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The Crisis in Iran: What Now? By Anthony H. Cordesman

 

 

 

Please note that an accompanying PDF with full graphs, charts, and figures is available for download on the CSIS website at https://csis-prod.s3.amazonaws.com/s3fs-public/publication/180112_The_Crisis_Iran.pdf?436140qcZULx2.FP2LQLcbaW0c4ZC5Y.

The protests in Iran seem to have died down—or been brought under regime control—for the moment. It is still unclear, however, how this latest set of popular protests will affect the regime, whether new protests will emerge at a broad level, and—if so—how the impact of such protests and the regime’s reaction will develop.

It is all too easy to either exaggerate to underestimate that level of popular opposition to the regime, and the ability of the regime to deal with such opposition. The fact is, however, that it is far from clear how any future protests and opposition will develop, or how much support the opposition in Iran 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.

At this point in time, most protests are also hard to characterize. There are no clear numbers or detailed reports on the exact nature of most protests. Many questions remain about the motives behind any given event and who took part. There are also few indications that any organized opposition lead to given protests or gave them substantial purpose and structure.

At least to date, the uprisings in Iran have not come close to the level of protests that overthrew the Shah in 1978 and forced him to leave the country in January 1979. They have been broader-based than the protests against the Iranian election in 2009, which led to “Green Revolution” in 2009-2010. The regime’s effort to suppress such opposition also indicate that Iran has steadily improved its internal security and ability to repress its people since 2009, and that no one should underestimate the ability and willingness of the Supreme Leader, the Islamic Revolutionary Guard, and the Basij to use force against their people.

The regime has reacted quickly to repress the uprisings, and so far, it seems to have reacted effectively. The regime has blamed the U.S. and Saudi Arabia, and outside media and reporting, for attempting to start and support such protests. It has accused and arrested many protestors, and carried out large demonstrations in support of the regime. As in 2003 and 2009, the Supreme Leader and his supporters have shown that a regime that controls the security forces, the justice system, the media, and much of the economy can do much to resist any popular movements or opposition, brand them as enemies and traitors, and control broadcast and printed media and at least some of the Internet.

Events have made it clear, however, that the protests had a relatively broad geographic base, and were driven more by broadly popular causes like jobs, income, corruption, and resentment of Iran’s privileged elites than more narrow concerns like democracy or human rights.

There also are many good reasons 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 actually 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.”

Iran’s Divided Perceptions of the West and Arab World.

The Iranian people are 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 do want a more liberal, modern, and developing Iran. Many other Iranians, however, who have supported Khomeini’s revolution “reforms,” believe in more conservative state, and see the West and Saudi Arabia as a threat.

So far, however, the regime has succeeded in steadily limiting overt political opposition. It has been able to narrow the range of candidates that can run for office. The end result is the emergence of what is more of a façade of democracy than the reality. The difference between the candidates who are allowed to run is now largely one between the more pragmatic supporters or moderate supporters of the Supreme Leader—the Ayatollah Sayyid Ali Khamenei —who focus on Iran’s internal development and stability, and his supporters that are hardline advocates of a conservative religious revolution and Iran’s efforts to expand its regional influence.

It is also important for outsiders to remember that while many Iranians may want a more liberal and more “Western society,” all Iranians have reason to distrust the United States, Russia, Europe, and their Arab neighbors. These attitudes have also been shaped by far more than the legacy of anger at U.S. support of the Shah.

Iranians have long had to see the West as a source of foreign influence and control. 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 of 1890-1892, and the D’Arcy oil concession in 1901. It includes the creation of the Anglo-Persian Oil Company that became the British Petroleum Company (BP) in 1933, and 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. Iranians were taught that the allies seized much of Iran’s harvest, sent them to Russia, and that the resulting bread riots led the police to fire on crowds in Tehran in 1942. They are also taught a postwar history where British Petroleum oil continued to dominate Iran’s market economy until the Mossadegh crisis in 1951. When the Anglo-U.S. coup pushed Mossadegh out, they know that both the U.S. and Britain 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.

