Thirty-eight prominent Iranian economists — including Dr. Seyyed Morteza Afghah, Hossein Raghfar, Mohsen Renani, Farshad Momeni — have written an open letter to President Hassan Rouhani containing recommendations which they believe could save the country’s economy from complete collapse.
The signatories have described the current state of Iran’s economy as “unproductive, unconducive to growth, and heavily influenced by favoritism and nepotism.”
“Favoritism and nepotism have created a dominant, wealthy segment in our society and shaped Iran’s economy in ways that have been unprecedented in our country’s recent history,” the economists write. “The current atmosphere has led to the emergence of a ruling oligarchy. Inadequate laws and ineffective economic policies have enabled a privileged group to create a private economy. They have misappropriated the country’s energy resources, obtained unsecured loans, enjoyed an unjustified tax-exempt status and monopolized imports.”
The economists argue that the so-called reconstruction initiative to rebuild the country’s infrastructure at the end of the Iran-Iraq War (1980-88) neglected crucial public projects that would have improved people’s lives. They point out that privatization schemes that lacked sound financial foundations triggered massive economic shifts in the country.
The absence of financial institutions to support the marketplace, the development of rent-seeking industries (which aim to increase a person’s share of existing wealth without creating new wealth), the establishment of quasi-public business enterprises (state-owned businesses disguised as private enterprises) and the creation of so-called private banks have been detrimental to Iran’s economy.
The signatories to the letter criticize senior government officials for failing to deliver on their “attractive but misleading and empty promises” of promoting “best workplace practices,” “a competitive business environment” and “an inclusive economy.” They cite exclusionary financial practices as reasons for the government’s failure to develop the country’s economy in the 1980s and the 1990s.
“A select group of influential and well-connected insiders took ownership of the country’s wealth during this period. These are the oligarchs who have monopolized the country’s economy,” the economists write. “This new class of investors has accumulated immense wealth through influence peddling, nepotism, and favoritism. They have carved up a cozy private economy for themselves.”
According to the economists, oligarchs have amassed great wealth and immense power, enabling them to “own the government.” They, therefore, control every aspect of the Iranian economy, including but not limited to setting interest rates and foreign exchange rates. “We have an economy that, instead of creating opportunities and promoting competition in the marketplace, as was promised by the government, is heavily influenced by favoritism and nepotism,” the letter notes.
The letter lists some of the underlying causes for the current dire state of the Iranian economy. It blames the forces in control of the Iranian economy for:
- Derailing the country’s development by moving away from a “production-based economy” towards “rent-seeking industries.”
- Focusing solely on the production of raw material and goods as a way of creating jobs has resulted in slow economic growth and environmental crisis.
- Increasing dependency on the export of raw materials, industrial products, with an emphasis on revenue from natural resources including oil and gas. Reliance on insignificant income from the sale of raw materials.
- The rapid and illogical growth and development of rent-seeking industries including steel, petrochemicals, banking, cars and mining.
- Providing state support for privileged quasi-public business enterprises which have access to vast resources including oil, gas and raw materials. Their preferential treatment with regards to low foreign exchange rates and tax exempt status.
- The weakening and threatening of small businesses. Promoting an unproductive and anti-growth economy which has resulted in high unemployment, lowering of the standard of living, increased poverty, widening of class division and social and economic inequality.
- A five-fold increase in the import of low-quality goods from Asian countries in the 1990’s which have dominated the domestic market ever since.
- A lack of productivity, rampant corruption, and chronic influence peddling.
- An alliance between government bureaucrats, the Majlis (Iranian Parliament) and quasi-public business enterprises, which promotes corruption among the three branches of the government, including political and economic lobbies.
- The revolving-door phenomenon which has enabled the government in the past 30 years to move officials from the executive branch to the legislative branch and vice versa.
- Using political clout to create and manage quasi-public business enterprises for personal gains – an economy heavily influenced by favoritism and nepotism and marred by widespread corruption.
