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Published on April 15th, 2015 | by Djavad Salehi-Isfahani

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Economics Will Decide the Fate of the Iran Deal

by Djavad Salehi-Isfahani

Israeli prime minister Benjamin Netanyahu has a terrible record in predicting the future of Iran’s nuclear programme, but it’s hard to argue with his suggestion that last week’s accord between Iran and the P5+1 countries will “bolster Iran’s economy”.

International sanctions have dealt a serious blow to Iran’s economy, so if there is any agreement soon and sanctions are partially removed, it is certain to bounce back. Iran is deeply integrated into the global economy and has a population that prefers it to stay that way. The idea pushed by conservative forces to build a “resistance economy” has not taken hold. The country’s large middle class is hoping the nuclear deal will boost the rial against foreign currencies and make the global economy more accessible.

I would credit the modest growth of 3 per cent in the past year and a half to the partial lifting of sanctions in November 2013, when the interim agreement called the Joint Plan of Action was signed. This had Iran agreeing to roll back parts of its nuclear programme in exchange for relief from some sanctions. But in any case, after two years of recession, Iran’s economy turned a corner in 2013 and has grown for four consecutive quarters. Though it’s true that a growth rate of 3 or 4 per cent is not hard to achieve when the economy has shrunk by 9 per cent, there is strong evidence that the bounce-back was the result of sanctions relief.

The ups and downs of the car industry in the past few years offer the best evidence that sanctions had a lot to do with those two years of negative economic growth. In 2010, before the sanctions tightened, Iran produced more than 1.5 million cars a year and was the 12th largest producer in the world. About 500,000 Iranians work in the car industry, 10 times the number in the oil sector. Although Iran has manufactured cars for decades, domestic production quality is low. So most cars are produced in Iran under licence from foreign manufacturers and it depends on them for critical imports, ranging from airbags to computer chips.

As sanctions tightened, such imports became unavailable or expensive and the car industry contracted. But in the Joint Plan of Action, the car industry, together with the petrochemicals sector, managed to get specific exemptions. By last spring, production was up by 90 per cent.

But unlike most analysts on Iran, I do not believe that all its ills can be blamed on international sanctions. Iranians use the term “internal sanctions” to refer to a variety of restrictions that inhibit business growth. These range from bad laws to no laws and from excessive power of the state to revolutionary disorder that feeds on the anti-capitalist rhetoric of Iran’s more hardline leaders.

Deep discord over economic strategy and the future of Iran’s relations with the West casts a long shadow over the future of any nuclear accord and how to benefit from it. While for the moment, Iran’s leaders appear united behind the deal, conservative religious leaders are concerned that the battles they fight against western values will be much harder when trade and other relations with the West are restored.

Finding the win-win deal, a favourite buzzword of the president Hassan Rouhani’s administration, is difficult but not impossible. In principle, Mr Rouhani’s economic team is very concerned about the economic consequences of the wrong kind of integration into the global economy, as a nation of consumers rather than producers.

During much of the 2000s, partly under the more liberal administration of president Mohammad Khatami, Iranians took advantage of high oil prices and cheap dollars to travel abroad on holiday, send their children abroad to be educated and buy everything foreign they could for their homes. During this period, Iranian inflation averaged 20 per cent a year, making domestic production uneconomic relative to imports.

It is no small irony that this process of integration intensified with the accession of hardliners to power, under the leadership of the anti-West president Mahmoud Ahmadinejad. It was precisely the increased integration that allowed the sanctions to inflict maximum harm.

There are many in Iran who fear the pouring in of the estimated $100 billion (Dh367bn) of Iran’s assets that are currently frozen abroad. They fear that pressures to keep foreign currencies low and welcome imports to appease the middle class will prevent Mr Rouhani from making good on his larger promises. These promises include reviving domestic production and creating jobs for nearly 3 million unemployed youths.

No one knows if Iran’s middle class is willing to go along with a tough-love policy. It has steadfastly supported Mr Rouhani so far and has already benefited from lower inflation and the small opening to the West. But tough love would privilege production over imports and jobs over consumption and only a productive Iran could truly integrate into the global economy.

Mr Rouhani’s famous refrain that as the centrifuges turn so should the wheels of the economy seems to be coming to pass with last week’s deal.

It remains to be seen if he can take much of the turning to production lines rather than shopping malls. If he manages that, the world would eventually realise that Mr Netanyahu’s cynical warning that an economically stronger Iran is a threat to the world is just one more foolish prediction.

This article is republished with permission from The National.

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3 Responses to Economics Will Decide the Fate of the Iran Deal

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  1. avatar tms5510 says:

    I guess ROuhani would give middle class a little bit of import before elections but then go for his plan (first he need to win )

  2. avatar Norman says:

    Perhaps therein lies the problem with Netanyahoo, if Iran is allowed to reintegrate with the West economically, then it’s possible Israel would lose out in the process. That may be a good thing, though I’m sure as long as the nay-sayers get their bags of shekels, they will resist, even if they do lose economically in the process.

  3. avatar Monty Ahwazi says:

    “The biggest concern or enemy to Israel is PEACE between Iran and the west and Iran with a moderate strength economy” as reiterated by Natanyahu last week!


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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