Qioptiq logoTop Engineer Harris

The Crisis in Iran: A Broader Perspective By Anthony H. Cordesman

It is easy to take a strong position on the level of current unrest in Iran, and some of the motives behind it. The fact is, however, that it is far from clear how it will develop, or how much support it really has. Iran scarcely permits the kind of polling that would expose its internal divisions, and many Iranians would be more than cautious if such polling was ever attempted. As a result, many see what they want to see in latest round of unrest, particularly those who want the regime to fall.

It is far from clear, however, that a regime that controls the security forces, the justice system, the media, and much of the economy is all vulnerable. The current uprisings in Iran have so far been relatively limited, although they have been broadly distributed throughout the country, have grown in scope, and have taken place in spite of the major improvement in internal security that has taken place in recent years.

They have not yet come close to the level of protests that overthrew the Shah in 1978 and forced him to leave the country in January 1979, or even to the much smaller protests against an Iranian election, which led to “Green Revolution” in 2009-2010. Iran has steadily improved its internal security and ability to repress its people since 2009, and no one should underestimate the ability and willingness of the Supreme Leader and Islamic Revolutionary Guard to use force against their people.

There are good reason why parts of the Iranian population see Iran’s government as failed and repressive regime, but it is important for those outside Iran to understand that there are no reliable indicators as to how many people oppose the regime, why they oppose it, or how serious their opposition is. It is equally hard to know how many Iranians support the regime, what aspects of it they support, and how many simply “go along to get along.”

The regime has succeeded in steadily limiting its overt political opposition and narrowing the range of candidates that can run for office in what has steadily become more of a façade of democracy—where the difference between candidates is one between more pragmatic supporters of Ayatollah Sayyid Ali Khamenei who focus on Iran’s internal development and stability, and supporters that are his hardline advocates and aligned with Iran’s efforts to expand its regional influence.

The Iranian people are also deeply divided in many ways and have been for much of Iran’s modern history. Iran has long been divided between a more modern and largely urban educated minority and a more religious and conservative mix of rural and urban poor. As the Green Revolution showed, many Iranians want a more liberal, modern, and developing Iran. Many others, however, who have supported Khomeini’s revolution “reforms,” believe in more conservative state, and see the West and Saudi Arabia as a threat.

Iran’s Divided Perceptions of the West and Arab World

It is also important for outsiders to remember that Iranians have reason to distrust the United States, Russia, Europe, and their Arab neighbors. Iran has long had good reason for more than a century to see the West as a source of foreign influcence and control. These attitudes are shaped by far more than simple anger at U.S. support of the Shah.

The United States may have been Khomeini’s “Great Satan,” but every Iranian school child knows that Western “imperialism” dates back to the British tobacco monopoly from 1890-1892, and the D’Arcy oil concession in 1901. It also includes the creation of the Anglo-Persian Oil Company that later became the British Petroleum Company (BP) in 1933. Every Iranian knows that this gave Britain de facto control over Iran’s key source of hard currency and industry through at least the mid-1950s.

Even under the Shah, every Iranian officer was told Iran’s version of the history of the Anglo-Russian invasion of Iran in 1941, and that the allies seized much of Iran’s crops and sent them to Russia, and that bread riots made the police fire on crowds in Tehran in 1942. BP also continued to dominate Iran’s market economy until the Mossadegh crisis in 1951. When the Anglo-U.S. coup pushed Mossadegh out, both countries cooperated in the creation of the National Iranian Oil Company after the Shah’s return, which gave Western companies near control over Iran’s oil policies from 1954 to 1973.

The Iran-Iraq War lasted from 1980-1988, and is still the bloodiest modern war in Middle Eastern history, and while estimates differ from as low as 375,000 to over one million Iranian dead. It did much to polarize Iranians against most of their Arab neighbors, and the one Arab state that really supported Iran was Syria under Hafez al-Assad. Iranians have not forgotten the European and Arab support of Saddam during the Iran-Iraq War from 1990-1988. The United States is seen – somewhat unfairly – as a supporter of Saddam Hussein. Iranians also remember the U.S. “cake” mission arms for hostages deal, the tanker war with the U.S. in 1987-1988, and that no one outside Iran really made an effort to halt Saddam’s use of poison gas during the war.

