2004 Buying Time in Tehran Iran and the China Model

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Buying Time in Tehran: Iran and the China ModelAuthor(s): Afshin MolaviSource: Foreign Affairs, Vol. 83, No. 6 (Nov. - Dec., 2004), pp. 9-16Published by: Council on Foreign RelationsStable URL: http://www.jstor.org/stable/20034133 .

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Buying Time in Tehran

Iranand theChinaModel

AfshinMolavi

foes. Not only did he fail to achievepolitical change, he also proved unable to

heal the sick economy he inherited or

toward off a looming employment crisis.

With itsextremely oungpopulationtwo-thirds of which isunder the age

of 3o-Iran needs to create more than

800,000 jobs ayear.So far,thegovernment

has failed even to come close to that target.

As a result, Iran's oung people have growndeeply frustrated and hungry for political

change and economic relief-even as they

remain unsure of how to achieve them.

The newlyresurgentonservativesthink they have the answer.Having beaten

back the reformers' challenge through

bureaucraticnfighting, rganized iolence, thejailing f leadingreformers,andelection-rigging,he conservativesnow want to embark on a program dubbed

the "Chinamodel" by Iran'smedia. The

idea-which is neither new nor pro

foundnoruniquelyChinese-is tooffereconomic growth, jobs, and limited social

freedomnexchange orcontinued ontrolof thepoliticalsphere. he conservatives

Ayatollah RuhollahKhomeini oncefamously dismissed an aide worried about

inflationy telling im that"this evolutionwas not about the price of watermelons."

Today,Khomeini'ssuccessors refindingthe high price of watermelons-not to

mentionofmeat,housing,andcars-muchharder to ignore.The untold storyof post

revolutionaryran isone of economic

decline:thesteady, 5-year eteriorationof a nation that once boasted a per capita

income quivalent o Spain's, umpedsixmillion barrels f oil a day,andnurturedavibrantmiddle class.Today,Iran's ealper capita income is a third of what it

was before the revolution; il production is two-thirds of the 1979 level, and

the middle class is being squeezed by

chronicallyhigh inflation,widespreadun- and underemployment,and debilitatingwage stagnation.

InMay 2005,PresidentMohammadKhatami,who thunderedntooffice in1997 on aplatform of political and social

liberalization,ill leavehis jobchastenedandlargely efeatedbyhis conservative

AFSHIN MOLAVI has covered Iran fornews outlets including The WashingtonPost andReuters and is the author of Persian Pilgrimages:JourneysAcross Iran.

He is a Fellow at theNew America Foundation.

[9]



AfshinMolavi

movement, studentunrest, enormouspopular discontent, and two U.S. wars

in the neighborhood.Moreover, Iran's ublic has growndeeply apathetic, itshopes for changesnuffed out by the failure of Khatami's

reform rogram. he regime s thereforelikely to survive he current conomiccrisis, as it has crises of the past. As crisis

management, an authoritarian bargain

aChina model "lite"-could work for

Tehran,evenif fundamentalconomicchanges of the sort Beijing has enacted

areunlikelyanytimesoon.

THE TEHRAN TANGO

Will the Iranian public-justifiably

viewed as one of the great hopes for

populardemocracyin theMiddleEast-accept the crude authoritarian

bargain of the China model? At the

moment, they seem more likely to ig

nore it.Frustrated by the failure of the

reform movement, Iranians are starting

to show signs of widespread political

apathy. After nearly 3,ooo reformist

candidates were banned by the hard

liners from running in February's elec

tions for theMajlis (Iran's parliament),

voter turnout (at 51percent nationwide

and 28percent inTehran) was lower thanin any other election since the revolution.

(There was also an inordinately high

number of spoiled ballots.) Iraniansmight

not likewhat the conservatives are plan

ning, but they seem to lack the energy

andwill to oppose it.Political apathy has

also been compounded by fear, a result

of the hard-liners' consistent and ruth

less use of violence and intimidation.Even with public supportor indifference,

reforming Iran'seconomy won't be easy,

despite the country's enormous potential.

are betting that Iran'scitizens will be

satisfied ith consumerism nd thus

give up theirdemands forpluralism.Will the Islamic Republic pull it off?