- Lack of financial transparency in quasi-public business enterprises, and absence of supervision over the distribution of profits among the subsidiaries of these businesses (daughter companies, limited liability companies, corporations and state-owned enterprises).
- Quasi-public businesses enjoying the same preferential treatments as state-owned companies. They operate without supervision, transparency or accountability. These are lucrative enterprises for the insiders, government officials, and their friends.
- The diminished capacity of the state and the government, which has given birth to a powerful shadow government with broad influence (a government within a government.)
- The increasing involvement of military organs and institutions in private businesses – with unprecedented access to unlimited resources – makes it next to impossible for real private firms to compete in the marketplace.
- The official privatization act designed to reduce government monopoly and to promote competition, which has, instead, allowed a select group of people to amass wealth. It has created a private economy that has only benefited the quasi-public business enterprises.
- Recycling government administrators in quasi-public business enterprises, and failing to improve efficiency and implement best workplace practices in state institutions.
- Initiating additional developmental projects, particularly those that have been harmful to the environment — including but not limited to constructing dams. These projects have only benefited those with influential connections.
- Manipulation of the foreign exchange rates by the quasi-public business enterprises aimed at controlling the country’s economy.
- Deriving more than 90 percent of Iran’s foreign exchange reserves from the sale of oil, gas and mineral products. The revenue from the sale of these products must go into the public finances and the treasury and not into the pockets of privileged individuals and groups.
- The creation of rent-seeking investments which include the manipulation of real estate and money markets. The measures, in turn, will make it easy to demand exorbitant housing prices and banking fees.
- Using the investment market (security stocks and bonds) to attract investors from the public and private sectors, and funneling that money into quasi-public institutions (more than 80 percent of the investment market belongs to the quasi-public institution stocks including petrochemical, steel, banking, mining and automotive.)
- Allowing semi-private banks to offer as much as 760 percent in interest on long-term certificates of deposit (CD). State-owned banks provided around 570 percent between 2009 and 2018.
- Allowing banks to reduce their financial services and support to agriculture and industries from 50 percent in 2004 to 27 percent in 2016. They instead invested in unproductive areas which have been mired in questionable practices by the banks and quasi-public businesses.
- The creation by semi-public banks of a massive cash-debt that has resulted in a sharp drop in the volume of the certificate of deposits from 17 to 11 percent. The figure drops to 5 percent after the banks pay off their debts to the Islamic Republic Central Bank. Also, a more significant share of the certificate of deposits for the quasi-public banks, from 19 to 70 percent, between 2007-2017.
- Banks continually raising their interest rates for the benefit of quasi-public businesses and to the detriment of the public and the private sector.
- Semi-public businesses obtaining tax-exempt status to expedite the import of raw material at a lower cost but selling them at inflated prices to domestic manufacturers who also have to pay a higher rate of value-added tax, as the result retailers pay 15 to 30 percent more for local goods than imports.
- The mushrooming of banks and financial institutions, which has created an unproductive cash economy. The government has handed over the ownership of the country’s resources to quasi-public business enterprises by commercializing public services including education, health care, housing, public transport, and energy. High unemployment and low wages are some of the other consequences of the unproductive cash economy.
- Quasi-public business enterprises using the “private sector and commerce” as a tool to promote rent-seeker industries, take advantage of unequal distribution of business opportunities and to eliminate the real private sector.
It is clear that the Iranian economy is facing a complex and multilayered crisis. The signatories believe that only a long-term comprehensive and workable plan can rescue the country’s nearly collapsing economy. In their letter, the 38 economists recommend the following steps which, in their opinion, would create a productive economy:
- Limiting quasi-public businesses’ monopoly and rent-seeking practices, mainly in the energy and mining sectors. Devising a viable plan for creating jobs and a fair distribution of resources.
- Providing an alternative to the current economic governing system, which is not capable of solving the country’s problem. The state must create a new apolitical and independent body to plan and implement constructive and workable policies.