The years since the Iran-Iraq War have also seen growing tension between Iran and most of the Arab world, and a massive arms race that has helped push Iran towards developing nuclear weapons, seeking military influence over Arab states, deploying long-range missiles, and creating major forces for asymmetric warfare in the Gulf. The rise of violent religious extremism in the Islamic world has also led Sunni extremists to attack Shi’ites and other sects as non-believers and—coupled with the pro-Shiite extremism of the Iranian revolution—led to steadily rising tensions between Iran and its neighbors. The recent demonstrations have made it clear that a significant number of Iranians want the regime to focus on domestic development and the economy, and not potential Arab threats or exporting the Iranian revolution, but Iran’s actions are not simply aggressive or the result of its ambitions, they are defensive as well.

It is also important to remember that modern-day Iran has developed under a regime that has tightly controlled the media and education since the early 1980’s, that resenting the regimes failures and repression does not mean support for the U.S. or massive political change, and that Iran has become a male-dominated society with large conscript forces that serve as a further indoctrination and control mechanism. On the one hand, Iran’s spending on security almost certainly sharply exceeds its public budget figure of some $15.9 billion, and may well have an equivalent cost closer to $25 billion when all of the costs of Iran’s efforts to create a defense industrial base, intervene in other states like Iraq and Syria, and support the internal activities of the IRGC and Basij are considered.

On the other hand, it gives the regime very powerful instruments to use in suppressing any dissent.

Popular demonstrations are one thing. Armed military and security forces are quite another. Iran’s military forces now total some 523,000: 350,000 in the army; 125,000 in the Islamic Revolutionary Guard Corps (IRGC); 18,000 in the Navy; 30,000 in the Air Force; and at least 40,000 in paramilitary forces like the Basij. These forces conscript or process well over 100,000 young men a year for at least 21 months of service.

Iran has also been able to deploy volunteer forces to Syria, and its forces are dominated by hardline IRGC commanders who are tied directly to the Supreme Leader and not the civil government. Some 500,000 police serve as another instrument of indoctrination and control, along with some 4,000-6,000 more personnel in the Ministry of Intelligence (also known as VAJA, VEVAK, or MOIS) and still more personnel in Iran’s other intelligence and security forces.

The Basij, in particular, have evolved steadily since the end of the Iran-Iraq War, and large elements are now local paramilitary security forces tied to the IRGC. Iranian official estimates sometime put their total part-time and full-time strength at more than 20 million, and other estimates indicate a core strength of 90,000, and up to 600,000 with some kind of mobilization potential. These numbers are soft to say the least, and being a regular solider or conscript, or policeman, has never meant that any given case is a strong supporter of any regime.

The Political and Social Causes of Iran’s Unrest

The other side of the coin is that the regime’s failures, efforts to control the day-to-day aspects of Iranian life, and insistence on a narrow and dated interpretation of Islam do create serious internal opposition. As the Shah’s fall and events since 2011 have shown, repression is not enough. Iran’s voters have deeply divided in Presidential elections to the extent that candidates stood for hard and soft aspects of the regime, and it is clear that many Iranians resent to social conservatism of the regime. Iranian young men and women, and the more educated portion of the civil population often show their opposition and resentment of the regime’s controls and failures, and Iran’s repression of women may partially silence them but repression is scarcely a reason for loyalty.

The current regime is also aging, although Rouhani and his “moderates” were at least elected with considerable support, it has been in power for nearly 40 years. The Iran-Iraq War ended 38 years ago. Khomeini died in 1989, and no equally popular or charismatic leader has followed him. Ali Khamenei, the current Supreme Leader has been accused of many things, but charismatic has scarcely been one of them. He is nearly 80 and often reported to be ill. At least a significant portion of Iran, now seems more interest in when he will leave or die, and who his successor will be, than in the Supreme Leader himself.

Figure One in the list of tables and charts that follows this analysis also shows that Iran performs from weak to very badly in all six of the indicates the World Bank uses to rate that actual performance governments as distinguished from their ideological character, although there has been some improvement under Rouhani. The rankings for voice and accountability, rule of law, political stability and the absence of violence are all poor to bad, and corruption – one of the most sensitive areas in terms of public perceptions in countries affected by political uprisings in 2011, remains a serious problem.

Many Iranians see the current Supreme Leader and his government as focused on exporting a Revolution that they do not support, and as spending Iran’s wealth on other countries. They have seen much of Iran development lag and fail to meet the needs of its growing population, and a level of social conservatism and repression that they do not support and affects every aspect of their daily lives. They also live in what the World Bank ranks as one of the poorest governed countries and that Transparency International ranks as one of the most corrupt.