They have far more immediate reasons to distrust the West and their neighbors. The Iran-Iraq War lasted from 1980-1988, and is still the bloodiest modern war in Middle Eastern history, although estimates differ from as low as 375,000 to over one million Iranian dead. The broad support Arab states gave Iraq 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 also 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 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.

This does not mean that most Iranians support the efforts of the Supreme Leader and the IRGC to expand Iran’s influence and control in the region. 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. At the same time, many Iranians feel 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.

One interesting aspect of the current protests is the suppression of some key methods of Internet communication and social networking, and that the Supreme Leader has reacted by halting the teaching of English in primary schools. It is unclear how long this will last, but it does demonstrate some aspects of the regime’s ability to exercise control.

Iran’s Security Efforts: Repression Works Until It Doesn’t

Outsiders also need to be careful about assuming that large numbers of Iranians will seriously oppose Iran’s military build-up and actions outside Iran. On the one hand, Iran’s spending on security almost certainly sharply exceeds its public budget figure, 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, interventions in other states like Iraq and Syria, and support for the internal activities of the IRGC and Basij are considered. On the other hand, they have given the regime very powerful instruments to use in suppressing any dissent.

Repression may ultimately fail, but so—all too often—does democracy and the rule of law. Repression still increases as often as it fails, and far too often, it works for decades. The reasons are also all too clear. Popular demonstrations are one thing but armed military and security forces are quite another, and Iran’s military build-up has given it massive security forces as well. 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 paramilitary forces like the Basij. Iran’s security forces also conscript or process well over 100,000 young men a year for at least 21 months of service.

Iran has also been able to recruit and 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.

Security Spending as a Cause of Unrest

One has to be careful to keep the probable costs of Iran’s military and security efforts, and interventions overseas, in proportion. Most Iranians probably only see Iran’s official budget estimates—if that—and the economic strain that security spending puts on the budget and economy appears to be relatively limited.

The CIA World Factbook estimates that military expenditures imposed a relatively low burden of in recent years. It does not publish current figures, but estimates that Iran spent 2.69% of GDP (2015), 2.33% of GDP (2014), 2.35% of GDP (2013), 2.81% of GDP (2012), and 2.41% of GDP (2011). Iran’s military build-up is also far smaller than that of its neighbors. It has been successful largely by exploiting their divisions and weaknesses, rather than in using significant amounts on force or spending vast amounts of money on military efforts.

Iran did sustain a major missile development and production effort during the 2000s, as well as the core of a nuclear weapons development effort. A comparison of the IISS estimates of its forces from 2011 versus 2016 shows, however, that Iran did not buy more modern armor during this period, although it has begun to produce upgraded T-72s. Some two-thirds of Iran’s main battle tanks are obsolescent U.S. and British models. Iran actually cut its artillery strength significantly from 8,798+ weapons to 6,798+. Much of its land force equipment dates back to the time of the Shah and had hard use during the Iran-Iraq War.

Iran has not acquired a major new combat aircraft in decades, and two-thirds of its fighters are aging U.S. F-5s, F-4s, F-14s, while the rest are formerly Iraqi French-made systems and early Russian export versions of the Mig-29 and Su-24. It’s only major new air system with strategic significance consists of the Russian S-300 surface-to-air system. It is producing a limited number of missile frigates, and missile patrol boats and miniature submarines, but is again dependent on its efforts to upgrade systems delivered under the Shah. While Iran is sometimes described as a major military power in the Gulf, Figure One shows that its security spending is actually very low relative to its neighbors, and puts less strain on Iran than such spending does on most Arab Gulf states.

Iran’s Uncertain Levels of Effort

As Figure One shows, however, there is no consensus in outside estimates of Iran’s more recent and current military spending, and reports of its total budget also differ. Outside sources are almost certainly correct, however, in estimating higher figures than the $11,000 billion-plus that Iran has reported and Iran’s 2017 and 2018 budgets are almost certainly higher.

For example, SIPRI estimates a cost of $12,362 billion for both the military and IRGC in 2016, or 3.03% of GDP. The IISS has reported $15,882 billion for 2016 or 3.85% of GDP, and IHS Jane’s estimates $16,312 billion for 2017 in 2017. The CIA puts Iran’s budget expenditures at $80.58 billion in 2016, and this would mean that Iran was spending some 15% to 20% of its total budget on security.

