Ahmadinejadonomics

From: Forces of Fortune: The Rise of the New Muslim Middle Class and What It Will Mean for Our World, by Vali Nasr (Free Press, 2009), Kindle Loc. 1345-1405 (reviewed here):

There is no question that Ahmadinejad has been the biggest individual beneficiary so far of the regime’s crackdown on reform. The fuel behind his electoral victories, and the reason for his appeal to the Supreme Leader, was his raging populist anger that the benefits of the economic reforms had not made their way down to the lower classes. During the 2005 campaign, he said little about the thorny nuclear issue and even less about religion and cultural freedoms. Instead he railed against corruption and the suspect wealth of clerics (including most famously Rafsanjani, who was running against him). Ahmadinejad vowed to halt privatization while protecting the consumer subsidies, price controls, and labor laws that were popular with those on the lower rungs of the socioeconomic ladder. Asked about his intentions regarding women’s rights, the aspiring candidate said: “People think a return to revolutionary values is only a matter of wearing the headscarf. The country’s true problem is employment and housing, not what to wear.”

When he became president, Ahmadinejad followed through with sound and fury in clamping down on the private sector. He shoved aside the normal economic-policy agencies and put monetary, budget, and fiscal matters under the president’s office. He then used that control to print money with no regard for the inflationary consequences. Iran’s money supply soon ballooned by a staggering 40 percent. His office also used its discretionary authority over planning and budgets to hand out contracts large and small to allies and favorites. A series of central bank governors resigned in protest—the last to go accused the president of mismanagement and plundering bank reserves.

To combat the growing problems Ahmadinejad proposed price controls as well as tightening the regulation of banking and credit markets. He even mused aloud about the benefits of abolishing interest (which despite all the talk of Islam’s ban on usury has remained the foundation of banking in the Islamic Republic), in the end settling for rates a good 10 and 15 points below the rate of inflation. Those who could withdrew their savings and bought real estate at home or abroad; those who could not saw their money dwindle amid Ahmadinejad’s flood of devalued currency. Salaried workers and pensioners suffered most. Ahmadinejad cared little if he was scaring businessmen into sending billions out of the country. At one point, he said that Iran’s economic problems would go away if a few people from the stock market could be stood up in front of a firing squad. The economic sanctions that his wild rhetoric helped to attract seemed to concern him even less. Capital investment, especially in manufacturing, dried up. Production fell, and by 2008 many factories were working at less than half their capacity. The money that was flowing into land speculation and property development was causing higher real-estate prices and construction costs—the latter dealing an especially heavy blow to a country that desperately needs to build up its basic infrastructure.

Ahmadinejad flaunted his lack of concern with economic planning and numbers; to him inflation and unemployment were alien concepts. He once told a reporter that he got his economic news from his neighborhood butcher (when that butcher too complained about inflation to a newspaper, Ahmadinejad closed the paper). Ahmadinejad’s game was raw populism. Why not bribe the poor for their support when there are so many more of them than there are of those wealthy Iranians who live in prosperous enclaves and depend on the private sector? He almost tripled government spending from $15 billion to $40 billion. Everywhere he traveled he promised public projects, and then decided to do more, to take wads of cash and checks to rallies and distribute them among well-wishers. Pensioners may have had a hard time making ends meet, businessmen may have faced a credit crunch, but all the poor needed to do to get a home loan was to write to the president’s office.

The steady rise in oil prices between 2005 and the third quarter of 2008 made this populist spending spree affordable. With dollars from oil sales flooding in, Ahmadinejad could afford to focus on currying favor with the voting masses while putting off hard economic decisions, and the Supreme Leader could afford to stand by and watch as Iran’s president shredded his country’s economy. Ahmadinejad used government contracts funded by the oil windfall to bolster his favorite businessmen and grease the Revolutionary Guards, whose support was essential to his political survival. The private sector changed shape, breaking down into the president’s preferred insiders (who got the contracts, cheap loans, and government support), and everyone else. The high oil prices made it seem, to the undiscerning at least, as if Iran could afford a political strategy masquerading as an economic policy.

When oil prices were peaking in 2007–08, Iran brought in $250 billion in petroleum income. Yet by the time prices fell off the table as a credit crunch cooled the global economy drastically in the second half of 2008, there was no more than $25 billion (some estimates run as low as $9 billion) of this left in the country’s cash reserves. Where did all that money go? Not to growth-promoting investments, but to populist causes near and dear to Ahmadinejad. As 2008 came to a close, Iranians found themselves staring into an economic abyss. The official rate of inflation was 27 percent (the real rate is almost certainly higher). Unemployment ran far into double digits too, possibly as high as 35 percent (the government admits to 20 percent). Merchants and salaried workers complained, and labor unions took to protesting for higher wages. The poor began complaining that their government handouts were not going far enough, and wanted more. The exceptionally cold winter of 2007–08 and a drought the following summer had caused first a fuel shortage and then an electricity deficit (Iran relies on rivers and dams for a good portion of its electric power). The depth of unhappiness manifested itself in September 2008, when merchants shut down bazaars across Iran for three days to protest a new sales tax. Growing government spending under Ahmadinejad had made the country dependent on oil prices in the $90 range (Iran claims its budget assumes $37) to stay in the black, and no one could say when prices that high would return.

Such a reversal in economic fortunes can be a powerful impetus for regime change. When a period of boom in Southeast Asia ended in the Asian financial crisis of 1997, many governments came under pressure. Anwar Ibrahim led a serious but unsuccessful challenge against Prime Minister Mahathir in Malaysis, and in next-door Indonesia, the Suharto dictatorship unraveled. The global crisis of 2008 and the massive drop in oil prices that it brought have buffeted Iran—which relies on oil for 80 percent of it government revenues—and could well have far-reaching political consequences beyond the summer of 2009 protests.

The last time Iran went through a boom-to-bust ride on the oil rollercoaster, there was a revolution. That will not likely happen again, but the downturn could end the current detour down the blind alley of populism and spark renewed interest in economic reform, privatization, and a viable private sector. Government spending (including subsidies that equal 25 percent of annual GDP) are a drag on the economy. Falling oil revenues and mounting government expenditure leave little room for complacency. The government will have to tighten its belt, shrink in size, and look to the private sector to create jobs, generate tax revenue, and grow the economy; and that will require private sector–friendly policies.