Iran’s Protests: All About the Economy?

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by Gareth Smyth

In 2007, when the Iranian government introduced gasoline rationing, increasing the price to 11 cents a liter, some angry motorists torched gasoline stations. Israeli Prime Minister Ehud Olmert said that it showed “economic sanctions are working increasingly well.”

Recent protests-cum-riots in many Iranian cities have renewed hopes of an uprising among those in the United States who have wanted “regime change” in Iran since the US-backed Shah was overthrown in 1979.

“We are witnessing the death throes of the Islamic Republic,” suggests one US-based commentator, Alireza Nader of the “non-partisan” RAND Corporation. Another, Robin Wright, makes the bizarre claim in the New Yorker that the protests were different from any others because they began in the city of Mashhad, “a bastion of clerical ideologues and political hardliners” (in fact, Mashhad city council is held by reformists).

Surprise resulted from the protests not so easily fitting the usual narrative of Iranians pursuing political freedom (basically wanting to be Americans). It wasn’t even “reformists vs conservatives.” Suddenly, it was the economy, stupid.

In reality, economic issues have been central to Iranian politics for decades, especially since the 1980-88 war with Iraq. “Social freedoms”—especially what women do and don’t wear—excite foreign reporters, but most Iranians are more interested in rents, prices, and the health service. The young worry about the costs of marriage and poor employment prospects.

Economic issues have shaped presidential elections, where turnouts are consistently far higher than in the United States. For example, 63% of eligible voters turned out in 2005 and 73% in 2013, compared to 56% for Donald Trump’s victory in 2016. These elections are competitive, sometimes bitter affairs, with voters ignoring calls for boycotts from exiled opposition groups.

In 2005, the principlist Mahmoud Ahmadinejad won the presidency on the slogan “put the oil money on the sofreh” (the mat on which poorer Iranians sit to eat dinner). In 2013, Hassan Rouhani won largely because he convinced many voters that Ahmadinejad’s assertive foreign policy, particularly over the nuclear program, had prompted stringent international sanctions and harmed the economy.

But did Ahmadinejad put oil money on the sofreh? And has Rouhani improved the lot of ordinary Iranian by easing sanctions through the 2015 nuclear deal and tighter economic management?

“No, no, no,” screams a chorus of commentators. Iranians are locked in poverty, they insist, partly because billions of government dollars are being spent on regional military adventures and support for allies in Syria, Lebanon, Iraq, and Yemen. Iranians are on the street looking to overthrow “the mullahs” and become US allies and good democrats.

Examining the Evidence

Iran’s military spending is estimated by the Stockholm International Peace Research Institute figures to be $12.3 billion a year, compared with Saudi Arabia at $70 billion, the United Arab Emirates at $22.8 billion, Israel at $17.8 billion, and the United States at $611 billion. Even allowing for creative accountancy, which is hardly peculiar to Iran, there are no grounds for portraying Iran as a military superpower.

What about poverty? Are millions of Iranians in desperate poverty, as we are being told?

Djavad Salehi-Isfahani, a professor of economics at Virginia Tech who has long studied inequality in Iran utilizing figures from Iran’s Household Expenditure and Income Survey, finds a “generally low rate of poverty, 4.7% for the country as a whole in 2016-17.” Many changes since the 1979 Revolution, especially in health services, have improved conditions for most Iranians.

In assessing changes under Rouhani, Salehi-Isfahani goes back to Ahmadinejad. Rationing petrol at 11 cents a liter in 2007 was part of his hesitant effort to reduce state subsidies of everyday items like fuel, bread, and electricity.

Such subsidies were expensive. Economists have argued that they divert money away from productive investment needed for longer-term economic growth and job creation. In 2007, they appeared profligate given mounting international pressure that would culminate in the stringent financial and energy sanctions that the Obama administration and the European Union introduced in 2012.

The subsidies were also, in economists’ terms, “regressive.” Although the less well-off no doubt liked cheap petrol and electricity, the rich benefited most.

To cushion the blow of phasing out subsidies, Ahmadinejad in 2010 introduced cash handouts. The original intention was to target the poor, although the cash handouts (45,000 tomans, then worth $40 a month) went at first to almost everyone, and it took years to narrow the scope.

