Iranian President Hassan Rouhani’s suggestion at the recent Davos World Economic Forum that Iran can become one of the world’s top 10 economies attracted even more attention back home in Iran than his insistence that Iran would not dismantle a single centrifuge.
True, Rouhani gave a time frame of 30 years, but reaching the top 10 would still be a leap. The World Bank lists Iran in 23rd place for 2011 for “nominal gross domestic product” and rising to 10th would require overtaking the likes of Turkey, Spain, Saudi Arabia, Korea and Australia.
In popular terms, Rouhani has his finger on an important button. Iranians consider their country a proud power and heir to a civilization that has long fallen from its true place.
Many date the decline to the demise of the Safavid dynasty, whose capital Isfahan fell to invading Afghans in 1722 after a six-month siege forced residents to eat tree bark. True, the Safavid shahs had a dark side, often blinding their sons to stop them from becoming rivals. But the Safavids’ stunning architecture and encouragement of trade mark the 16th and 17th centuries in retrospect as a golden age.
For despite the military victories of Nader Shah (1736-1747), including the theft of the jewel-studded Peacock Throne from the Mughals, the Safavids were followed by 150 years of stagnation as Europe industrialized and the United States found its feet. By the early 20th century, many Iranian intellectuals believed Iran was held back by a combination of lethargic kings and conniving foreign powers.
Mohammad Reza Shah (1941-1979) looked to close the gap, undertaking social reforms and investing rising oil income in order to “modernize.” This perspective was largely shared by the rulers of the Islamic Republic who after the 1979 revolution took electricity and piped water to the countryside while expanding higher education and health care. The supreme leader, Ayatollah Ali Khamenei, today portrays the nuclear program as a mark of scientific progress.
The economic results have been patchy. Growth was uneven under Mohammed Reza Shah, and under the Islamic Republic an 8 percent target set by successive five-year plans was never met. Growth averaged 5.5 percent from 1996 to 2007, then fell, and after U.S. and European Union sanctions halved oil exports after 2012, the economy shrank 5.8 percent in the year 2012-13 and is still shrinking.
Can that now change? November’s interim nuclear deal with world powers has excited outside interest in a market of 78 million people and the world’s largest combined oil and natural gas reserves. Hotels in Tehran are crammed with trade delegations.
But the key challenge for Iran, even if all sanctions end, is to invest productively its oil revenue, which has often disappeared into current spending. Under President Mohammad Khatami “windfall” oil earnings went into a ring-fenced fund for infrastructural investment or soft loans to businesses.
But both parliament and government raided the pot to fund anything from subsidized bread and gasoline to higher state salaries. After Mahmoud Ahmadinejad was elected in 2005 on a promise to “put the oil money on the sofreh (a mat on which poorer Iranians sit to eat),” ring-fenced funds went into dubious schemes such as the multimillion-dollar Mehr housing project, which Ahmadinejad called the “finest undertaking since Adam.”
So while the notion of “catching up” appeals hugely to Iranians, it may raise rather than dampen expectations, adding to three challenges Rouhani will face.
First, growth beyond low digits requires the easing of sanctions, which means either a substantive agreement over the nuclear program or Russia and China breaking ranks from the world powers’ unified approach. Some detect the latter in Beijing’s discussing a new contract for condensates and in Moscow and Tehran mulling the bartering of oil. However, both apparently depend on diplomatic progress.
Second, Iran needs investment, both to extract energy reserves – especially gas – and to achieve growth. This has to come from a mix of oil revenue, foreign investment and a more vibrant domestic private sector including capital markets.
The last two both require relaxing state control. So, a third challenge for Rouhani will be building a more open economy. Djavad Salehi-Isfahani, an economics professor at Virginia Tech and an astute Iran analyst, is optimistic. Rouhani “knows that more than three decades of revolutionary rhetoric and eight years of failed populist economic policies under President Mahmoud Ahmadinejad have tired out the general population and caused a major shift in the attitudes of Iran’s intellectual and technocratic classes,” he recently wrote. “There is now a wider consensus in favor of private enterprise and engagement with the global economy than during the time of the Shah.”
Progress with privatization has been slow since Khamenei in 2005 and 2006 issued rulings backing privatization of 80 percent of state-owned companies. Most “public listings” have transferred shares to quasi-state bodies such as pension funds or Bonyads, the opaque religious foundations controlling vast businesses.
This partly reflects low private-sector capital and underdeveloped private banking, but it also shows the weight of vested interests. Those in the know have made money during sanctions. “North Tehran is now full of luxurious cars like Porches,” a friend in the city told me this week.
Perhaps Rouhani will try to accommodate rather than confront such vested interests, so following the path of his ally Akbar Hashemi Rafsanjani who as president in the 1990s encouraged the Islamic Revolutionary Guard Corps (IRGC) to enter into business. If Iran made the top 10, Rouhani may argue, the size of the cake could allow everyone a bigger slice.
Gareth Smyth has reported from the Middle East since 1992 and was chief Iran correspondent of The Financial Times in 2003-07. He wrote this commentary for THE DAILY STAR.