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Published on February 24th, 2016 | by Djavad Salehi-Isfahani

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The Economic Backdrop to Iran’s Elections

by Djavad Salehi-Isfahani

Former president Akbar Hashemi Rafsanjani has described Iran’s parliamentary election this Friday as critical, setting the course for years to come. It will certainly set the course for the rest of President Hassan Rouhani’s presidency, especially whether it will last beyond its first term ending 18 months from now.

Two elections are taking place this Friday, one for the Assembly of Experts and the other for the parliament. The fate of the former, which selects the next supreme leader and oversees his actions, is all set because heavy vetting eliminated nearly all the non-conservative candidates.

But the election for the parliament is being hotly contested. The stakes are high as Rouhani tries to solidify his foreign policy gains by passing legislation that enables the private sector—domestic and foreign—to invest in Iran with confidence.

A Tale of Two Plans

Most of that legislation is contained in the Sixth Five Year Development Plan (2016-2020), whose details have not been released but whose general direction is not in doubt. It will likely resemble the Fourth Plan drawn up by President Mohammad Khatami’s Management and Planning Organization (MPO) in anticipation of the next reformist or moderate president. It was approved six months before he left office, but was never implemented because his successor, Mahmoud Ahmadinejad, who won the 2005 presidential election had very different ideas about the direction the economy needed to take.

Not only did he shelve the plan, he dissolved the Management and Planning Organization that had produced it so he could implement his populist agenda without oversight.

The Fourth Plan had an expressive subtitle that is now the motto for Rouhani’s economic development strategy: “Toward a knowledge-based economy in conformity with the global economy.” Although the Rouhani administration does not like to be identified with reformists, the new Sixth Plan was drafted by many of the same people who drafted the Fourth Plan. Both plans bear the mark of Masoud Nili, then the chief economist of the MPO and now the senior economic advisor to President Rouhani.

Both plans share the logic that economic prosperity depends on rising productivity, not rising oil money, and that economies that remain safe from global competition, as Iran was under sanctions, cannot raise their productivity or their growth rate. This was the deeper motive of Rouhani’s team for settling the nuclear issue, not just getting Iranian funds released.

The conservatives, who fought the nuclear deal every step of the way, prefer to keep their distance from the global economy. Having “lost” the sanctions, they are keen to erect new barriers to stem the tide of Iran’s integration into the Western world.

Influence of Nuclear Deal

The nuclear deal and closer relations with the West are very much issues in this election. The representative of the Supreme Leader in the Revolutionary Guards warned voters not to elect those “seduced by the West.” A Tehran Friday Prayer speaker, who also warned against those “infatuated by the West,” spoke of sanctions “as a blessing that we failed to appreciate.”

Reformists and moderates have put their differences aside in this election. In most cities, they are running on the same platform defined by the nuclear deal and closer ties to the rest of the world. They do not want to repeat the mistake they made in the 2005 presidential election, when they competed against each other and allowed the relatively unknown Ahmadinejad to emerge as the winner. Reformists who in the past championed leftist economic causes are now helping elect a parliament that, if they succeed, will enact Rouhani’s liberal economic agenda of free markets and foreign investment.

Under ordinary circumstances, this coalition would be hard to defeat, even with the heavy vetting of the candidates by the conservative-dominated Guardian Council. The problem is that this is not an ordinary year. The economy is in very bad shape and the nuclear deal has not had a chance to make a difference.

True, since Rouhani’s election, inflation has been cut in half, a historic nuclear deal has been signed, dozens of business delegations from Western Europe have visited Iran, the released frozen funds have started arriving (even pushing the rial up slightly), and the president has concluded successful trips to Rome and Paris.

Economic Downsides

But these positive developments have not made their way into the pocketbooks of ordinary Iranians. According to official figures, between the summer of 2013, when Rouhani took office, and the summer of 2015, when the latest comparable employment figures are available, 300,000 industrial jobs were lost. Official sources are silent on industrial output, but the government has not been able to quash rumors of a significant drop. In its most recent report, the IMF predicts no economic growth for this year.

My calculations, based on expenditure and income survey data, show that in the 2014-15 fiscal year the average per-person household expenditures fell by 6.4% in rural areas and by 2.4% in urban areas; only in Tehran did it increase by 4%. The poverty rate has increased, sending 1.3 million people below the poverty line of roughly $5 per person per day, and income inequality has also increased. We will not know for some time the numbers for the current Iranian year that ends in a month, but the odds are that they will not tell a better story.

A stagnant or declining economy is hardly surprising given the 80% drop in oil prices since Rouhani took office. But rising poverty and inequality are to some extent the result of Rouhani’s policies. He has twice raised energy prices without offering any compensation to the poor. The much-maligned cash transfer program that Ahmadinejad instituted when he first raised energy prices in 2011, though poorly executed, did in fact reduce poverty and income inequality. Last year, for the first time in three years, that trend was reversed.

This is a tough setting for pulling off an election victory, and certainly not the one Rouhani was expecting when he raised people’s hope around the benefits of the nuclear deal. In a few days we will know if Iranian voters will ignore the current dismal state of the economy and help elect a pro-Rouhani parliament on the promise of a better tomorrow.

Photo: Masoud Nili


About the Author

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Djavad Salehi-Isfahani conducts research on the economics of the Middle East and is currently a professor of economics at Virginia Tech. He is a nonresident senior fellow at the Brookings Institute and is also serving as the Dubai Initiative fellow at the Belfer Center for Science and International Affairs at Harvard University's John F. Kennedy School of Government. This fall he is the Kuwait Foundation Visiting Scholar at the Belfer Center of Harvard Kennedy School. He has served on the Board of Trustees of the Economic Research Forum (2001-2006), a network of Middle East economists based in Cairo.



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