Thursday, April 17, 2008

Ahmadinejad and the “System”

Farideh Farhi

Mahmoud Ahmadinejad went to Qom and gave a rather bombastic economic speech even in comparison to his usual standards. The contours of his speech were not that different from the one he gave last week in Mashad but the details were both interesting and revealing in terms of how he sees himself vis-à-vis what he considers to be the powerful and corrupt entrenched interests or forces in the Islamic republic that prevent him from doing his job and fulfilling his campaign promise of pursuing economic justice. His demeanor was strident as usual; added was the element of exasperation.

Like his Mashad speech, Ahmadinejad highlighted his hard work and success against foreign powers who have tried hard to import a “70 percent inflation” rate into Iran. It was his administration’s efforts, he said again, that presumably limited the damage to only 20 percent (more than 8 percent above what it was when Khatami left office)! He also lambasted the powerful domestic mafia and powerful political forces that have joined the foreign powers in stunting his economic plans. But ironically the detailed explanation of where these powerful forces are located ended up revealing his belief that these sinister economic forces are also operating within his own administration.

As usual, of course, he refused to name names but he identified the roots of economic corruption in the country to be the uncontrolled giving of import licenses and monopolies as though after three years of being in office, he has had nothing to do with these economic policies. “Unfortunately,” he said “these groups are so powerful that they even direct law making authorities towards themselves.” He went on to state:

“I have to apologize to you since the truth is that it was our belief that once the problem became recognized, and order was given to the Central Bank and the Ministry of [Finance and] Economy, they would take steps to solve the problem. Unfortunately they did not perform their duty and the situation continued in the same form and on the other hand some organizations did not perform their main responsibility and could not fight against that mafia-like body…. Unfortunately some individuals said in their meetings that that we will defeat him. No matter how much he [Ahmadinejad]works and tries, we have two places in our control. One is Petroleum [Ministry] and the other are banks…. I announce right here to the people of Iran that I am your humble servant who is standing by his words and in the fight against corruption I will not stand back even a bit from my economic positions.”

Come to think of it, this is an astounding argument, essentially saying that the people he appointed himself to run Iran’s economy did not and are not doing what they are supposed to do, which is to carry his orders. This is presumably why he just sacked one of the folks who was not carrying his order: the finance and economic minister, Davoud Danesh-jafari.

It is important to understand the backdrop to this argument. Like in many other countries, these are turbulent economic times in Iran. There is no doubt that inflation rate has picked up substantially, officially inching above 20 percent and unofficially, particularly in the housing market, well above that percentage. Inflation is obviously harming the poor and the middle class more than those with abundant assets. Economists had warned Ahmadinejad about the inflationary impact of his expansionist economic policies since he embarked upon them. At this point, Ahmadinejad’s options are to acknowledge his mistaken policies and begin a re-direction (which the Iranian economist say will take a couple of years – well beyond the 2009 presidential election – to begin to have an impact) or look for sources of the problem elsewhere.

The desire and urge for confronting mafias and powerful economic interests has been part of the Iranian political dynamics and discourse since the 1979 revolution. In fact, last week, Hossein Shariatmadari, the editor of conservative Kayhan, wrote an editorial essentially acknowledging runaway inflation in the housing market and food prices and also acknowledging that they hurt the poor and not the rich. He, however, said that this inflationary trend cannot really be blamed on policies of a government that is clearly dedicated to combating inflation. The problem, he also said, must be found in the control of various sectors of the Iranian economy by economic mafias and the rich.

All in all, it was a scary editorial, hinting at the possibility of attacks against “those who are causing inflation” Incidentally, it sounded very much like the promotion of anti-profiteering campaign pursued by the Shah immediately before he fell in 1979, which blamed individual entrepreneurs for inflationary policies and expansion of money supply because of the uncontrolled infusion of oil money into the Iranian economy.

Shariatmadari’s editorial immediately elicited a response from a conservative member of the parliament (a cleric to boot) who reminded Shariatmadari that all the inflationary consequences of Ahmadinejad’s 2006 and 2007 budgets were predicted; hence, he pointed out, the conversation should revolve around correction of wrong headed policies and not scapegoating.

And here lies Ahmadinejad's problem in convincing the Iranian elite in Qom or elsewhere that the best policy is to go after the economically powerful and the rich. To boot, of course, is the reality that the Iranian establishment does not have much reason to support a president who, at least rhetorically, wants to attack their economic interests.

These disagreements essentially leave Ahmadinejad with policy confusion and not much beyond fiery speeches attacking members of his own conservative administration, and also attacking the conservative-controlled judicial system, and government-controlled banks for not following his orders or bringing charges against corrupt individuals, and preventing his pursuit of economic reform and justice.

This predicament was perhaps why Ahmadinejad ended up canceling the major economic speech he was supposed to give on the Iranian television, reportedly to announce a plan for the monetization of more targeted subsidies. Conflicts within his own administration over how to deal with runaway subsidies and what to do with the interest rate (raise it by indexing it to inflation or not) prevented the announcement of his new economic plans, at least for now.

At this point, it is perhaps worth remembering that by the last year of his first presidential term, Mohammad Khatami was also bemoaning his lack of power against the systemic forces that were stunting his agenda of political reform. But at least he was not complaining about his own cabinet or his own political wing – the reformers -not doing what he tells them to do.

In order to not take responsibility for the inflationary pressures that are causing havoc in the Iranian economy and harming the poor, in Qom, Ahmadinejad had to confess his lack of power even in relation to members of his own administration.


