. Electricity, gas, housing and oil rates increased by 16.5% and transportation rates by no less than 30%.

Dr. David Goldman, former global head of fixed-income research at the Bank of America and head of credit strategy at Credit Suisse, is currently the president of MacroStrategy, a financial research firm focusing on geopolitical and strategic research. He says that the average Iranian has much more to worry about than the escalating consumer price index. Goldman says that Iran and Iranian society are living on borrowed time. "Iran is dying. Birth rates in Iran plunged in the past 20 years at the fastest pace ever recorded, anywhere in the world," Goldman notes. "The reason for the fast drop — from 6.5 children per family to far below 2.1 (the threshold under which the population size cannot be maintained over time) — is neither governmental policy seeking to limit the birth rate nor the rising education level of Iranian women, but rather social disintegration, which leads to the dissolution of traditional familial structures and the steady decline of the marriage institution."

In an article published on his blog, Goldman reviews a range of social anomalies which, he argues, show that Iran is not the religious, conservative society that Iranian President Mahmoud Ahmadinejad wants us to believe it is, but rather a nihilistic hell where all barriers have been broken. In the article, titled "Worst Time for Iran," Goldman cites research done by the Teheran Police in 2008 which shows that 90% of the prostitutes in the Iranian capital passed a university entrance exam, while 30% are university graduates or students. The research cited by Goldman was published in an Australian newspaper — no media channel in Iran dared give it publicity. Goldman notes that the prevalence of the phenomenon, which pervades even the educated classes, indicates that the Iranian society has become a licentious, decadent society. "Such high prevalence of prostitution was observed only in post-communist Russia. However, in the years following the dissolution of the Soviet Union, Russian women were pushed to engage in prostitution due to the extreme hunger in the state at the time, while Iranian women pursue this occupation as it is considered a legitimate way of making a living," Goldman writes in his article. He cites another study by the Iranian Ministry of Education, from which it emerges that 36% of young Iranians aged 15 to 29 wish to leave the country.

Opium makes you forget your troubles

How do the Iranians escape the hopeless, bleak reality they live in? According to UN assessments, about 1.7 million Iranians — accounting for 5% of the adult Iranian population — are addicted to opium. It is the highest rate of hard-drug addiction of any country in the world. For comparison, in the United States, there are some 100,000 hard-drug addicts, less than 0.1% of the American populace.

However, the most urgent problem facing the Iranians is not how to escape the miserable reality of their lives, but rather this very reality itself. According to Goldman, cutting off the Iranian financial system from the SWIFT — the worldwide financial messaging network that facilitates most international bank transfers — deals the Iranian economy a serious, and in the long run fatal, blow. "The step taken by SWIFT [as part of the international sanctions designed to discourage Tehran from developing nuclear weapons] limits to a large extent Iran's ability to conduct global financial transactions. In fact, it is virtually impossible to manage a modern economy for long under such circumstance," Goldman notes.

"Iran is a dictatorship relying on gas and oil exports — which account for 80% of its export revenues. At the same time, its ability to provide food for its population depends on imports. The question of whether and for how long the Iranian economy will survive is contingent to a large extent on its ongoing oil exports to China. Now that it has been cut off from SWIFT, it may have no choice but to resort to exchange trade with China, and barter its oil for vehicle spare parts, wheat or other commodities," says Goldman.

Blocking Iran's access to SWIFT could potentially have another outcome — rather than weakening the Iranian regime, it may strengthen it, at least in the short run. Cutting off Iran from the international financial system is expected to cause further devaluation of the Iranian rial, which has already lost some 40% of its value since December 2011. The Iranian currency will most probably continue crashing following the recent sanctions imposed on Iran. "In the short run, it strengthens the government," Goldman points out. "After all, governmental payments are made in rials and, given the declining value of the Iranian currency, it turns out that the government actually profits from inflation at the expense of the public. No one in Iran except the government has money, and money means power."

Notwithstanding the enormous difficulties Iran has to cope with, its economy is still of a significant order, ranking 18th in the world, with a GNP of $929 billion — four times larger than that of Israel.

However, economic magnitude is not necessarily indicative of economic solidity or growth. In fact, in terms of gross national product per capita, Iran lags far behind the West and even Israel, with a GNP per capita of $12,200 in 2011, about a third of the GNP per capita in Israel (which is roughly $31,000). And while in Israel productivity is achieved primarily thanks to its thriving private economy, the Iranian economy is based for the most part on oil exports, in the absence of which Iran would have dropped to the low GNP levels of the poorest of African countries.

"The Iranian economy is one of the least free in the world," notes Dr. Eldad Pardo from the Harry S. Truman Research Institute for the Advancement of Peace at the Hebrew University of Jerusalem. Pardo, an expert on Iran, points out that in terms of international indices, Iran is but a few steps ahead of North Korea. According to the Heritage Foundation index of economic freedom, Iran is ranked 16th out of 17 countries in the Middle East and North Africa region, and its overall score is well below both regional and global averages, with its economy ranking 171st in the world in 2012.

As a matter of fact, Israel is ranked ahead of Iran in every category measured in the Index of economic freedom — from monetary and fiscal freedom to labor and trade freedom — (which, along with investment freedom and financial freedom, indicate market openness). Surprisingly, the only parameter on which the Iranians surpass Israel is the regulatory environment provided by the government for business activity.

Iran is most severely criticized with regard to the rule of law and property rights (scoring a mere 10 points out of a maximum of 100 in this category). According to the Heritage Foundation findings, "corruption pervades all branches of government, including the court system, which is infected by cronyism. Finding a local business partner with substantial political patronage is the best way to protect contracts — even more effective than appealing to the legal authorities. The constitution allows the government to confiscate property acquired in a manner not in conformance with Islamic law."

At the same time, UN-compiled data show that, in terms of economic and social equality, Iranian civilians are doing slightly better than their Israeli counterparts. While in Israel, the income of the 4 lowest tenths accounts for 16 percent of the GNP, in Iran it accounts for 17 percent of the GNP. And while in Israel 97 percent of the children attend elementary school, the corresponding attendance figure reported for Iran is 100 percent.

However, Israelis are by far more tech savvy than the Iranians. Thus, for instance, in Israel, there are 1.3 mobile phones per inhabitant, in comparison with only 0.9 in Iran. According to official data, the rate of Internet usage in Israel is significantly higher — standing at 67 percent, in comparison with a mere 13 percent in Iran.

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