by: Zuhair Ahmed
Iran for years has been plagued by poor infrastructure, high levels of unemployment, and excessive government interference. It has been the site of two paramount revolutions since the end of World War II, the latter which terminated all diplomatic relations with the United States. Soon after Iran would face an even greater hurdle with the advent of the brutal eight year long war with Iraq which left over a million dead and countless more injured. Yet despite all this, Iran has emerged over the past couple of years has a regional power in the Middle East and an increasingly vital player on the world’s stage.
In the past few decades, Iran has accumulated vast amounts of energy wealth. Iran has the third largest proven oil reserves in the world behind Saudi Arabia and Canada and comes in second in natural gas reserves, next to only Russia. With all these natural riches, many were baffled when the Iranian government decided to enact a controversial reduction on oil production in the early 1990s. At the time, many felt this to be a great blunder as most of the government budget came directly from petroleum revenues. However Iran’s gambit proved to be successful as the price of crude oil plummeted 40% from 1997-1999 (see graph below). If Iran stepped up oil production in the early 90s like Venezuela and Saudi Arabia did, it would have lost billions. As fate would have had it, the demand for oil soon sky-rocketed pushing prices higher and higher to ever record-breaking levels. Soon enough Iran began to take initiatives to bolster oil exports in 2005. With freshly built oil refineries and pipelines, and more on the way, Iran began to bring in hefty profits. In January of 2008, oil topped the symbolic level of $100 a barrel, nearly a tenfold increase over the past decade. With Iran all geared up for further production, these profits will surely continue to be increasing for some time in the future.
￼ The most striking aspect of Iran’s economic profile however lies in its robust growth in non-energy based industries. Iran's non-oil exports stood at $16.3 billion in the year ending March 20, 2007, a rise of almost 50% from the previous period. Tremendous growth in vehicle manufacturing, mining, agriculture, and in pharmaceuticals has all helped in driving this trend. This move has been also aided by a sharp improvement in the nation’s infrastructure. In recent years large amounts of government spending have helped to lay down millions of miles of roads, construct hundreds of new bridges and tunnels, and have taken serious measures to improve on deteriorating dams, public spaces, and airports. Information and communications technology is another important sector that is doing really well with the number of internet users expanding to 18 million in 2008, more than any other nation in the Middle East. All this production has lead to a dramatic increase in total exports. This has allowed Iran to maintain a large trade surplus with a current account balance of $19 billion (ranked 18th the world and 3rd in the Middle East). This sits in stark contrast to the US’s large trade deficit and current account balance of negative $750 billion (ranked last in the world).
Many speculate that much of this recent growth can be directly attributed to Iran’s rapid increase in the welfare of its people. With the modernization of Iran’s once ailing healthcare industry, Iranians are living longer. According to the United Nations, the average life expectancy at birth has jumped to 70.5 years in Iran, a few years ahead of the world average and good 18 ahead of neighboring Afghanistan. However, the most profound demographic shift Iran has to be its rapid decline in population growth. Soon after Ayatollah Khomeini came to power, Iran had a population growth rate of 3.1%; today it stands 0.663%. To demonstrate further, if Iran continued to grow upwards of 3% a year then it would have easily toppled 100 million inhabitants today. Instead, tax benefits for smaller families coupled with easier and cheaper means of contraceptives and sterilizations have led to a current population of around 70 million. It is important to note that the total number of Iranian citizens has not declined, but the rate of change from year to year has. Its population growth rate has fallen from levels of much of Sub-Saharan Africa to less than many of the industrialized world in span of just 25 years, making it a model for many other nations in the developing world aiming to curb population growth. Developmental economists have stressed a falling population growth rate for years. With fewer children being born each year, a nation can much better manage to nurture, train, and allocate more resources to each new member of their society usually leading to faster GDP growth rates. This rapid decline in population growth has also been cited as a leading factor for the economic spurts of Germany and Japan, and more recently of China and India. This has also lead to a big rise in literacy rates. The literacy rate for adult males increased from 48% in 1970 to 87% today, nearly doubling in 30 years. Female literacy climbed even faster, rising from less than 25% in 1970 to more than 70%.
