Khatami and His "Reformist" Economic (Non-)Agenda

by Sohrab Behdad | published May 21, 2001

Mohammad Khatami is widely expected to be the winner in Iran's June 8 presidential election. He will, most probably, serve a second term, despite his own reluctance to enter the race, and the disappointment of those who gave him his surprise landslide victory in the tight contest of 1997. Khatami's platform in 1997 called for cultural and social liberalization and building civil society in Iran, projects that have provoked a strong conservative backlash. In the 1997 campaign, Khatami said little about the economic crisis that has plagued Iran in the post-revolutionary years, and said nothing about the failed economic liberalization program of his predecessor, former President Ali Hashemi-Rafsanjani. Analysts suspected that he had no appreciation of the intricacies of Iran's economy, and no economic agenda. They were correct, but there is more to it. Khatami was caught in the internal contradictions of the coalition that brought him to the presidency.

Alliance of Convenience

Khatami came to power in an alliance with two previously opposed factions of the state in the Islamic Republic of Iran (IRI). His principal allies were the "modern right," a liberal coalition promoting economic liberalism, and the "modern left," the hard-core remainder of the populist-statist tendency, who dominated the IRI in the first decade after the 1979 revolution. These two factions joined forces to defeat the "traditional right" and "traditional left" in the 1997 presidential, municipal and parliamentary elections. The unifying theme of the Second of Khordad Movement—named after Khordad 2, 1376 (May 23, 1997), the date of Khatami's victory—was opposition to the supremacy of clerical rule and its cultural and social traditionalism.

But the factions did not agree on economic policy. Khatami delayed announcing his economic program until the fall of 1998, when he submitted the 1999 budget to the parliament. His statement to parliament was more like a literary essay on social alienation and political empowerment than a budget presentation. But Khatami is not simply an economic ignoramus; he is trapped between the divergent economic views of his allies. His economic program has been an eclectic composition of the views of the two opposing factions.

On the one hand, Khatami stresses that the keys to economic recovery are to mobilize domestic capital and to attract foreign investment. In agreement with free-marketeers, he says that more investment is only possible if the state eliminates its control over the market. On the other hand, to appease his allies on the left and to maintain his mass appeal, Khatami pledges his commitment to social justice and the equitable distribution of income. He put a free-market economist in charge of the Central Bank, and a proponent of state intervention at the helm of the Ministry of the Economy and Finance. The first has joined forces with proponents of privatization to find loopholes in the constitution for nationalizing "50 percent of banking in Iran." Recently, the Central Bank issued permits for formation of private credit companies and for privatization of the Cooperative Bank. In the past few days, there has been talk of privatizing the Workers' Welfare Bank, and the formation of a private Guilds (Asnaf) Bank. The finance minister has collaborated with opponents of economic liberalization to maintain consumer subsidies and price controls. In February, a report noted that in 2000 the government paid out twice as much subsidy as in 1996.

The "Conservative" Opposition

In the early days of Khatami's administration, the opposition took up economic slogans because they expected an intense economic crisis and mass discontent around the corner. The disaster never happened. Ironically, today Khatami is criticized less for the economy than for the failure of his civil society agenda. On May 13, only three weeks prior to the election, every daily paper in Iran gave front page coverage to a glowing report from the World Bank about Iran's declining unemployment rate, inflation and foreign debt. With the reformists' newspapers banned, their editors and columnists banished, the reformist majority in the parliament effectively gagged by decrees of Supreme Leader Ali Khamenei, and conspirators in the chain assassinations of political dissidents not only free but in positions of power, the conservative opposition has little substantive reason to attack Khatami. Besides, there is just as much disagreement about economic policy among "conservatives" as there is among "reformists."

Khatami has occasionally made disparaging comments about the power of monopolies in Iran's economy—many of which are owned or controlled by his conservative opponents—and the prevalence of corruption and rent-seeking activities. Yet he has never dared to be explicit in his criticism, nor has he implemented any policies to undermine the monopolies or to expose corruption and rent-seeking. Meanwhile, some vocal advocates of monopoly busting and an anti-corruption campaign are spending time in prison. The monopolies—which Iranians refer to as a "political-financial mafia"—are virtually the only point of sensitivity between Khatami and his opponents on economic matters.

The "conservatives" are disappointed that the expected economic crisis has not occurred. Khatami has been lucky on two counts. He has benefited from the support of ordinary Iranians, who see no alternative to Khatami in confronting the oppressive rule of the theocratic government. They seem to have tolerated economic hardship in hopes of achieving cultural and political freedom. Perhaps Iranians concur with the stated views of Khatami's strategists that political reform must precede economic reform, even though the Second of Khordad Movement has made little progress toward political reform either. Fortunately for Khatami and his supporters, the economic performance of the previous, conservative-led government was not any better. But more importantly, Khatami has been fortunate that changes in the world oil market have favored Iran.