Anonymous said...

Please further explain this important article; I cannot make sense of the problems with the Iranian economy from this writing.

Why the inflation? Where are the gains from the oil price increases? Who is sharing in the oil gains?

Please continue. This article is important but not at all comprehensible on the economics.

Anonymous said...

All sorts of developing countries are thriving, from China to Venezuela. Why not Iran? What is happening to the oil revenue?

I cannot understand this article though I know it is important, and I am a professor of history.

Please sort out the economics for us.

Mark Pyruz said...

If the US-Iran Cold War were to end and Iran's economic management were to improve, its economy would take off like a rocket ship.

I must admit, from this vantage point, that is asking for a lot. But the potential is definitely there, and its been there for a long time.

Mark Pyruz said...

I, too, have a question, Farideh. Why is it this essay doesn't mention Rasfanjani by name? Correct me if I'm wrong but I assume Rasfanjani and his like personify "the system" according to Ahmadinejad in his speech at Qom.

Just wondering.

Farideh Farhi said...

Iranian economy is heavily dependent on revenues from oil exports. Hence, given the rising oil prices, the general numbers regarding the Iranian economy have actually been quite decent.

Iranian economy has been growing steadily around 4 or 5 percent annually. But these numbers are not sufficient enough to accomodate the large number of young people who are joining the work force. Hence Iran has been suffering from high unemployment (officially between 10 and 11percent now) and underemployment. No doubt, as Mark points out, the problem has been exacerbated and Iran has been held back by the economic sanctions an that have been going on one way or another for almost 20 years.

Also problematic has been the very large amount of subsidies the government has been giving for energy and some basic foodstuff (e.g., flour and sugar). During the Khatami administration fiscal discipline brought deficits down somewhat and an oil fund was created to be used for investment purposes. Ahmadinejad's administration came into office by making the argument, I think rightly, that these austerity measures had worsened income distribution and harmed the poor. His campaign promise was one of putting the oil money on people's tables and indeed has pursued policies that accoridng to critics have been consumption rather than investment oriented. He was warned, repeatedly, that these poliies (lowering the interest rate, easing imports, raiding the oil fund for consumption purposes)would cause an inordinate increase in the money supply and lead to runaway inflation.

The problem for him is that, given the high oil revenues and Iran's continued economic growth, the policies he has pursued actually have ended up helping the rich who are benefitting handsomely from speculation in the housing and property market as well as importation of goods. Inflation does not impact them because their income has been going up more than inflation. Needless to say that this has not been the case for the middle class and the poor who presumably supported Ahmadinejad's candidacy because of his promotion of economic justice.

Ahmadinejad's argument is that this is not his fault but the fault of those, including his own economic minister and head of Central Bank (at least the previous one), who in Ahmadinejad's rendering have been in cahoots with Iran's powerful economic players in various sectors (called with names like the sugar mafia or cement mafia and so on).

My point was that this is amazing admission of ineffectiveness for an administration that has been in power for three years.

As to Mark's question of why he does not name names (particulalry Hashemi Rafsanjani, Iran's former president who in Iran's popular culture is seen as an epitome of official corruption), the simple answer is that I really don't know. Perhaps it is because naming names is not a custom in Iran's political discourse which mostly works through hinsts. Even in newspapers and blogs names are not given and when references are made, it is only through the use of initials.

But the likelihood is that even Ahmadinejad knows that Hashemi Rafsanjani, with all the presumed economic clout he has, cannot be in charge of all the mafias -sugar, cement, housing, tobacco and so on - named by Ahmadinejad.

Anonymous said...

Two points to add to the previous (very informative) post are

1) Iran is a exporter of unrefined oil but a importer of refined. This lowers the oil revenues from their natural resource significantly and the population is at the behest of foreign refineries. Its a strange dynamic but one that is very negative for the country

2) Iran's president went overboard with public works programs, which along with increased subsidies (refined oil being one of the most important) creates inflationary pressure

One area where there I disagree with the posts is the assertion that real estate has uniformly moved up. During certain periods in the last few years housing has not only failed to keep pace with inflation but actually *declined*

What that means is that there were points in time when the inflation and economic problems were so bad the 'flight to safety' tactic of going to real estate to counter the problem was not seen as viable. On the whole real estate has boomed in counter to inflation but underneath the surface, there are very troubling signs.

To use a extreme example to illustrate this, Mugabe's inflationary practices in Zimbabwe , where the currency is going to hell should be creating billion dollar homes but thats not the case at all.

masoud said...

Hi Farideh,

Thanks for the informative article. I notice that attempt to approach Ahmadinejad's claims from a neutral point of view, but don't Ahmadinejad's claims have more credence then the general tone of the article sometimes implies? Ahmadinejad has been in cosntant conflict with his minister's of oil, finance, and interior, replacing them every couple of months, and in fact wasn't able to have a full cabinet ratified until some three months into his term in office. There was also a tremendous amount of fear mongering and demonisation of both Ahmadinejad personally and, in a self fulfilling prophecy, the prospects for business in Iran to the rest of the world in what seemed to be a bid to crush a political rival by some of his rivals in Iran's political landscape. This process was well underway before Ahmadinejad had even assumed office. Besides reports of mob like elements in the Iraninan economy are hardly new or controversial, i don't think any serious person would dispute them.
About the inflationary pressure's on Iran's economy; is there anyway to spend Iran's oil revenue without being accused of indiscretion in this regard?


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