They choose the most pragmatic and moderate candidates that the clerics and hardliners allow to run. They see far too much of the Shah in today’s regime: a Shah decoupled from the real needs of his people has been replaced by a Supreme Leader who is no better. A viciously repressive intelligence and security service called the Savak has been replaced by an equally repressive service called the Vevak. A hopelessly corrupt Pahlavi Foundation under the Shah, that controlled much of the nation’s wealth, has been replaced by a hopelessly corrupt set of clerical foundations called Bunyods that also control much of the nation’s wealth.

The Supreme Leader – Ali Khamenei and his supporters either did not – or could not – elect a hardliner in the 2013 elections. The election of Hassan Rouhani in 2013, like the election of Mohammed Khatami in 1997, and his reelection in 2001, demonstrated that Iran’s clerical regime does face limits on its power, and Khamenei seems to clearly realize this. He sided with Rouhani in backing the Joint Comprehensive Plan of Action (JCPOA), or the Iran nuclear weapons deal and in economic reforms that have come to some extent at the expense of support for the Islamic Revolutionary Guards and the religious foundations or Bunyods that are run by Iran’s hardline clergy.

Population Pressure and the Youth Bulge

At the same time, Iran’s population has grown sharply since the1950s, and the time of the Shah, and Iran now has a very high and growing population with many young men and women seeking jobs or decent careers. population. Here it is possible to quantify Iran’s problems in at least broad terms. No set of international population and economic data affecting developing countries (and many developed ones) is totally reliable and the differences between different estimates are often sharp. However, there is a reasonable level of consensus over Iran’s population growth, and to a lesser degree over its most probable near-term trends.

As Figure Two: Iran’s Rising Population and Youth Bulge: 1950-2050 in the charts and tables that follow this report shows, the U.S. Census Bureau estimates that Iran’s population has grown from 16.4 million in 1950 to 39.7 million (X2.4) at the time of the Shah’s fall, and 82.0 million today (X5). It projects a growth to 98.6 million by 2050. This is a massive population boom for a country that had a far higher population base in 1950 than its Arab neighbors and already used much of its arable land and water. It is also a key source of pressure on the economy, infrastructure, and governance capabilities of a nation that has been badly governed, and often at war or in crisis, for most of its modern history.

Unlike other Middle Eastern states, Figure Two shows that the bulk of Iran’s youth bulge is not too young to understand the prospects for their future lives or what their parents are going through. The Census bureau estimates that that 38.9% of a population of over 82 million Iranians is 24 years of age or younger. A total of 4.7% is 15 to 24 years of age. A total of 6.8% is 15-19 years and has seen little progress, tolerance, and hope in the regime. Another 7.9% is 20-24 years of age and has already suffered from the regime’s failures at one of the most critical periods of their lives in terms of career, social status, marriage, and child bearing. As later Figures show, this youth faces major economic and employment problems. Moreover, women face the additional problems of facing point social restriction, and discrimination in education, hiring, and careers.

The Economic Causes of Unrest

Similarly, there are a great deal of data showing that there is one area where Iranians do not split along religious lines or over loyalty to the regime. There are hard data showing that the vast majority of Iranians have suffered in very practical ways from the mismanagement of Iran’s economy since the time of the Shah, and from the costs of the regime’s wars and adventures. This may do much to explain why the protest have not been concentrated in Tehran, but have spread throughout the country—from Kermanshah and Khorramabad in the West to Tonekaban on the Caspian, to Izeh and Bandar Abbas in the South, and Mashhad in the East.

As is the case with most developing countries, estimates differ by source, and the Iranian government attempts to put the best face it can on Iran’s problems. Objective sources like the IMF and World bank, however, have made recent estimates that seem likely to provide a broadly accurate picture of Iran’s current challenges. A long series of IMF Article IV reports are also available on the web that provide a good history of the government’s mistakes in economic policy even before the fall of the Shah and their continuing impact on the Iranian people.

The Shah fell as much because of his failures to shape an economy that met the needs of his people as because of his authoritarianism and repression. Iran’s economy was shaped by revolution the Iran-Iraq War for eight years between 1989 and 1988. It has been badly managed since the ceasefire in the war, and particularly under President Mahmoud Ahmadinejad between 2005 and 2013.