- Fighting widespread corruption and limiting or completely eradicating rent-seeking enterprises. Implementing a policy of transparency in foreign exchange reserves and revenues and expenditure of the public funds.
- Drafting a comprehensive, coherent and workable plan, and appointing knowledgeable and expert managers who will put the country back on the path of progress and economic growth.
- Making a clear division between the government managers and those running quasi-public business enterprises. Criminalizing the transfer of government managers to quasi-public businesses – before and after retirement.
- Placing the relationship between government managers and Majlis deputies under greater scrutiny. Monitoring services rendered by the government agencies and managers to the Majlis deputies.
- Reforming the country’s tax system. Imposing a tax on real estate, certificates of deposit and cash businesses. Cutting taxes for small businesses to encourage hiring, and canceling tax-exempt status for the exporters of raw material.
- Holding the government accountable for every decision regarding the foreign exchange rates and revenue reserves. The Majlis must be involved in the decision-making process for allocating foreign exchange reserves.
- All major banks that are not on the brink of bankruptcy should merge into one or two banks. The measure is aimed at restricting the activities of the institutions that have so far operated unsupervised and with impunity. The government must decide on the merger or the transfer of the ownership of the smaller banks or those that are on the verge of going bankrupt in a timely fashion.
- All public funds must be held in government-owned bank accounts, and should not accumulate interests.
- Limiting the allocation and expenditure of the foreign reserves to essentials including food, medicine, and domestic manufacturing. These activities should not financially benefit any individual, group or institution.
- Drafting a formal foreign exchange agreement with exporting firms which have traditionally benefited from public funds. The Central Bank should process all foreign currency exports.
- Before implementing any of the recommendations listed above, an expert study of the January foreign currency market must be carried out. Any hasty action would have dire consequences under the current circumstances.
- The government must focus all of its efforts to control the price of goods and the foreign exchange rates. Only then, it could stabilize the economy and restore public confidence.
- All military institutions should refrain from economic activities.
- The Majlis should approve the country’s defense expenditure which should come out of the taxes paid into the treasury funds.
- One of the contributing factors to the current economic crisis relates to the importers of foreign goods, which have had a direct impact on domestic production and employment. The government must rethink its import policies.
- A comprehensive review of trade practices aimed at decreasing and increasing the cost for productive and unproductive sectors, respectively.
- Comprehensive and workable housing projects aimed at providing housing for the working class and the poor which would also curb all land-grab schemes.
- Although the issues highlighted here have played a key role in destabilizing the country’s economy, ultimately the discord among senior officials, the lack of a coherent foreign policy and the loss of public confidence in the governing system have caused the crisis in recent weeks. To reduce tension and focus instead on the challenges at hand, politicians who are not in charge of the decision-making process must refrain from fuelling discord. The government must practice a transparent, logical, constructive and workable foreign policy.
Signatories: Abdolmajid Ahangari, Seyyed Morteza Afghah, Hossein Raghfar, Mohsen Renani, Farshad Momeni, Naser Elahi, Amrollah Amini, Kamal Athari, Seyyed Mohammad Bahrinian, Ali Asghar Banouie, Sajjad Barkhordai, Jahan Mirpishbeen, Hatef Hazeri, Gholamhossein Hassantash, Hamidreza Hari, Mahmoud Khataei, Morad Rahdari, Mohsen Riyazi, Saeed Rasekhi, Shahriar Zarouki, Ehsan Soltani, Bahram Sahabi, Abbas Shakeri, Valiollah Shahbazkhani, Hassan Taei, Farhad Alinejad Mehrabani, Jamal Fathollahi, Rasoul Ghasemi, Seyyed Ziaoddin Kia-Alhosseini, Kamran Kasraei, Seyyed Mohammad Hassan Mostafavi, Mir-Hossein Mousavi, Saeed Nayeb, Seyyed Mohammad Bagher Najafi, Alireza Naseri, Mohammad Lashgari, Mohammad Reza Yousefi and Seyyed Ahmad Yazdanpanah.
[Translated from Persian by Fardine Hamidi]