Economy, Domestic Economy

Iran’s Economic Enigma

Iran’s Economic EnigmaIran’s Economic Enigma

In what system has Iran’s economy become entangled in that it has failed to live up to expectations despite the abundance of economic resources and the availability of skilled human resources?

The question was raised by eminent economist Mousa Ghaninejad in an editorial titled “The Enigma of Iran’s Economic System” published in Donya-e-Eqtesad economic daily. His response’s translation is as follows:

The only way to break the cycle of decades-long lackluster performance of Iran’s economy is to answer this question.

Many economists have argued, for quite a long time now, that the root of all our problems is our state-dominated economy, which emerged from the nationalization of the oil industry. But state-dominated economy is a general concept with different perspectives.

Two different (yet overlapping) perspectives on features of Iranian economy have been presented of late. The first has been put forth by Minister of Roads and Urban Development Abbas Akhoundi. He sees the Iranian economy as an offshoot of mercantilism that has nothing to do with the competitive market economy.

Instead, it is a monopolistic system ruled by special interest groups with support from political powers.

The second perspective was presented by Iranian economist, Ali Mirzakhani. He describes Iran’s economy as a “modern manorial system”, a refurbished version of an outdated system in the country’s history. These two perspectives reveal the true nature of Iranian economy.

Mercantilism was an economic practice dominant in modernized parts of Europe before the Industrial Revolution where political power and economy were closely intertwined. Under such regimes, governments used to control the whole economic system and block free trade on the pretext of protecting the national economy.

A few major economic entities with close ties to the government enjoyed monopolistic advantages. They were the economic arm of colonial policies on the international stage. Small- and medium-sized enterprises were dominated by large state-run organizations, therefore the whole economy was cornered by political power and its objectives.  

Mercantilism in western Europe collapsed in the final years of the 18th century and was replaced by somewhat competitive, free economies.

Some features of that system can be detected in today’s Iranian economy: Almost all major Iranian organizations are either governmental or semi-governmental. In either case, they are run, directly or indirectly, by the reigning political powers, including municipalities. The 1980s efforts to liberalize Iranian economy and create a strong private sector independent of the government proved to be unsuccessful.

  Botched Privatization Effort

Despite the mass privatizations carried out during the 2000s, as per Article 44 of the Iranian Constitution, the economic system remained within the realms of the government and mercantilism.

The real private sector hardly accounts for 10% of the economy, while a peculiar phenomenon called semi-governmental sector came into being in the national economy.  

The companies of this sector are dominated by government heavyweights, but since these entities have been handed over by the government, they are not categorized as state-run firms and should comply with market regulations like a private sector entity.

Yet, these large companies do enjoy the backing of the establishment and refuse, at times, to play by the rules of business.

The concept of modern manorial system might help clarify this new phenomenon in Iran’s economy. Manorial system, which dates back to Iranian dynasties such as Ilkhanid and Qajar, refers to an institutional form of land tenancy granted by the king to a special coterie. Distribution of land does not include transfer of ownership right, but only the temporary right to use and derive income or benefit from that usufruct. This means the subjects can be dispossessed of the land whenever the king wishes to.

The manorial system is the worst possible way of using economic resources since the subject does not have a sense of belonging to the resource under his control as he might lose that resource any time. Therefore, he uses every possible way to fully exploit what’s in his disposal and won’t bear any costs to increase the long-term productivity of that resource.

One of the early measures taken by the first Iranian parliament after the Persian Constitutional Revolution (between 1905 and 1911) was to abolish this unwise, wasteful system. Although the Constitutional Revolution spelt an end to the traditional version of the manorial system, reminiscent practices reemerged in different periods whenever opportunity presented itself.

The most favorable condition to cultivate new manorial-like relations is the rule of a state-dominated government in which economic resources are distributed through bureaucratic mechanisms. Manorial systems come into being when state executives manage the economy, particularly when their designation does not follow clear, transparent regulations and it is mostly managed on the basis of partisan considerations.

Under such circumstances, each office-holder knows that his rule is short-lived and he might be dismissed any time, therefore he should be quick to line his own pocket. Instances of this claim are the undeserving, astronomical salaries the executives paid themselves despite the poor performance of their, rather bankrupt, organizations.

[The scandal went viral two months ago when the inflated paychecks of top officials at state-owned banks and companies surfaced online.]

The scandal brought to light the true nature of our economy’s manorial system. Economic analysts had already warned against this ugly truth for quite some time but their warnings had fallen on deaf ears.

As we speak, there is this danger that the specter of manorial economy should be reduced to a partisan fight and the whole thing might be swept under the carpet as heads roll.

It will serve public interest to direct this fight toward preserving national resources. To that aim, the government and parliament need to set an agenda for two things.

First, they should probe into the origins of the new manorial system that seems to be linked with the 2000s mass transfer of ownerships and the emergence of semi-governmental companies.

Second, investigative journalism must be officially recognized through a parliamentary ratification. In doing so, the country will throw off the shackles of manorial economy as a national challenge and also a guaranteed political tactic, which is now being used exclusively by one political party, would become a very effective oversight tool for the whole society.