The World Bank and IMF have both found that Ahmadinejad left office having created a nightmare of poorly managed governance and development, debt, food and fuel subsidies, expansion of the state sector, and barriers to private industry and development–effectively becoming one of the most incompetent single leaders in Iran’s history. Many of the current popular complaints and protests focus on the lingering impact of the mistakes that are his legacy.

The Economic Narratives

Rouhani’s election in 2003 did lead to some important economic reforms in spite of the imposition of U.S., UN, and EU sanctions, and recent CIA, World Bank estimates have tended to be somewhat more optimistic about Iran’s near-term economic future—although many of the growth estimates in late 2016 and early 2017 have had to be lower in the course of 2017 and the earlier IMF growth projections for 2018-2022 now seem substantially over-optimistic.

The current CIA World Factbook summary of the Iranian economy notes that,1

Iran’s economy is marked by statist policies, inefficiencies, and reliance on oil and gas exports, but Iran also possesses significant agricultural, industrial, and service sectors. The Iranian government directly owns and operates hundreds of state-owned enterprises and indirectly controls many companies affiliated with the country’s security forces. Distortions – including inflation, price controls, subsidies, and a banking system holding billions of dollars of non-performing loans – weigh down the economy, undermining the potential for private-sector-led growth.

Private sector activity includes small-scale workshops, farming, some manufacturing, and services, in addition to medium-scale construction, cement production, mining, and metalworking. Significant informal market activity flourishes and corruption is widespread.

Fiscal and monetary constraints, following the expansion of international sanctions in 2012 on Iran’s Central Bank and oil exports, significantly reduced Iran’s oil revenue, forced government spending cuts, and sparked a sharp currency depreciation. Iran’s economy contracted for the first time in two decades during both 2012 and 2013, but growth resumed in 2014. Iran’s stock market plunged between 2013 and 2015. Iran continues to suffer from high unemployment and underemployment. Lack of job opportunities has prompted many educated Iranian youth to seek employment overseas, resulting in a significant “brain drain.”

In June 2013, the election of President Hasan RUHANI generated widespread public expectations of economic improvement and greater international engagement. RUHANI has achieved some success, including reining in inflation and, in July of 2015, securing the promise of sanctions relief for Iran by signing the Joint Comprehensive Plan of Action (JCPOA) with the P5+1. The JCPOA, which severely limits Iran’s nuclear program in exchange for unfreezing Iranian assets and reopening Iran to international trade, should bolster foreign direct investment, increase trade, and stimulate growth.

The IMF and World Bank analyses of Iran’s economy date back to late 2016 or early 2017, did focus on the key mistakes of the Ahmadinejad era, but made relatively optimistic estimates of Iran’s progress in 2017 and for the years to follow. Neither fully addressed the impact of Iran’s current economic problems on ordinary Iranians in any narrative depth – although many of the IMF quantitative estimates did.

For example, the World Bank Overview of Iran’s economy on its website—as of April 1, 2017—stated that, 2

Iran is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with an estimated Gross Domestic Product (GDP) in 2016 of US$412.2 billion. It also has the second largest population of the region after Egypt, with an estimated 78.8 million people in 2015. Iran’s economy is characterized by the hydrocarbon sector, agriculture and services sectors, and a noticeable state presence in manufacturing and financial services. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still depend to a large extent on oil revenues and therefore remain volatile.

Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the sixth five-year development plan for the 2016-2021 period. The sixth five-year development plan is comprised of three pillars, namely, the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan envisages an annual economic growth rate of 8 percent and reforms of state-owned enterprises, the financial and banking sector, and the allocation and management of oil revenues among the main priorities of the government during the five-year period.

The Iranian government has implemented a major reform of its subsidy program on key staples such as petroleum products, water, electricity and bread, which has resulted in a moderate improvement in the efficiency of expenditures and economic activities. The overall indirect subsidies, which were estimated to be equivalent to 27 percent of GDP in 2007/2008 (approximately US$77.2 billion), have been replaced by a direct cash transfer program to Iranian households. The second phase of the subsidy reform plan began in Spring 2014 which involves a more gradual fuel price adjustment than previously envisaged and the greater targeting of cash transfers to low-income households. Around 3 million high income households have already been removed from the cash transfer recipient list. As a result, the expenditures of the Targeted Subsidies Organization (TSO) is estimated to have declined to 3.4 percent of GDP in 2016 from 4.2 percent in 2014.