Given Iran’s competitive, factionalized politics, both Ahmadinejad and parliamentary deputies were wary of upsetting voters. Unpopular decisions were kicked into the long grass, leading to a messy, opaque situation where Iran still has some subsidies and some cash handouts.

Rouhani’s Approach

Elected in 2013, Rouhani has set about phasing out both. With support from the International Monetary Fund (IMF), Rouhani wants economic growth based on a robust private sector and a streamlined state. He would like to channel rising oil revenue into productive investment—helping reduce youth unemployment of 25% and giving hope to young people—rather than into handouts or subsidies.

But that’s the medium or long term. In the short term, Rouhani’s recently proposed 50% hike in gas prices has gone down badly. At the same time, his allowing cash subsidies to decline in value, argues Salehi-Isfahani, has led to “increasing poverty rates for urban areas” and “a sharp increase” in rural poverty.

This means the economy’s improvement under Rouhani—from recession to 5.6% GDP growth in 2017, as estimated by the London-based Economist Intelligence Unit—has made little if any difference to many people outside Tehran. “The good news,” writes Salehi-Isfahani, “is that the economy has continued to grow in the first six months of 2017/18… but we do not yet know if this growth has started to reach down more widely to the poor in smaller urban areas.”

Salehi-Isfahani concludes that Iran’s protest may reflect unfulfilled expectations but not a high level of poverty. He believes Rouhani is generally on the right course. Asked to put himself in Rouhani’s shoes, he does envisage some changes.

I would try hard to preserve the important pieces of my program—rationalizing the economy, global integration—and not descend into Ahmadinejad populism. I would reshuffle the cabinet so as to signal greater appreciation of the plight of lower income people, not just the poor, perhaps the type of people who make up the bulk of people who live in smaller towns. I would use the parliament to revise the budget, combining energy prices increases with higher cash transfers. Announcing a 50% increase in gasoline while slashing the transfer program [cash handouts] for the lower middle-class is bad politics and bad economics.

Another important challenge, highlighted by visiting IMF representative Catriona Purfield in December, is the level of bad debts left by Ahmadinejad’s populist lending policies. “This is very serious,” says Salehi-Isfahani. “Rouhani has been trying to deal with this for over four years, and he can’t cannot continue at such a slow pace. Interest rates are too high, and credit is out of the reach of small businesses.”

Revolutionary Values

Politics, of course, cannot be reduced to economics. Perceptions matter. Iran is very different from, say, Saudi Arabia, because of the official egalitarianism rooted in the 1979 Revolution. Many of those complaining about rising prices in social-media clips are veterans of the 1980-88 war with Iraq. Why, they ask, should they be struggling when the better off flaunt their wealth? Was the Revolution, and their wartime sacrifice, for nothing?

Such egalitarianism has long been a core value of the Islamic Republic. The principlists mocked the reformist president Mohammed Khatami as “Fariba” (a girl’s name meaning charming but mischievous) because of his expensive leather shoes and stylish clerical cloak. They demonized the pragmatic conservative Akbar Hashemi Rafsanjani because of his alleged wealth. They now argue that Rouhani and his rich supporters in leafy north Tehran have turned their backs on ordinary Iranians.

Another staple in Iran’s political discourse are allegations of corruption. December saw the latest round of barbs traded between Ahmadinejad and the Larijani brothers (including Ali, the parliamentary speaker, and Sadegh, the judiciary chief). For this to be aired in public is unusual in the Middle East.

In a piece on LobeLog earlier this month, Hossein Mousavian, a former Iranian security official now at Princeton University, contrasted the “modest lifestyle” of Iran’s leader, Ayatollah Ali Khamenei, with the riches of the Saudi crown prince Mohammad bin Salman, which Mousavian quotes The New York Times as including a $500 million yacht. The divergence reflects profound differences in politics and public discourse between the two countries.

The current protests appear to have begun with principlists in Mashhad looking to undermine Rouhani. They drew back as crowds raised slogans against clerics and even the Islamic Republic, and when protesters torched shops and cars and even attacked police stations. It remains to be seen whether Iran’s political factions continue slinging mud at one another, or now close ranks.

Gareth Smyth, who has reported from the Middle East since 1992, was 2003-7 the chief correspondent of the Financial Times in Iran. Photo: Inside a bakery in Tehran (Kamyar Adl via Flickr).

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