If Tehran's goal is to create an economic

dynamo on a scale similar to China's,

the short answer is no.With U.S. sanc

tions firmly inplace, apoor regulatory

environmentor foreign irect nvestment,a relatively ncompetitivemanufacturingsector, and a cronyist business climate rife

with corruption, Iran is hardly primed for

aneconomicrenaissance.oreover, thehard-line wing of the conservative faction

has shown little interest in real economic

reform, preferring instead a form of crony

capitalism that spends state resources on

politicalpatronage f keyconstituents,including he security ervices-amodelfollowed widely in theMiddle East, most

notably in Saudi Arabia, Egypt, and Syria.

If,however,Tehran's goal ismore mod

est-to get through a politically bumpy

period by creating limited economic open

ings that produce minor job growth and

forestall nrest-the conservativesaysucceed.And suchmodesty is likely, given

that agenuinely expansive economic reform

program that enlarges the private sector,

creates jobs, and strengthens themiddle

class could undermine the stability of theregime.Indeed,Iran's 979revolutionoccurred during a time of economic im

provement and relative social liberalization.

Thus the conservatives are likely to tread

carefully.This regime has had itsobituary

written before, and as one conservative

official toldme, Tehran is "good at crisis

management." The Islamic Republic has

alreadyweatheredpostrevolutionaryinstability, a devastating eight-year war

with Iraq, international isolation, a spirited

reformist challenge, agrassroots democracy

[10] FOREIGN AFFAIRS Volume83No.6



AP/WIDE WORLD PHOTOS

Education nautocracy:

IransMohammadKhatamiithChina'sJiangemin,Beiing, June2000

Iran boasts a cheap work force of both

skilled ndunskilled abor, largemarketof 70million people, low-cost nergyresources, mple ashreservesocushion heinevitablelowscaused y liberalization,strategicocation djacento themarketsof South and Central Asia and the Persian

Gulf,wealthypotential nvestorsntheIranianiaspora,ndawell-educated echnocraticlitecomfortableithWesterners.

Beneaththe surface, owever, heconditionsare lesspromising. keyproblemis thedegree owhich Iranian oliticshavebecome actionalized,aralyzingconomic

policymaking.uring his tenure, resident

Khatamicomplainedhat "a risiseverynine days"made it hard to get anything

accomplished.lthough theconservativeshave since recaptured heMajlis, theyarenot amonolithic bunch.Differencesand personalrivalries emainandwillensurecontinuedconflict.Pragmaticconservatives,edby former resident ndperennial owerplayerAkbarHashemiRafsanjani, iew theworld, theeconomy,and theChinamodel differentlythando hard-line, ideological onservatives,who controlkey institutions uch as the

F O R E IG N AF FA IR S * ovember/December2004 [Ii]



AfshinMolavi

judiciary nd the security ervicesandinfluenceran'supremeLeaderAyatollah

Ali Khamenei.The hard-liners see theChina model

principally as ameans to forestall un

rest. They are thus less interested in

real economic reform and more prone

to think in terms of patronage politics.

Their approach-more a distributivemodel than aChina model-will use oil

wealth strategically,olingout subsidiesto the populationand interest-freeloans and cash to their supporterswhile

creating a few highly restricted and

tightlycontrolledopeningsfor foreigninvestment and the private sector.

Hard-liners view Iran's economy as a

small party with a closely guarded invi

tation list. And the party, they believe,

shouldremainsociallyconservative.The pragmatists, on the other hand, are

less interested in controlling how people

live and have abetter grasp of how the

global economy works, of the need for

liberalization, and of the obstacles to eco

nomic growth. They, too,view theChina

model as a safety valve, but their economic

vision promisesmore opportunities for the

private sector and foreign investment.Un

fortunately, thehard-liners alreadyhave the

upper hand. InAugust, theMajlis overturned lawspassed by the earlier,reformist

parliament aimed at easing foreign invest

ment and facilitating the entry of foreign

banks into Iran.Mohammad Mir Moham

madi, ahard-line member of theMajlis,

announced that the vote had prevented

"foreign dominance of Iran'seconomy."

The hard-liners also have an advantage

thanks to three years of high oil prices,which have translated into a cashwindfall

forTehran. Swelling foreign reserves

($35billion, at last count) have allowed the

government oputmuch-neededreformson holdwithout disrupting tspatronage

networks.One influential ard-lineparliamentarian,hmadTavakoli,has evenbeguntalkingaboutfurther educing hecostof gasoline,which is already eptartificiallyow(ataboutnine centsa liter)by high government ubsidies.