Following a contraction of close to 2 percent in 2015, the Iranian economy bounced back sharply in 2016 at an estimated 6.4 percent. Latest data available for the first half of the Iranian calendar year 2016 (ending in March 2017) suggest that the Iranian economy grew at an accelerated pace of 9.2 percent (year over year) in the second quarter (corresponding to July-September 2016) after a 5.2 percent growth in the first quarter. This brought the overall growth in the first half of 2016 to 7.4 percent, while non-oil GDP grew by a mere 0.9 percent. Despite the dominance of the oil sector—driven by the positive impact of the Joint Comprehensive Plan of Action implementation on oil production and exports, there are some signs of dynamism in the non-oil sectors as well.

The unemployment rate returned to a three-year high of 12.7 percent (or 3.3 million unemployed) in the second quarter of 2016 despite the high growth rate in this period. This increase is largely a reflection of an increase in the labor participation rate to 40.4 percent compared to 35.4 percent in Jan-Mar 2014. Male and female unemployment rates of 21.8 and 10.4 percent respectively, also highlight a widening employment gender gap in the job market compared to 2015.

Poverty is estimated to have fallen from 13.1 percent to 8.1 percent between 2009 and 2013 (US$5.5 a day line in 2011 PPP). This was likely due to a universal cash transfer program in late 2010, which preceded the elimination of subsidies on energy and bread. The program appears to have more than compensated for the likely increase in energy expenditures of less-well-off households, thus contributing to positive consumption growth of the bottom 40 percent of the population, even though overall consumption growth between 2009 and 2013 was negative. However, poverty increased in 2014, which may have been associated with a declining social assistance in real terms.

Both external and budget balances improved in 2016. Iran’s current account surplus witnessed a strong boost due to the robust growth in oil exports. The current account surplus is estimated to have increased to 6.5 percent of GDP in 2016 up from 2.7 percent in 2015 benefiting strongly from the removal of oil sanctions and a recovery in exports. Similarly, the fiscal deficit is estimated to have improved in 2016 due to strong growth in revenues, with the central government budget deficit declining to around 1.5 percent of GDP from 1.9 percent in 2015. The government’s proposed budget for 2017 mandates a reduction in the deficit by reducing total expenditures and increasing overall revenue shares of GDP. Annual inflation is estimated to have fall below 10 percent in 2016, for the first time in a quarter of a century due to a less accommodative monetary policy.

In the medium to long term, growth prospects will rely on the pace of Iran’s reintegration with the global economy in banking, trade and investment and the implementation of key structural reforms. Growth rates in 2017-19 are expected to retreat to slightly above 4 percent. As Iranian banks face the challenge of delays in establishing correspondent banking relationship with large international banks, foreign direct investment inflows to Iran and trade relationships with the rest of the world are restrained. Still, recent developments suggest non-oil sector and investments are likely to play a bigger role in the next few year.

Going forward, implementing the domestic reform agenda is likely to bring the highest growth dividend in the medium to long term. The new government’s challenge, after the May elections, will be to prioritize the reforms outlined in the new five-year development plan and steadily implement them. This will involve tackling the structural reform agenda that will boost the non-oil sector growth, through creating a level-playing field for existing and new firms, improving the business environment and the efficiency of labor markets.

Similarly, its Iran Economic Outlook, published in October 2017, like that of the IMF, focused largely on fiscal issues and not the human and political impact of Iran’s economic policies, 3

The Iranian economy strongly recovered in 2016, on the back of a significant rise in oil production and exports, following the removal of nuclear related international sanctions. However, unemployment remains high and non-oil sector activity remains subdued, as anticipated foreign investment flows have not materialized, in the absence of a full integration of the banking sector with the global banking system and continued uncertainties regarding full implementation of the JCPOA. Growth prospects in the medium term are modest. 

 In 2016, the economy registered a strong oil-based bounce back, with an annual headline growth rate of 13.4 percent, compared to a contraction of 1.3 percent in 2015. The largest contribution to growth was from the industry sector (at about 25 percent) as oil and gas production increased by a staggering 62 percent, mainly as a result of sanctions relief. Recovery in non-oil GDP however was limited at 3.3 percent, although this represents the highest growth rate in the last 5 years. Recent data suggests that growth in crude oil production in the first quarter of 2017 declined to 17 percent year over year.

On the demand side, all components except investment registered improvements over the previous year. Investment continued to contract in 2016, albeit at a much lower rate of 3.7 percent (compared to 12 percent a year earlier). The reduction in investment was primarily driven by the continued contraction in the construction sector since 2012 following a boom in speculative demand for housing. Despite the growth in the non-oil sector, unemployment increased to 12.6 percent in Spring 2017 up from 12.4 percent six months earlier, which suggests a very limited employment generation capacity in the sectors spearheading growth. The CBI together with the Money and Credit Council have implemented measures to increase investment and non-oil growth.