The higher range of these figures seems more likely to be correct, and Iran has a striking advantage over its neighbors in terms of equivalent cost because it can rely so much on cheap conscripts and volunteers, on arming and supporting foreign (Lebanese, Syrian Iraqi, and Afghan units), and on its own volunteers. Coupled with the IRGC’s role in its economy, this could push actual spending in equivalent cost terms to as high as $25 billion, but a maximum actual budget cost of $18-$19 billion seems more likely.

Even the highest figures indicate, however, that security spending only put a minor strain on Iran’s economy compared to those for other Gulf states. The IISS reports that Saudi Arabia had a military budget of $63.7 billion. It was the world’s fourth-largest spender in 2016, and spent 8.92% of its GDP. (A level of comparative austerity because of the crash in its oil revenues in 2014-2015). It spent $81.8 billion in 2015, and 12.67% of its GDP. A virtually bankrupt Iraq spent $16.9 billion or 11.61% of its GDP. Smaller Gulf powers like Oman spent only $2.7 billion on military forces in 2016, but this was 15.3% of its GDP.

As for the future, there are no reliable figures on the cost, and equivalent cost, of Iran’s planned security spending for FY2018/2109. State media has reported, however, that the IRGC’s military budget will be some 267 trillion Iranian Riyals ($7.393 billion), the Iranian army will get 97 trillion riyals ($2.686 billion), the Ministry of Defense and the logistics forces are allocated 44 trillion riyals (1.28 billion). This would put Iran’s total defense budget for FY2018 at 408 trillion (11.359). If one adds 11 trillion rials for the Basij—one gets a total military budget of 420 trillion rials ($11.663 billon).

This total would amount to some 11 % of a total FY2018/2019 budget that one source reports will be as high as 3,681 trillion rials ($103.9 billion) for FY2018/2019. Other sources, however, put the figure at 3,115 trillion rials, and the spending would be closer to 14% of the budget. To put this military spending in a broader national perspective, the same Iranian budget was reported to allocate some $4.2 billion for job creation, and relies on conservative estimates of revenues which involved a fairly modest $55 per barrel oil. It is, however, a conservative budget that many Iranians can see as an austerity budget that does not provide past subsidies or help them keep up with inflation.

In short, all of these military and security spending totals, however, have limited credibility. They may well not reflect the cost of the industrial base for the IRGC, the true cost of the Army (which includes the Navy, Air Force, and Air Defense Force) including all facilities and equipment, the full cost of military imports, and the earnings from IRGC-controlled industries. The budget also probably does not include anything like the full costs of Iranian security activity overseas in countries like Afghanistan Iraq, Lebanon, and Syria—or any economic subsidies to the Assad regime.

The Political, Governance, and Social Causes of Iran’s Unrest

It is the regime’s domestic failures, not foreign adventures, that are the primary cause of public unrest. These include decades of failed economic policies, efforts to control the day-to-day aspects of Iranian life, and corruption. Insistence on a narrow and dated interpretation of Islam do create serious internal opposition. One key issue is not economic, but the restriction of social life. Indeed, Rouhani publicly warned his colleagues of this in a statement he made calling for continued reform and liberalization on September 9, 2018.

A Divided Regime

This is also an area, however, where both Iranian voters and key officials in the regime are divided. Iran’s voters have deeply divided in post- Gulf War Presidential elections in supporting candidates that stood for the hard and soft aspects of the regime. Iranian young men and women, and the more educated portion of the civil population, have often shown their opposition and resentment of the regime’s social controls and restrictions, and Iran’s repression of women has also been an issue.

Only those tied to the Revolution and with some links to the leader have been allowed run but there has long been a broad division between the “reformers” or “moderates” who focus on Iran’s internal needs and the hardliner” or “conservatives” who focus on security issues and a strict interpretation of religious constraints and custom.

The voting in the 2013 presidential election made it clear that many Iranians resented the social conservatism of the regime, its corruption, and its economic failures. 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. Rouhani and his “moderates” were elected with considerable popular support.