Oil Price Lottery

It is no secret that oil prices can make or break the Iranian economy. The mid-1980s oil glut forced Ayatollah Khomeini to accept a ceasefire in the long war with Iraq. Rafsanjani's presidency (1989-97) rode on the upswing of the oil market after the 1990-91 Gulf war. Iran's oil revenues rose from $6 billion in 1986 to almost $18 billion in 1990, and averaged about $16 billion in subsequent years. With the state's coffers full, Rafsanjani pursued an economic liberalization policy. By 1995, public reaction compelled him to abandon important aspects of the policy: the floating exchange rate, the elimination of subsidies for consumer staples and the privatization of state-owned enterprises. A high inflation rate and a $30 billion foreign debt are what Iranians remember of Rafsanjani's liberalization effort. Khatami quietly discontinued most aspects of his predecessor's policy.

Early in his presidency, Khatami was holding a losing number in the oil price lottery. By May 1998, when the 1999 budget was presented to the parliament, the projected per-barrel price had been revised downward from $16 to $12. By June 1998, Iranian oil was trading at only $9.50 per barrel, leaving Iran with a projected $4 billion trade deficit. Inflation and unemployment began rising from their already high rates. At this point, the conservatives began raising economic slogans, comparing Khatami's economic performance negatively to Rafsanjani's. But to the conservatives' chagrin, in 1999 oil prices began to rise, topping $16 billion once more. Early estimates indicate that in 2000 they reached $24 billion. The Khatami government can now brag about a substantial surplus and a resulting decline in unemployment and inflation rates.

Zigzagging Toward Liberalization

In his second term, Khatami is expected to continue zigzagging through a very mild economic liberalization policy, pushing no further than the left faction of his alliance and the Iranian population will accept. The other faction of Khatami's alliance will pressure him to reduce state's hold over the market, and he may manage to make some advances in this respect. On May 12, the parliament began the second and final round of debate on the bill for "Attraction and Protection of Foreign Investment." The bill will probably pass with no difficulty. The present bill is less restrictive to foreign capital than the law (with the same title) that passed in 1955, in the aftermath of the coup d'etat. Ironically, in past decades many leaders of the IRI have viewed the 1955 law as the most vivid proof of the Shah's dependence on "satanic powers." Yet the law remained in effect throughout the post-revolutionary years, though it was occasionally ignored in the early years after 1979.

Current sentiment in the IRI is that foreign investment is necessary for getting the economy out of its rut. The need for renovation and expansion of the oil and petrochemical sectors is most pressing. Khatami's supporters drafted the foreign investment bill with the hope that an explicit commitment to protect foreign investment would make Iran more attractive to foreign investors. But according to the World Bank, the 1955 law, with the same general provisions, attracted only $24 million in 1998 and $85 million in 1999—not appreciable amounts. Khatami's victory in June may improve the situation, but only slightly. The uncertain future of the rule of law, and unclear definition of the economic order, are the main obstacles to attracting foreign capital to Iran.

Both foreign and domestic capital are also troubled by the constitutional limitation on the domain of the private sector and by Iran's labor law of 1990. The constitution explicitly places some major economic activities under state ownership. Revising this provision would embarrass the regime, and would open up debate about other controversial aspects of the constitution. Instead, this limitation will probably be circumvented through ad hoc reasoning, as has been the case with the privatization of banking. The labor law is a much more serious matter. Proponents of the private sector have argued for limiting the benefits that the present labor law provides for workers. Last year, amidst controversy, the parliament exempted workshops with five workers or less from the stipulations of the law. Revising this law further could cost Khatami the left faction of his alliance, and would seriously damage his popular image. It is doubtful that Khatami would travel that path.

Hoping for Lucky Numbers

Khatami may soon benefit from the removal of US economic sanctions on Iran. US corporations, particularly major oil companies like Conoco and ExxonMobil, have been campaigning to lift sanctions. In February 2001, executives of these two corporations met with the Iranian foreign minister to discuss the prospects for removing them. Although the US representative in the World Bank voted against extending Iran a $700 million loan at the May 10 meeting of the Bank's board of directors, it was clear that the US was not actively trying to kill Iran's application. The US sent similar signals in May 2000, when the World Bank voted to grant two new loans to Iran for sanitation, health and nutrition.

It is clear that Khatami is not a president for economic reform. His moves on the economy will be cautious and contradictory. He must know by now that the performance of the Iranian economy ultimately depends on the price of petroleum in the international market. Neither he, nor any of his predecessors in the past two decades, have done anything about ending this unhappy state of affairs. As he prepares for near certain victory in June, Khatami can only hope that he is holding more lucky numbers in the oil price lottery.

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