The average interbank interest rate was reduced by around 6 percent to 18.6 percent in 2016, although the declining trend in 2015 has ended. The fiscal deficit further widened to 2.2 percent of GDP in 2016, but the debt to GDP ratio fell to around 35 percent due to a higher GDP. The current account surplus increased by more than 80 percent to reach around 4 percent of GDP, up from 2.3 percent in 2015, primarily as a result of increase in oil exports. However, non-oil merchandise exports declined by 9 percent in 2016 and recent data for the first four months of the new fiscal year indicates a negative growth in non-oil exports (-10 percent year over year).

The Economic Data

As this article demonstrates, hindsight is always easier than foresight It does not take much vision to guess that the CIA, IMF, and World Bank will soon rewrite key parts of these narratives to reflect the economic sources of the current protests and unrest in Iran. Like the failures of the World Bank and IMF to address the human impact of economic forces on the peoples of all countries, or the deep divisions in income and economic privilege within many states, it is clear that focusing on national econometric and fiscal trends is not an adequate way to assess the performance of given states, their level of risk, and their need for reform and change.

At the same time, the economic data the CIA, IMF, and World Bank have developed do provide better insights into the potential causes of Iran’s current unrest. The IMF, in particular, has already provided some excellent quantitative data in its Article IV report – although it dates back to late 2016, and other data are available that help put it these data perspective.

Once again, it must be stressed that such charts can never fully speak for themselves. The sources they are drawn from need to be consulted in depth to put them in context, and most such sources describe key uncertainties and problems in their methodology in detail, but many key trends are still clear.

  • Iran’s problems have been heavily shaped by outside forces Figure Three shows an IMF assessment of the trends in World Oil prices used in its World Economic Outlook. It shows all too clearly that Iran faced the same economic problems as every other state dependent on oil export revenues: A cut of nearly 50% in the value of its petroleum exports.

 

  • The crash in oil prices on Iran radically cut Iran’s earnings Figure Four shows an assessment by the U.S. government Energy Information Administration (EIA) of the trends in Iran’s oil export revenues. It shows all too clearly that Iran faced the same economic problems as every other state dependent on oil export revenues: It suffered a cut of nearly 50% in the value of its petroleum exports.

 

  • Sanctions hit first and then the crash in oil and petroleum prices. To put this drop in perspective, the data base for the EIA estimate shows that increase U.S., UN, and EU sanctions help cut Iran’s annual export income in 2016 U.S. dollars from a peak of $99 billion in 2011, to $68.3 billion in 2012 and $48.8 billion in 2013. They were $50.7 billion in 2014, but the combination of sanctions and crash in oil prices cut them to $29.4 billion in 2015, and they only recovered to $36.2 billion in 2016. (The IMF estimates total petroleum export revenues in Iranian fiscal years, and estimates total oil/gas/ product revenues at $55.4 billion in 2014/2015, $33.6 billion in 2015/2016, and $57.4 billion in 2016/2017, but this is an estimate published in February 2017, and is high for its final year.)

 

  • The true nature of oil wealth in Iran is very low in per capita terms . Figure Four also helps put Iran’s oil wealth in human perspective by showing Iran’s oil wealth per capita.. Iran has never spent its oil wealth properly on its people, and the IMF Article IV report for February 2017 lists a long list of ways in which it has wasted oil wealth of unproductive expenditures, subsidies, and other government/state efforts. The key to understanding what Iran’s problems, however, is the impact of its large population on its oil revenues per capita,

 

  • Iran is oil poor by the standards of most other exporters in the Gulf In 2016, Iran had a per capita export earning of only $453 –half the OPEC average of $912. A war torn Iraq had a per capita income of $1,423 – more than three times as much. Saudi Arabia had a per capita income of $4,132 – more than nine time as much. Qatar had a per capita income of $10,458 – 23 times as much. Looking again at the longer term trends, Iran’s per capita oil income was $1,317 in 2011, $898 in 2012, $632 in 2013, $649 in 2014, $372 in 2015, and $453 in 2016. Even a well-managed economy was have faced a major crisis in allocating resources under these conditions, but the IMF and World Bank Rouhani’s reforms were only a beginning of what would be necessary to give Iran good prospects for development, and many measures – like cuts in food subsidies – immediately made life harder for many Iranians.

