Prague, 25 March 1998 (RFE/RL) -- Iran's President Mohammad Khatami has told his countrymen they must tighten their belts as the country's economic problems grow under the impact of collapsing world oil prices.
In a nationally-reported speech this month (March 15) Khatami described Iran's economy as "sick -- whether in production, distribution or regulation". He also noted the high inflation -- about 23 percent annually -- and joblessness -- officially some 9.5 percent -- among the fast-growing population. And he said the country must get used to spending less hard currency. Iran earns nearly all its foreign currency from oil, and the downward oil price spiral spells extra hardship for a population already suffering declining living standards.
Khatami, who has the support in particular of young Iranians, came to power last year promising greater prosperity and freedoms. He could not have foreseen the collapse in oil prices, but even without that, fulfilling his task would seem supremely difficult.
Not only does he face all the usual difficulties inherent in reviving a moribund economy long starved of foreign investment. He faces much more than that, namely the riddle of how to combine modern economic efficiency with Iran's brand of Islamic fundamentalism.
Analysts say there is no real model for successful economic development under such a fundamentalist-oriented system. If there was such a model, one might expect Iran itself to provide it. A country of rich cultural heritage, highly educated population, and adequate natural resources, it has been governed under strict Islamic principles since the 1979 revolution.
The point at issue is not to question the right of an individual or a community to live by their religious beliefs, the question is whether a people can introduce economic reforms within a system which ignores principles of economic logic as known today.
The recent crisis in Asia offers some interesting pointers on this issue. For years the high-growth economies of South-East Asia appeared to have symbolized an economic success story. Investment money arrived in endless streams from around the world, and Asians proceeded to prosper on the fruits of their own efforts. But what no-one cared to notice was that much of the prosperity was built on opaque practices, insider deals and influence peddling. The yardsticks of sound business practice, particularly transparency of transactions, were absent and this contributed eventually to the crash.
The lesson from this is not that the so-called "Asian values," such as hard work, thrift and obedience, were wrong, but that broader economic realities intervened to bring down a system built on the wrong economic methodology.
Hanno Sonntag, as senior analyst with the Deutsche Morgan Grenfell investment advisers, points to numerous instances where Iran's Islamist orientation is interfering with good economics.
One is the system of Bonyads, the Islamic foundations which, under the influence of the clerics, bring together much of the country's non-oil related enterprises. These enterprises and other properties were confiscated after the Shah and his supporters fled the revolution. Sonntag calls them wasted assets, in that they are generally considered to be run on highly inefficient lines by powerful vested interests, although little data on them is ever released. The government subsidies which go to these combines are never included in the published state budget. Khatami has made some moves against the bonyads, but no quick progress in reform can be expected.
In banking too, strict Islamic rules are followed, including a ban on interest-bearing loans. The refusal to collect interest does not constitute any inefficiency, in so far as Islamic banks using this practice in other countries are flourishing. But in Iran extremely tight rules on credit, along with full state control of banks, add up to grossly inefficient investment decisions.
This is compounded by problems of a multiple exchange rate system which makes trade very difficult. Add to this strict interpretations of law which run contrary to proper international business codes. For instance it is extremely difficult to re-possess assets, and where big investments are under consideration, that weights heavily.
Islamic law has also complicated the issuing of treasury bills, interest-bearing instruments which are very useful to governments in financing budget deficits.
Compare all this with the situation in Egypt, a country firmly within the sphere of Islam but which has adopted secular market principles in recent years, under a program endorsed by the International Monetary Fund (IMF). From an initial situation of zero growth, a bad fiscal balance, high inflation and falling currency values, Egypt today has sturdy real growth of 5 percent per year, and low annual inflation of about 4 percent. Other Islamic countries which have largely separated economic factors from ideology, such as Jordan, Morocco and Tunisia, are also doing well. The message therefore appears to be: if you have a system which does not deliver benefit to the people, make adjustments within that system.