Iran addresses legacy of rents in economy

The role of foreign exchange, fuel smuggling and commercial rents are all under scrutiny.

al-monitor An exchange currency dealer sits at his shop as he waits for customers, Tehran's business district, Oct. 24, 2011. Photo by REUTERS/Raheb Homavandi.

Topics covered

private sector, iranian economy, iranian central bank, iran sanctions, iran, government corruption, elites, business class

Jan 20, 2014

Experts agree that Iran’s path out of its current economic situation will have to include a growing focus on private sector activity as a source of employment and economic growth. While private sector players face a host of challenges due to outdated regulation as well as the dominance of governmental and semi-state companies in the economy, they also face an unlikely challenge from society at large.

A recent poll by a televised economic program (“Payesh”) asked: “How have Iran’s wealthy individuals become rich?” While 83% responded, “Through rents and connections,” 12% believed that the wealthy had achieved their success through their own hard work and 5% considered “luck” to be the main reason.

The overwhelming belief that successful private sector players are only a result of their contacts and the rents they secure from the state has been shaped throughout the past decades. The government’s dominant role in the economy and its arbitrary approach to entrepreneurs and private sector players can be considered the main reason for the suspicion that the state would only allow those entrepreneurs to succeed who are closely affiliated with the political power structure.

Instruments such as licensing, access to bank facilities and so on are perceived to be at the government’s disposal to limit the space for the genuine private sector. Furthermore, the involvement of apparent entrepreneurs (such as the recent case of Babak Zanjani) in corruption and embezzlement cases has intensified this belief. Due to the complexity and the multidimensional nature of the power structure in Iran, it is difficult to measure how far political connections have contributed to the success of private sector players. Can one consider the effort by a provincial Majles deputy who wishes to attract an investment to his own constituency also “rent”?

The fact is that both phenomena exist: The majority of Iranian private sector success stories are mainly due to the hard work of entrepreneurs, but there are also many cases where government rent and discriminations have paved the way for extraordinary wealth generation. As in other phenomena, there are also many shades in a country like Iran. The unfortunate reality is that rent-seeking activities have undermined the economic potential of the country.

Therefore, it is important to identify the most significant rent-seeking patterns and differentiate between those and others who succeed due to their actual efforts. According to Ali Shams Ardakani, former diplomat turned entrepreneur, there are three main types of rent-seeking in the Iranian economy. These are:

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