 

  • The JCPOA did little more than partially compensate Iran for the crash in world oil prices :It seems doubtful that many Iranians understand the complex interactions between the crash in oil prices and the added income provided by Iran’s nuclear agreement with the JCPOA and Rouhani’s economic reforms since 2013. Figure Five provides an IMF estimates that shows that Rouhani’s economic reforms and the Iran’s JCPOA nuclear agreement gave Iran the increased exports and earning potential to offset the crash in oil prices that took place in the immediate period before the JCPOA was signed and went into force. This seems equally true of many critics of the JCPOA who saw it as massive windfall that Iran could exploit.
    In reality, the IMF estimate in Figure Five shows all too clearly that the JCPOA only kept Iran from suffering what otherwise might have approached a major economic crisis, and that the IMF notes that Iran still have major problems in some areas of the international banking system and trade. It also shows that the IMF may see Iran as one of the more diversified economies in the Gulf, but that it does not forecast significant growth as a result of the other sources of Iran’s income.

 

  • Iran has had twice the level of inflation as GDP growth, and static growth or drops in current per capita income Figure Six provides an IMF estimate of the real trends in Iran’s GDP growth, consumer prices or inflation, and current per capita income from 1980 – the start of the Iranian revolution through 2016 – with projections to 2022. It shows that Iranian’s have experienced virtually no real increase in per capita income – as measured in international market terms, and that inflation has averaged more than twice the rate of economic growth – effectively wiping out most cash savings and creating massive problems for investment.
    Here, it is striking that even a relatively favorable pre-uprising IMF estimate forecast inflation at 10.2% and real GDP growth at only 3.5%—and future growth levels at a maximum of 4.2%—driven largely by estimated rises in oil prices. In practice, inflation could now be substantially higher –12% or more—and substantially growth lower.

 

  • Iran’s per capita income lags badly behind most of its neighbors . Comparisons of per capita income are difficult, but Figure Seven shows that Iranian’s have good reason to envy their neighbors in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Only an equally war torn and highly populated Iraq compares with Iran – although Yemen is a total basket case.

 

  • Experts do argue over the use of current or nominal GDP versus GDP in purchasing power parity or PPP terms because the PPP estimate tries to take account of the relative cost of living and inflation, rather than using only the market exchange rate which can distort the real differences in income. The problem is that the PPP estimate can be so uncertain, but even if it is used, Iran does not compare well with its neighbors. As Figure Seven also shows, however, Iran ranks badly regardless of the measure used. Qatar has some seven times the per capita income. Kuwait has for times the per capita income, the UAE has 3.8 times, and Saudi Arabia has three times.

 

  • Iran scores badly in terms of poverty and average income . The top part of Figure Eightshows an IMF estimate of the possible poverty levels in Iran, depending on the definition of poverty in terms of income per day, ranging from $4 per day (1,460 a year) to $10 per day ($3,650 a year). It is clear that the regime has done nothing to benefit most Iranians over the period shown, and that there has been a slow rise in every poverty level in recent years. Experts disagree about which level of income to use in defining poverty, but many – if not most – Iranians are likely to have economic expectations that can only be funded at levels of at least $8 to $10 a day per person—particularly in urban areas.
    Moreover, the incomes of both the poor and the vast majority of other Iranians are reflected in making such estimates. The remaining elements of Iran’s food and fuel subsidies may help the poor, but poor Iranian’s may still have suffered from Rouhani’s cuts in such subsidies. If one considers what these figures mean for the result of the population, many in the Iranian middle class almost certainly saw a steady decline in their real income since the Revolution, as well as in their economic status relative to their neighbors.

 

  • Unemployment and Labor Participation Rates are critical Problems . The two graphs at the bottom of Figure Eight are equally negative. Unemployment is extremely hard to estimate in a developing economy, and normally sharply understates the actual level of real world unemployment. Iran officially estimates total current unemployment at 11.7% and youth unemployment at 24.4%. Such figures, however, do not reflect the fact that many cease trying to participate in the formal work force when the economy is in severe trouble, and that poor nations create many unproductive jobs are created where there is no useful output, and multiple employees do the productive work of one worker and are only employed for family or other social and political reasons. The gaps between the reported figure and the real world level of disguised unemployment can easily make the total level of unemployment some 10% higher.