Both the Revolution and the “hardline” or “conservative” core of the leadership are aging. The Shah fell some 38 years ago. The Iran-Iraq War ended 30 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 charisma has rarely been one of them. He is nearly 80 and often reported to be ill. At least a significant portion of Iran now seems more interested in when he will leave or die, and who his successor will be, than in the Supreme Leader himself.

The Shah to Theocracy: Iran’s Political “Animal Farm”

This helps explain why Khamenei sided with Rouhani in backing the Joint Comprehensive Plan of Action (JCPOA), or Iran nuclear weapons deal, and backed economic reforms that came at the expense of support for the Islamic Revolutionary Guards and the religious foundations or Bunyods that are run by Iran’s hardline clergy.

At the same time, the protests have shown that many Iranians see elements of George Orwell’s Animal Farm in modern Iran. A Shah who increasingly ignored 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,” often using the same prisons and offices which is supported by a corrupt and arbitrary judiciary. 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.

Iran’s style of governance has also failed its people in many ways. Figure Two shows that Iran performs from weak to very badly in all six of the indicators the World Bank uses to rate the actual performance of 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 both it and Transparency International ranks Iraq as one of the most corrupt—the 45th most corrupt country in the world in 2016.

What is striking in some ways is that the opposition to the regime remains so weak and fragmented in the face of these pressures. If the Green movement has an organized core, it is remarkably quiet. The Monarchist movement seems to have no meaningful strength inside Iran.

The National Council of Resistance of Iran (NCRI) and The People’s Mojahedin Organization of Iran (PMOI) (aka Mojahedin-e Khalq or MEK ) have not shown that they can command serious public support, and some sources report that the PMOI has a past history of terrorism in its struggle against the Shah and Khomeini. Others seem the PMOI as having served Saddam Hussein during the Iran-Iraq War.

The other elements of the opposition are no more effective. The Arab opposition in the southwest is limited and regional and has marginal strength at best, Iran’s Kurds have never posed a serious threat to the regime, and the Baluchi movement in the east is too small and narrowly ethnic to be more than a minor challenge.

Even so, a more effective internal opposition may develop over the coming months, and some aspects of regime control are limited. The communications problems that affected the green movement are now far smaller. They have been reduced by the spread of smart phones and satellite dishes as an alternative to the regime-controlled media. Euromonitor International and the BBC estimates that Iranian smart phones owner rose from 16.2% per family in 2011 to 21.6% in 2012, 25.6% in 2013, 30% in 2014, 35.3% in 2015, and 41.3% in 2016. While the regime has been able to sharply limit easy access to the more popular networking systems that existed before the protests, many Iranians already have applications that sharply limit the regime’s ability to block messaging and social networking.

Population Pressure and the Youth Bulge

The regime will find it difficult—if not nearly impossible—to deal with some of the broader structural forces behind the protests. These are also areas where it is possible to quantify Iran’s problems in broad terms, and one key set of pressures is Iran’s population growth and “youth bulge.”

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 the sheer scale of Iran’s population growth since 1950, and to a lesser degree over the most probable near-term trends.

Iran’s population has grown sharply since the 1950s, and the time of the Shah. As Figure Three 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.

Iran now has a growing population of over 82 million, and millions of young men and women seeking jobs or decent careers. Unlike other Middle Eastern states, Figure Three shows that the Census Bureau estimates that that 38.9% of a population of over 82 million Iranians is 24 years of age or younger, and other estimates indicate that some 840,000 young Iranians enter the job market every year.

A total of 4.7% of the population is 15 to 24 years of age. A total of 6.8% of the population is 15-19 years of age, and has seen little progress, tolerance, and hope coming from the actions of the regime. Another 7.9% of the population 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, the youth also face major economic and employment problems. Moreover, women face the additional problems of facing pointed social restriction, and discrimination in education, hiring, and careers.

The Economic Causes of Unrest

There also 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 and 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. 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,i

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 World Bank and IMF analyses of Iran’s economy that 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—dated April 1, 2017—stated that, ii

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 years.

