Tentative steps: Ahmadinejad's economic reform.

Iran's economy is on the rise. According to The Economist Intelligence Unit, real GDP growth for the last year was 4.3 percent, and indicators show a positive current account balance. There appears to have been concrete progress ever since the state began moving toward a market-oriented economy in 1988. However, the positive statistics obscure structural problems that plague the economy. In the last two years, real GDP growth fell short of the 7.5 percent growth projected by the central bank. With a booming middle class, an emergent young and educated labor force, growing consumer demand, and vast natural resources, one would expect Iran's economy to be racing, rather than inching forward. Experts--citing an escalating unemployment rate of 11.2 percent, a high inflation rate of 14.5 percent, and unsustainable government spending fueled by oil revenue--trace the problem to poor economic management and ineffective governance. The Iranian government must reevaluate the policies and inefficiencies that are causing these macroeconomic woes and must commit itself to real reform of economic policy.

Upon election in 2005, President Mahmoud Ahmadinejad inherited an economic system with much need for repair. Under Ahmadinejad, spending has increased by 25 percent, and the state has supported large-scale state subsidies of more than US$40 billion a year for food and gasoline. While Iran holds 10 percent of the world's oil reserves, it also lacks the infrastructure to drill and refine it. Moreover, an intense nationalistic pride bars foreign direct investment. Domestic consumption, encouraged by low prices and subsidies, has increased and become wasteful, resulting in rising petrol imports to meet demand. The government deficit is further exacerbated by problems with tax collection. Charitable organizations called bonyads make up 30 percent of the economy, unaccountable to government oversight and exempt from taxes. Though bonyads are supposed to aid revolutionary martyrs and the poor, they have become essentially private enterprises that crowd out small businesses and hinder competition. The government's bureaucratic operations serve as patronage networks, creating market inefficiencies and promoting corrupt officials who are needed for their specialized knowledge.

The government has planned to address some problems with a series of Five-Year Plans, but its reforms have thus far been half-hearted. Overtly embracing capitalism runs contrary to the socialist principles of the Iranian Revolution, and Ahmadinejad has opted for "middle-of-the-road" compromises. For example, the government plans to give "justice shares" of companies to low income households, so that companies, though private, still remain under government management. Iran's policy toward foreign investment, a result of nationalistic sentiment, is similarly unclear: though foreign investors can bid for Iran's oil fields, they must be approved on a case-by-case basis by the Economic Ministry. The central bank fears capital flight as the United States takes increased economic measures against Iran. By deterring foreign companies, Iran's economic system prevents the construction of infrastructure and capital influx.

What Ahmadinejad must realize is that the Iranian populace cares little about politics when confronted with economic troubles. An obscure candidate in 2005, Ahmadinejad rode to victory promising to alleviate poverty and create jobs, and his promises have not yet materialized. Furthermore, if world oil prices plunge, Iran's economy--so inextricably tied to oil exports--will falter, and experts predict not just popular dissent, but revolution. Ahmadinejad has already begun testing the public, unveiling unpopular plans to ration petrol and advocating an Islamic labor code that would ban independent trade unions in order to curb possible nepotism and ease privatization. Though there has been ardent criticism of these moves, discontent appears to be contained. It seems that Ahmadinejad has enough political capital to chip away at Iran's decrepit economic structure and build a more solid foundation for future, sustainable growth.

For real economic reform to take place in Iran, consensus must be established to lower subsidies, increase transparency, clarify economic distribution mechanisms, and create an efficient tax collection system. Perhaps with the creation of effective social security to support the poor, the government can begin tackling inflation and easing out subsidies. What is certain, however, is that liberalization measures should be approached cautiously, making steady and vital changes that maintain the increased wealth of the Iranian people and promote the creation of a reliable system to support economic growth. Iran's economy has hope yet, and serious reforms must be enacted for economic wellbeing in the long run.

senior editor

SAMANTHA FANG