 

  • Figure Eight does shows a sharp rise in unemployment after sanctions were lifted, expectations rose, but also that more Iranians tried to participated in the work force. It also shows a very low female participation rate in a country with high educational standards for women, and for both young men and women – rates nearing 30% for young men and close to 50% for young women. This is true in spite of a bloated state sector. It is almost certainly a major source of the current protests – compounded by the fact that many of the unemployed are graduates.

There are many other economic issues that seem likely to cause unrest even among Iranians that might otherwise support the regime. This includes state financing of education and services, and a pervasive level of corruption that leads Transparency International to rank Iran only 131st out of the 176 countries it examines. The IMF Article IV reports also document a wide range of failures in the work of the government, and—as Figure Nine shows—the World Bank ranks Iran poorly in most measures of business opportunity.

Such barriers to the efforts of Iranians from the shop keeper to the major business level have to be a major source of unrest. This is particularly true when they are coupled to corruption, poor governance, abuse of the state sector in competition, and the separate abuses of the Bunyods and IRGC in competing with the private sector, they both compound Iran’s economic problems and alienate a wide range of educated and wealthier Iranians that might otherwise support the regime.

Time May Tell

There are no certainties in any aspect of this analysis when it comes to Iran’s current crisis or the future. The steady increase in protest activity and violence over the last few days is a possible indicator, and the actions of the Iranian government seem to rely more on repression than reform. The spread of the protests is also important. It was a key indicator in 1978 that the Shah was in deep trouble.

If there is any consistent historical lesson about political unrest and revolution, however, it is that repression, authoritarianism, and failed governance work until they don’t. Many of the same negative indicators that affect Iran’s political system, governance, and economy can shape a given nation for decades or dynasties, or suddenly emerge as critical driving factors because of the most minor event or cause.

There are no polls to rely on—to the extent polls can be relied on—and Iran’s efforts to limit and shut down social networking make even good guesstimates more uncertain. It does seem possible, however, that Iran’s economic failures have done more to unite its people against the regime than has previously been estimated.

At the same time, it seems useful to point out that there almost never is one dominant cause of major political upheavals. Politics, religion, ethnic and sectarian tensions, outside pressures, economics, and all the other factors listed in this analysis combine to affect different parts of a population in different ways.

Historians, theologians, political scientists, economics, anthropologists, military planners, and every other specialty can generally find key causes in their own areas of expertise, but it is far from clear that that any one such set of causes reflects a good way of predicting the future. Even broader based analyses of past uprisings warn that efforts to analyze their causes generally remain uncertain even after the fact. Even hindsight scarcely ever leads to 20-20 insight.

To the extent comparative current and historical data do exist, they do not seem to indicate that Iran’s problems are so serious that they necessarily lead to explosive uprisings or political change but that they can—particularly if the regime over reacts and continues to focus on denial and repression rather than reform.

Nevertheless, To the extent that historical parallels exist, it is more than possible that Iran’s regime can ride out its problems if it promises to carry out reforms and particularly if it combines the kind of reforms recommended by the IMF and World Bank with a focus on the immediate needs of the Iran people and liberalizes its social restrictions. Other regimes have survived far worse. They have also, however, imploded for far less. Looking back, the failure to make relatively limited reforms when they are most needed has often been the critical point at which a true crisis began.

As for the policy of outside states, the United States needs to be very careful. Any U.S. or foreign calls for regime change can provoke just the opposite popular reaction. Any efforts to try to pressure the regime with sanctions that go beyond the narrow target of the regime would hurt the Iranian people and could provoke the same reaction. Calling for military intervention would almost certainly do much to unite the Iranian people against the intervening power, and make the problems created by the U.S. invasion of Iraq seem minor by comparison. Any Arab threats or negative action would have the same effect.

The United States, other countries, and international organizations can, however, highlight the benefits of reform and international organization can describe what actions might help most. The U.S. and its regional allies can also offer economic “carrots” and incentives, rather than “sticks” or sanctions, for Iranian efforts to focus on the economy and needs of Iran’s peoples—rather than focus on nuclear weapons, missiles, regional power, and asymmetric war. Positive negotiating options, and ones that offered both sides more security, could have a much more beneficial effect.

###
The Center for Strategic and International Studies (CSIS) is a bipartisan, nonprofit organization founded in 1962 and headquartered in Washington, D.C. It seeks to advance global security and prosperity by providing strategic insights and policy solutions to decisionmakers.
Back to article list