Governance Deadlock and Economic Crisis in Iran

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"Iran is currently undergoing its deepest economic, governance, health, environmental, and social crises since the inception of the Islamic Republic in 1979. After more than four decades of the regime’s mismanagement, over half of the country’s 85 million people live in poverty, net capital formation—which has undergone a secular decline for two decades—is now in negative territory, groundwater resources have been largely depleted (which in turn increases the risk of hunger and internal conflicts among different regions), the massive wealth embedded in hydrocarbon and mineral resources has been exhausted without being replaced by enduring financial or physical assets, two-thirds of the working age population are unemployed or are out of the workforce, about half of the population window of opportunities has passed with no savings made to support the largest cohorts of population that will reach retirement in the coming decades, political and administrative corruption is among the highest in the world, and the large flux of brain drain and capital flight is depriving the country of the elements sine qua non for future growth [1–4].

Over the past hundred years, the Iranian economy has undergone three periods of sustained growth: 1926–1941, 1954–1977, and 1989–2011. While the first two periods of growth came to abrupt ends due to major political events,* termination of the last period of growth was a gradual process caused by the Islamic Republic’s dysfunctional institutions and political decay. The main mechanisms through which shortcomings in the regime’s political institutions have adversely affected the economy include the lack of meaningful elections to hold the state accountable and allow for purging of corrupt and incompetent officials, the lack of a strong institution of the rule of law to enforce contracts and control corruption, dominance of the bonyads and IRGC enterprises, unmeritocratic recruitment and promotion in the bureaucracy, and a self-imposed international isolation which has deprived the country of new technology and foreign capital.

Today, the real GDP per capita (Figure 1) hovers around the same level that it was two decades earlier—a level which is significantly lower than its historical peak registered half a century ago just before the revolution. In terms of income distribution, a recent study found that the top 10% of the population earned about half of the total income, while the share of income going to the next 40% of the population (the economic middle class) and the bottom 50% were about 35% and 15%, respectively [5]. Ironically, the Islamic Republic regime—after four decades of claiming to be for the oppressed ( نافعضتسم ( and demonizing capitalism—has managed to create an economy in which income inequality is almost exactly similar to that of the United States, which has always served as a symbol for the viciousness of the oppressors in the regime’s propaganda.

Figure 2 shows long-term trends in real minimum wages in Iran (which can be seen as a proxy for trends in the living conditions of the lower economic class). In 2020, the minimum wage of Iranian workers was about $2 per day, implying that millions of families currently live with a per capita income of less than a dollar per day—a level which is about half the commonly used $2/d threshold for abject poverty. While wages in Iran was comparable to, or even higher than, wages in countries like Turkey and China in the past, it is now substantially lower than them. Even more striking is that today’s real wage for unskilled labor is comparable to its level back in the 1960s.

The drastic slump in real income depicts only half the story of the dire situation for the lower and middle classes. Today, only one-third of the working age population is employed (two-thirds are unemployed or not in the job market). Iran’s low economic participation rate of 45% [1] (which puts Iran among the bottom 5% of countries in the world [8]) and its double-digit unemployment rates have been the defining features of Iran’s labor market in recent decades.

Table 1 provides an overview of important economic indicators in recent years along with their predictions for the next year under different scenarios with regard to sanctions and fiscal policy. Since 2018, according to official statistics, the economy of Iran has contracted by a total of more than 10% (~13% on a per-capita basis), the fiscal deficit rose to 8–10% of the GDP (which is on par with the Soviet Union’s average fiscal deficit during 1985–1991 [9]), and annual inflation soared to 40–50%. While these statistics already depict a dire picture, there is every reason to believe that they are manipulated and reality is much worse (consider the regime’s notorious underreporting of COVID-19 cases and deaths). As a result of Iran’s nuclear program—which never had economic justification given Iran’s enormous natural gas reserves—the country has lost over $200 billion directly from the shrinkage of its oil revenues so far. Needless to say, this staggering amount of money has mainly gone into the pockets of other major crude oil producers such as the United States, Saudi Arabia, and Russia. Due to the combined effects of sanctions and increased capital flight, the balance of payments (hence net changes in the stock of foreign reserves) has become negative in recent years. With the current sanctions in place and the government’s inevitable expansionary monetary policy (and fiscal policy if the new and inexperienced administration embarks on its announced industry stimulation agenda), hyperinflation will be a plausible scenario in the coming years. Besides structural root causes, some of the crises facing Iran are almost solely attributable to the decisions made at the personal level by the regime’s high officials (e.g., Khamenei’s decree banning American and British COVID-19 vaccines which caused from tens of thousands to hundreds of thousands more deaths so far).

Recent developments indicate that, a quarter century after the idea of gradual reforms within the regime’s existing political framework first became popular by Khatami and his circle, a large and increasing share of society now sees the notion of progress under the reformist agenda as a fool’s paradise. Meanwhile, the diminishing legitimacy of the regime prevents it from implementing even the most obvious reforms such as fuel prices (which are near record low levels, Figure 3) as they are deemed too risky for the political stability of the regime. Under this governance deadlock, while the continuation of business-as-usual will certainly beget catastrophe, the fate of the nation is not predetermined and it is possible that the current crisis will unite large segments of society to take collective action to bring about a positive paradigm shift by complete transformation of political institutions. Decades of the Islamic Republic’s poor governance, irresponsible international behavior, and internal conflicts in economic policy have resulted in an unworkable economy and a development logjam which is impossible to fix without a fundamental transformation of the underlying political institutions."

*Anglo-Soviet invasion of Iran and abdication of Reza Shah, and the 1979 revolution in the first and second episodes, respectively.

References

1. Statistical Yearbooks (1966−2019), Statistical Center of Iran.

2. Economic Time Series Database, The Central Bank of Iran.

3. P. Azadi, The Structure of Corruption in Iran, Stanford Iran 2040 Project, Stanford University, August 2020.

4. P. Azadi, M. Mirramezani, M. B. Mesgaran, Migration and Brain Drain from Iran, Working Paper 9, Stanford Iran 2040 Project, Stanford University, April 2020.

5. F. Alvaredo, L. Assouad, T. Piketty, Measuring Inequality in the Middle East 1990–2016: The World’s Most Unequal Region? World Inequality Lab, 2018.

6. Statistics and Datasets, International Labor Organization.

7. Collected from several newspapers and news websites.

8. Labor Force Participation Rate in 2019, World Bank Data.

9. C. Miller, The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR, U. N. Carol., 2016.