Islamic Republic of Iran in an Age of Global Transitions: Challenges for a Theocratic Iran

April 2019
Abbas Milani
Roya Pakzad
Governance in an Emerging New World, Spring Series, Issue 519

For the last 150 years, Iran, like most countries in the industrializing world, has experienced the tumults of two epochal global revolutions—the industrial revolution that changed the nature of labor and now the advent of the “second Machine Age,”2 which is changing the nature of not just labor, but life and leisure, knowledge and information. In the same period, Iran has gone through the travails of two domestic revolutions—the first in 1905-07 when the country’s elite tried to introduce democracy and modernity  to the country, and the second in 1979 when a democratic mass movement overthrew the monarchy but eventually begot the rise of a theocratic despotism keen on dismantling as much of modernity as possible.

In the span of these tumultuous years, Iran as a nation has also experienced the three biggest mass migrations in its 3,000-year history. More than two thirds of the population moved from their traditional feudal villages to increasingly mercantile cities; women gradually moved from the inner confines of their homes—the andarun—to the public domain; and finally about five to seven million Iranians migrated to virtually every corner of the world, creating, for the first time, a powerful diaspora.

The compressed coil of these historic dislocations is being released in the last few decades, at the time of the “second Machine Age.” The tempo of change has been expedited and the scope of transformations expanded to include every facet of life. The fact that in the last three decades, Iran has undertaken a controversial nuclear program that has squandered tens of billions of dollars on the program, and cost arguably several hundred billions in lost economic opportunities, has only added new layers of complexity and urgency to the situation.3 Even in the best of times, and with the most competent leadership, the challenges would have been nothing short of Herculean.

But these are far from the best of times in Iran. A septuagenarian male elite—more specifically about 2,330 individuals, virtually all men4—have occupied every major political position of authority in the country. The country, as we will see, now faces a serious economic, political, cultural, and environmental crisis—everything from shrinking revenues from oil and gas to a financial crisis and a crisis of legitimacy for the government. Yet, the most powerful of the ruling male elite, Mr. Ali Khamenei, the “Supreme Leader” for more than three decades, dismisses all talk of the impending socio-economic crisis and inevitable transitions as parts of a propaganda war, a “Cultural NATO,” masterminded by the “Great Satan” and “Zionism.” The only solutions he accepts come under the rubric of what he calls “Resistance Economy,” an incoherent combination of slogans about “self-reliance” and uses of a “Jihadi style” of leadership. The only transition he openly and repeatedly admits is what he calls a “historic turn” for the rise of Islam around the world. What makes his peculiarities relevant for governance is not just the titular powers that come with his claimed divine legitimacy but the giant sums of money and resources he has direct, unsupervised control over. Reuters estimates that no less than 90 billion dollars are controlled directly by him. Offices under his control, and the IRGC under his nominal command, control a disproportionate share of the Iranian economy, and their greed, no less their corruptions, has no apparent limit.

But facts are surprisingly stubborn. They defy the dictates of the most self-assured despots, or the prayers of the most pious (and certainly their “Jihadi” management style). Today, after four decades of Jihadi management in the country—broken only briefly by occasional bouts of technocratic ascent—signs of stress in all sectors of the economy are multiplying. Double digit unemployment and inflation have been chronic facts of life for almost forty consecutive years.5 A water crisis is causing large and irreversible damage to the environment and gradually turning into a major risk for the food security of more than 80 million people. Floods of unprecedented ferocity in late March and early April 2019 caused havoc on cities and villages, made worse to no small measure by mismanagement, badly constructed or selected dams, deforestation, and reckless building on riverbeds and in flood-zones, particularly by the IRGC and its affiliates. There is no evidence yet that the deluge will in any way alleviate the historic water shortages that had come about. What is more likely is that in the months ahead, the role of these institutions in worsening the consequences of the flood, or their failure in taking preemptive measures is likely to become a thorny political issue for the regime. One plan to limit the water crisis by limiting economically unsound farming and replacing it with import of food stuff estimates that the cost will hover around 25 billion dollars per year—or about half of Iran’s entire oil revenues, before the sanctions.6 Crude oil exports have of course plunged due to new sanctions implemented since late 2018. The use of AI technology has made the enforcement of these sanctions far more efficient.7 Even if sanctions end, the future of oil prices, and Iran’s share of the market hardly offer a rosy picture. Shortsighted in every facet, the regime, which heavily subsidizes the price of gas, has made it economically unprofitable to invest in solar energy—in spite of Iran’s enormous natural possibilities in this domain.8

Financial markets are going through bouts of instability that are historically unprecedented and can potentially cause major economic contraction. In its most recent report, the IMF already predicts that the Iranian economy will shrink by about six percent in the next year (having experienced more than three percent contraction over the last year).9 Banks are all saddled with enormous amounts of non-performing loans. Offering interest rates of up to 30 percent, the banking system has essentially turned into a country-wide Ponzi scheme with a growing imbalance in their balance sheets.10 The government taking over four semi-private, IRGC-dominated, virtually bankrupt banks simply transfers the burdens to the taxpayers, forestalls a more general breakdown, and offers tactical solutions to strategic problems.

Aside from the problem of major banks, there are at least 7,000 small “Islamic financial institutions” posing yet another looming burden on future budgets and the country’s financial stability. Their rapid growth in forty years, from 200 in 1979 to 7,000 in 2016, and the fact that of these at least 2,500 are directly linked to an entity called Institute of Islamic Economy, and finally the connection of most such institutions to some religious, military, or paramilitary organizations has made any real supervision over their work impossible. In a move reminiscent of changed regulations that allowed savings and loans associations in America to engage in normal banking activities, these Islamic financial institutions, often begun as micro-credit units, forced a change in the law in Iran and began to behave as full-fledged but unsupervised banks. Their corrupt and irresponsible management has brought a majority of them to the brink of bankruptcy.11

Another major challenge facing the economy is the dire financial standing of pension funds that are at the verge of becoming insolvent despite what has been a favorable ratio of those of working age to those over 65. The Ahmadinejad years, particularly the bizarre stewardship of Said Mortazavi—one of the most brutal interrogators in the sordid history of the Islamic Republic—over the biggest of these funds, and a pattern of plunder and bad loans have made these funds a ticking bomb. The pension crisis not only threatens the economic well-being, even survival, of the society’s most vulnerable but also has negative consequences for the availability and health of capital markets urgently needed for economic development.

Since the inception of the Islamic Republic, the government of Iran has responded to these challenges with short-sighted, populist, and unsustainable policies that offered tactical remedies but never addressed the underlying problems. The moment of reckoning is near. The inevitable departure of the economy from its current disequilibrium to a new position that is better aligned with the fundamentals will be associated with either a major structural change12 or at least a devastating austerity—an austerity that the regime, given its obvious unpopularity, can ill afford or enforce. All factors indicated a fraught path forward for the existing model of semi-competitive, clerical despotism that claims legitimacy and authority not from the people but from Allah. A more detailed look into some of these factors can better show the complicated nature of the challenge.