Did Bad Economic Conditions Cause Iran’s protests?

by Djavad Salehi-Isfahani

Like other Iranian president before him, President Hassan Rouhani is having a bad second term. Only six months after his decisive re-election, protesters were in streets shouting “Death to Rouhani.” Then came a sharp fall in the value of the rial, by 10% in two weeks, which threatens to undo the principal economic achievement of his first term—lowering inflation—and his plans to lower interest rates. Iran’s Central Bank had to increase interest rates last month to stop the fall of the rial. These are precarious times for Rouhani, who has won two elections promising economic revival.

Whatever or whoever started the protests, widespread economic dissatisfaction definitely animated them. Ironically, the economy is doing much better today than it has been in five years. Rouhani must be wondering why protests are happening now, after two years of economic growth, when several years of sanctions and recession went by quietly.

Since the Iran nuclear deal (the Joint Comprehensive Plan of Action) went into effect in January 2016, the economy has experienced rapid growth. GDP grew by 11% in 2016—from March 21, 2016 to March 20, 2017, according to the Iranian fiscal year—and is expected to grow by a robust 6 percent this year. Household survey data confirm that growth has found its way into people’s pockets, though very unevenly. According to survey data from the Statistical Center of Iran, average real per capita income grew by 6.2% in 2016, but spread unevenly across the country: 9.6% in Tehran, 5.9% in other urban areas, and only 3.4% in rural areas.

Add to this the fact that during the recession, incomes in Tehran fell by less than the rest of the country. This geography of growth may have had something to do with the relative lack of protest in Tehran. As in the past, in 2016, the benefits of rising oil income (and returned frozen assets) flowed into the economy starting from Tehran. It may take a year or two before the benefits reach smaller towns and rural areas.

Rouhani may not view this as politically disadvantageous. After all, his support is concentrated in larger cities, and his share of votes increased in these areas between the 2013 and 2017 elections. In the capital’s richest district, Shemiranat, it increased from 49% to 79%.

Unequal sharing in last year’s economic growth is evident in the rates of growth of income at the ninetieth (rich), fiftieth (middle class), and the tenth (poor) percentiles: 7.5%, 3.9% and minus 1%, respectively. Cleary, the rich and the poor see very different types of economic recovery.

Rising poverty is one problem for which Rouhani is to blame. After 2010, following Ahmadinejad’s subsidy reform, generous cash transfers to all citizens became an important part of Iran’s social protection. They reduced poverty and bought peace in the worst of the sanction years. Even before coming to office, Rouhani sharply criticized this program. In his first year in office he raised energy prices without adding to the monthly cash transfers. As a result, poverty increased during his first term, especially in smaller towns and rural areas. Then, in December, in a reckless move as part of his proposed budget for 2018, he announced plans to completely dismantle the universal direct cash transfers and replace them with payments through the welfare bureaucracy. At the same time he announced plans to raise the gasoline price by 50 percent.

Few countries have been able to raise gasoline prices without seeing urban riots, Mexico being the latest example a year ago. In response to the unrest, Iran’s parliament has announced a freeze of the gasoline price.

To put the record straight, even with the increase under Rouhani, poverty is nowhere near the exaggerated and erroneous level mentioned in the Western media. A case in point is an opinion piece in January in The New York Times, entitled “How the Other Half Lives in Iran,” claiming that 40% of Iranians lived in poverty. The World Bank, in a paper [pdf] to which I contributed, estimated 9.5% of the population under a poverty line of $5.5 (in Purchasing Power Parity). To arrive at a poverty rate of 40%, you would need a poverty line twice that high, which is what the development literature defines as middle class. These are the people you would call poor when you raise the poverty line from $5.5 to $10 per day: They all have electricity, piped water, and a refrigerator; 97 percent have indoor showers and color TVs; 80 percent have natural gas; and 26 percent own a car.

Under President Mahmoud Ahmadinajed, Iran experienced rising incomes with little increase in employment, thanks to the huge inflow of oil money. In contrast, Rouhani’s economic recovery, if unevenly shared, has come with an average of 700,000 new jobs each year. Growth hasn’t yet lowered the rate of unemployment of young people, because of the rapid entry of new job seekers, many with university degrees. An unscrupulous expansion of universities by Ahmadinejad in the mid-2000s, which helped millions of high school graduates escape the deteriorating labor market conditions, is now haunting Rouhani. According to the national census of population of 2016, 42 percent of university graduates are unemployed (36 percent for men and 50 percent for women). These rates will take several years to come down.

Finally, no economic grievance has brought more (mostly peaceful) protestors to the streets in Iran’s cities in recent years than bank failures. During the oil boom of the 2000s, while Iran’s central bankers were asleep at the wheel, official and unofficial financial institutions lured depositors with astronomical interest rates. Once sanctions hit and the real-estate bubble burst, most of these institutions went bust and could not pay back depositors. But, to stay afloat, they had to attract new deposits, so they continued to pay high interest rates. These Ponzi schemes cost the country heavily by keeping interest rates high, and keeping funds away from investors who could have created jobs for the unemployed.

Photo: Hassan Rouhani (Wikimedia Commons)

Djavad Salehi-Isfahani

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 Institution and research associate of the Iran Project, at Harvard Kennedy School’s Belfer Center for Science and International Affairs.