Any policy responses to Iran’s nuclear program must avoid hurting the classes that are the future foundation of a peaceful, democratic and globalized Iran.
The MTG Nuclear Iran Series focuses on the background and implications of the alleged Iranian nuclear weapons program. The second part paints the economic background to the conflict and sets the stage for an evaluation of policy responses in the next article. Overall, policy makers must be aware of the dynamism of Iran’s highly educated youth and the government’s dependency on oil exports as its main source of revenue. If policies are not correctly tailored, the international community risks alienating a cosmopolitan public critical to a lasting peace while strengthening the hand of Iran’s ruling elites.
Iran’s Economy: The Bright Spots
Iran’s economy has been surprisingly dynamic. As a result of its successful education, health and living standards have improved steadily since the conclusion of the Iran-Iraq War. Iran has the world’s 20th largest economy and a GDP over $800bn US (adjusted for PPP). Its economy is surprisingly dynamic, even after decades of sanctions—robust trade relations exist with China, India, Japan, Turkey, South Korea, and Italy. Iran also has a large manufacturing sector, and is a leader in engineering and technology. It is the 12th largest car manufacturer in the world and plays host to almost all of the major European, Korean and Japanese makers.
Iran’s growth in non-petroleum industries is driven by a world-class education system. The quality of Iranian education can be demonstrated in the remarkable increase in scientific publications since the late 1990s: overall scientific output has grown at 11 times the world average. Iran and Turkey dominate a region filled with scientific laggards. Iran was 23rd overall globally in citations of peer-reviewed medical articles. From 1999-2008, researchers have published a total of 60,979 scientific articles in major international journals, and during the first half of 2011 alone, Iran produced 12,000 peer-reviewed articles. Even more surprisingly, collaboration between American and Iranian scientists on research projects went from 388 in 1999 to 1831 in 2008.
Despite its successes in the face of sanctions, Iran will continue to remain as an under-achieving economy. It has been isolated financially for many years and has been cut off from basic technological components such as spare parts for western aircraft. As well, inflation has always been very high and is estimated to be hovering in the range of 17-20 percent this year.
Apart from a dependency on oil exports, Iran is faced with one major structurally-related challenge: youth unemployment. Iran’s population exploded after the revolution meaning many people coming of age today. Youth aged 15-29 make up 30-35 percent of the population. As much as Iranian youth are well-educated and worldly they have a hard time finding meaningful work in the country, according to a study by the Balfer Centre at Harvard University and the Dubai Centre. Thousands leave every year in search of opportunity in the West. Youth unemployment for men (both urban and rural) was around 24%, while for women it was over 46% and many in this demographic are highly educated, tech-savvy and cosmopolitan.
Much of Iran’s economy was state-controlled following a large number of nationalizations in the Revolution. As well, the government often bought support from large members of the public by providing expensive subsidies for food and fuel. The government has moved over the last number of years to slowly eliminate many subsidies, estimated at draining the treasury of $60-100 billion US per year.
Recent economic reform measures include privatizations and direct payments to citizenry. The program sees $50/month handed out to many citizens instead of general subsidies and was instituted to avoid the type of popular blow-back seen in countries like Nigeria when subsidies were removed. Finally, getting rid of subsidies allows the government more flexibility should its revenues come under attack through more sanctions.
Thriving from conflict
The conflict that continues to feed the revolutionary and anti-imperialist rhetoric of the regime has helped Iran’s ruling elites in a number of other ways since 1979. Sanctions, state control, and protectionism have allowed the development of an opaque system of license-patronage. As well, important players like the Revolutionary Guard have expanded their control of the economy by manipulating lucrative privatizations.
Moreover, an ‘equilibrium of conflict’ helps maintain government revenues. So long as Iran can keep most of its export markets open, the government can rely on high oil prices to maintain revenues. The $80 billion US flowing into government coffers every year helps to maintain social cohesion and pay the security services. In fact, the odd dust-up in the Strait of Hormuz that drives up oil prices that does not result in an Asian embargo of Iranian oil or an OPEC response means the government can rely on high prices for its 3.5 million barrel per day exports.
Although on hold as of January 30, 2012, Iran has recently announced it will begin a preemptive halt of oil exports to EU trading partners in light of EU sanctions against Iranian oil. The regime does not appear overly concerned over losing its EU market making up 17% of its exports. Other recent sanctions like U.S. actions on Iran’s Central Bank in the Defense Appropriations Bill have resulted in the plunging of the Rial against the U.S. Dollar. The official exchange rate stayed steady around 9000 Rials/USD for years. However, the new official rate is 12,600 Rias/USD and the black-market rate is at nearly 23,000 Rials/USD.
A more disturbing trend for the government has been the Chinese cutback of oil imports from Iran in January. China has cut its imports of Iranian crude by 50%, reducing its daily purchase to 285,000 barrels. Whether a sign of support or driving a hard bargain with the “pariah discount” this move by China may put more pressure on the Iranian government than the EU ban ever could. Finally, if the IAEA inspections currently taking place do not bear fruit, expect more drastic action including possible Japanese action to halt imports. An intensification of sanctions in this manner will surely hit the middle classes first while the regime has taken some steps to become more fiscally nimble to increase its ability to hold out in the event of a protracted economic war.
Policy makers must be cognizant of the nuances of Iran as a nation. Yes, the Iranian government is repressive; however, Iran also a large economy full of educated, tech-savvy, and cosmopolitan youth and a large middle class. Avoiding alienating these important groups is critical in bringing Iran back into the globalized community of nations and creating a lasting end to the current regional tensions.