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, iii

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 the 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 IMF Article IV Report issued on December 18, 2017 gave no hint of the protests that were to follow within days. It did call for economic reform, but focused on an estimate of 4.2% growth for the coming year, the success of the reform efforts made to date, and the possibility Iran could achieve 4.5% growth with further reform even if this meant further cuts in fuel and other subsidies.[iv]

The Economic Data

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 Four 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 Five 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 database for the EIA estimate in Figure Five 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 Five 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 Six provides IMF, BBC, and other 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 fact, the estimates in Figure Six show 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 the remaining sanctions and U.S. policies still give Iran have major problems in some areas of the international banking system and trade. Figure Six 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 Household income has dropped sharply over time. The graphs in Figure Seven provide IMF, BBC, and other estimates 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 Eight 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 Eight 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, and shows a serious decline in food consumption per capita Figure Nine shows IMF and BBC estimates 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 graphs in the second part of Figure Nine are equally negative. Unemployment is extremely hard to estimate in a developing economy, and normally sharply understates the actual level of real world unemployment. Various Iranian official and ILO estimates put total current unemployment at 11.7%-12.4% and youth unemployment at 24.4%-26.7%. 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 real-world youth unemployment some 10% to 15% higher. Moreover, unemployment—like all economic effects—is distributed very differently by city, region, and profession, and the suffering of a large part of each percentage can be far greater.
    Figure Nine does shows a sharp rise in unemployment after sanctions were lifted, expectations rose, but also that more Iranians tried to participate 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 in resisting corruption 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 Ten 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 when it comes to Iran’s current crisis or the future. The outburst of protest activity and violence in early 2018 is a possible indicator that further major and more serious protests will follow, and the Iranian government may well have a made a mistake in seeming to rely more on repression than reform. The spread of the protests throughout a wide part of the country and in less “modern” and well-educated parts of the population is also important. This same spread was a key indicator in 1978 that the Shah was in deep trouble.

These protests did not endure or worsen to critical levels in any city, however, and this too is a key indicator. If there is any consistent historical lesson about political unrest and revolution, 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 affect a given nation for decades or dynasties without threatening the regime. At the same time, they can create underlying pressures that suddenly do threaten the regime because of a seemingly minor event or catalyst. To the extent that historical parallels exist, it is more than possible that Iran’s regime can ride out its problems—particularly if Rouhani can make good on his promises to carry out reforms and combine 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. At the same time, the data presented in this paper shows that Iran’s regime is under serious economic pressure as well as political and social pressure. There are no polls to rely on—to the extent polls can ever be relied on—and Iran’s efforts to limit and shut down social networking make even good guesstimates more uncertain, but it is possible that Iran’s economic failures have already clearly done more to unite its people against the regime than has previously been estimated. While Iran’s problems do not seem so serious that they will necessarily lead to explosive uprisings or political change, it is also clear that they can—particularly if the regime overreacts and continues to focus on denial and repression rather than reform.

As for the policies 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 and that hurt the Iranian people could provoke the same reaction. It is also critical to note that the data on the effectiveness of sanctions shown in the Figures in this analysis were the result of EU support of the U.S. in sanctions and Russian and Chinese support in the UN and arms sales.

Similarly, hollow U.S. and Arab security threats are far more likely to give the Regime’s hardliners a better case for uniting Iranians against the U.S. and its partners. Any form of actual military intervention would almost certainly do much to unite the Iranian people against the intervening power (or powers), and any effort to occupy Iran or install a U.S. or Arab supported regime might make the problems created by the U.S. invasion of Iraq seem minor by comparison.

The United States, other countries, and international organizations can, however, highlight the benefits of reform, and international organizations have already described the actions that might help most. Any such reform plan would force the regime to use more of its limited resources to support the economy at the expense of the security forces and ruling elite, and lead the “moderates” in Iran’s leadership to reach out for foreign investment and technology.

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 and potentially help correct the timeline and other problems in the JCPOA.

[i] CIA, World Factbook, accessed 1.1.207, https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html .

[ii] World Bank, Iran Overview, last Updated: Apr 01, 2017, http://www.worldbank.org/en/country/iran/overview

[iii] World Bank, Iran Economic Outlook, October 2017,http://www.worldbank.org/en/country/iran/publication/iran-economic-outlook-october-2017 .

[iv] IMF, IMF Staff Completes 2017 Article IV Mission to Islamic Republic of Iran , December 18, 2017

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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.

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