Unfortunately for Iran, this rapid development in educational standards has occurred so fast that there aren’t enough jobs available. While much less than before, unemployment still remains a big problem in Iran which currently hovers around 11%. Growth in domestic industries has significantly helped to cut joblessness and boost productivity, but this has simply not been enough. As a result, Iran is experiencing what many economists refer to as a “Brain Drain”. This refers to the fact that most of the talent in Iran, the employees who are most likely to get to bring innovation and creativity to the labor force, are working for foreign instead of domestic companies due to higher salaries abroad. Another, and more pressing, concern for investors has been Iran’s high levels of inflation. An overdose of government spending, while helping in many aspects of the economy, has eroded much of the value of the Iranian Rial. While high levels of unemployment can only directly affect those without jobs, high inflation hurts everybody as the nominal value of nations currency devalues overtime. A stable currency is absolutely necessary for long-term economic growth. This problem is further exacerbated by fiscal and monetary policy rarely going hand-in-hand. The Central Bank of of Iran (CBI) has far too much independence from the Iranian Majlis, or parliament, which often leads to the passing of contradictory policies. For instance, whenever the CBI feels that the country needs to lower its money supply it will increase interest rates, but at the same time the Majlis will cut taxes which puts the money right back into the economy.
Politically speaking, the situation in Iran has been mixed over the past several years. This has primarily been attributed to the elections of whom many criticize of being two very hawkish presidents, George W. Bush and Mahmoud Ahmadinejad. Since Bush took office in early 2001, his administration has taken a very hard-line approach to Iran. It has passed and has heavily pressed various international organizations such as the UN and IMF to place numerous sanctions on Iran, as well to its close allies Syria and Venezuela. Bush has openly expressed that one of his primary goals in office is to prevent Iran from developing nuclear weapons at all costs. The Iranian government asserts that its nuclear enrichment program is part of its civilian nuclear energy program only, which is permitted under the Nuclear Non-Proliferation Treaty. However, Iran did break agreements when it decided to enrich uranium in secret after the United Nations Security Council prohibited it from doing so, a motion lead by the United States. Iran stated that it “would not halt its economic and scientific research over such false assertions”. Nonetheless, US scrutiny has been easing off in recent months. Much of the US’s international support for such sanctions have since eroded as a recent report, confirmed by both domestic and foreign intelligence, finds that Iran unilaterally ended its nuclear weapons program back in 2003. Iran has made much progress since then as it plans to commission its first nuclear power plant in the port city of Bushehr later this year. Iran’s own leader, Ahmadinejad has proved just as damaging, if not more, for Iran. Not only has Ahmadinejad taken an equally harsh stance on the United States, but since taking office in 2005 he has interfered excessively in the free market. He has tacked on expensive subsidies to many of Iran’s already “well-connected” farming industry, put up stiff tariffs on many imports, and has refused to cut transfer payments on large oil and natural gas suppliers. All of these factors have lead to sluggish growth in recent quarters and made domestic corporations very inefficient. Iran is starving for foreign direct investment (FDI), but such actions are only going to make it more hard to come by. This populist and overly nationalistic measures have curbed Iran’s GDP growth rate from an average of 6.5% during the reign of Ahmadinejad’s predecessor, Mohammad Khatami, to a current rate of growth of about 4.3%; failing short of the world’s average by a full percentage point.
Thankfully for Iran, and for rest of the world for that matter, Bush’s final term in office is coming to a close, and Ahmadinejad’s unpopularity at home will certainly bring an end to his mischief in the economy. The new American president will, at the very least, will have some kind of talks or negations with the Islamic Republic which help the situation incredibly. Even more so, Iran’s new president will most likely return to push for greater free-trade and privatization that occurred in the first half of this decade that resulted in such vigorous growth. Oddly enough, the new president of both the United States and Iran will both take office in 2009; hence serious change for both countries is just a few short months away. On a similar note, relations between Iran and other big players in the world has also seen recent improvements. Russia and China have protested to many of the new anti-Iranian legislation pending in the UN Security Council feeling that they lacked enough evidence. Even tensions with Iran’s regional rival seem to be cooling, as King Abdullah of Saudi Arabia recently invited the Iranian President to perform the Hajj, or the Muslim pilgrimage to Makkah. This is something which would simply not have been possible even five years prior.
The future of Iran is looking brighter than ever. On top of increasing its credit rating, Goldman Sachs has selected Iran to be part of its “Next Eleven” group of developing nations. These are countries that Goldman Sachs feels have very likely future prospects for growth and high returns on investments. (This “Next Eleven” category was a follow up to and second-tier level of Goldman Sachs popular grouping which it referred to as “BRIC”, composed of Brazil, Russia, India, and China). Thus, Iran awaits the moment to come out of the bushes and emerge as the newest tiger on the world stage. It’s going to be a little shy at first, but with time and a little help, it is sure to thrive in this every changing and ever demanding world of ours.