Since Iran arns ome 85percent f itsforeign urrencyromoil exports ndgetsan extra billion dollars a year with each

$1-per-barrelise inglobaloil prices,thecurrent pike npriceshas inflatedranianGDProwthfigures, hich have tickedabove 6 percent in the last two years.High

oilpriceshavealsocontributed o aproperty boom and a bullmarket on theTehran

stockexchange.But theyhavenotyetresulted nsignificantobgrowth,whichcouldspellreal roubleortheconservatives n thenearfuture.

Thus thepragmatists ay eventuallyregaincontrol.Yet the only thing thatseems certain is thatprogress towardeconomicreform n Iranwill remainhalting, followingthe familiar ehrantango: one step forward, one back, one

step to the left, another to the right.

RAFSANJANI REDUX

The Iranian ublic,meanwhile,couldbeforgiven for feeling a strong sense of deja

vu. Iran has tried the China model before,

and the results nlycontributed o thecurrent conomicwoes. In1989,Rafsanjani, then president,made a similarattempt

tobuyoff thediscontentedpopulacewith

stability,obs,andlimited ocial reedoms.His initiativeserewelcomedby Iran's

war-wearypopulation, hich, havingjustconcluded brutal ight-yearonflict ithIraq, embraced his non-ideological and

pragmatic pproach.

[12] FOREIGN AFFAIRS Volume83No.6



Rafsanjani ignificantly iberalizedtheeconomy, oreign nvestment egantrickling in, and a new generation of

Iranian business elites-many of them

government pparatchiksith close tiesto those in power-arose. In 1995, the

Iranian president evenmade an overture

toWashington, offeringConoco anoffshoreoil contract although heU.S.government ltimatelyrejected hedeal).

Rather than trulyopening the economy,

however, theRafsanjani era only ended up

strengtheningran'sonyads-governmentlinked Islamic charities and businesses that

today control asmuch as a quarter of the

nation's GDP-and furtherwove govern

ment into the tapestry of Iranian private

business. n thehighlyincestuoususinessclimate, companies associated with the

bonyadsor government ministries won the

lion's share of government reconstruction

contracts and used their access to licensesand cheap credit to become leading traders.

Well-connected conservativemerchants

(known asbazaaris)with established trading

networks also used some of their accrued

wealth to enter industry,which had been

thepreserve of the state in early revolution

aryIran and fWestern-oriented usinessleadersbefore 1979).As a result of these

developments, Iran'sprivate sector is todayhamperedotonlybygovernmentbstruction,but alsobygovernmentompetition.

The country's chaotic business sector is

filledwith government-linked and gov

ernment-owned firms engaged in crony

capitalism, insider dealings, and predatory

practicestocrushlargecompetitors.Reformist ournalistseride"businessmafias" that exploit their access to state

insiders for personal gain.

Khatami-era reforms opened some

new spaces for a genuine private sector,

-~~~~ A

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[14]

and a string of recent business successes

by outsiders-that is, those not linked to

Iran's tatepower networks-shows

thatopportunities ave increased. till,those opportunities remain far too con

strained. he bonyads, ccountable nlytoKhamenei,stillown everything rombanks, hotels, and shipping lines to car

manufacturers nd fruit uiceproducers.They dominate any industries,quelchingsomeprivate ompetitors nd rewardingothers who play by their rules. Several

government ministries even run their ownbusinesses: heIntelligenceMinistryowns telecommunicationsnd nformationtechnologyompanies ndtheAgriculture

Ministry ownsagribusinesses.ompaniesaffiliatedwith Iran'sRevolutionary Guard

Corps havewon contracts to build roads,

pipelines,andapartmentlocks,occasionally even using army conscripts as free

labor to laybricks and pour cement.These problems are replicated on a

smaller scale: civil servantscommonly open

small businesses, using their access to

insider nformationowin subcontractingwork or toprocure necessary (but otherwise

hard to come by) licenses.Many bureau

crats also regularly accept bribes. One

small-business owner I know inTehran

even employs amid-ranking government

taxauditor to fake his taxes. "He knows

how to fool his bosses better than I do,"

the businessman explains, "andI pay him

better than his government salary."

WASTING AND WANTING

Of course, oligarchic and kleptocratic

governments and low-level corruption

are common inmuch of Asia, even in its

fastest-developingconomies(includingChina's). But aside from Iran, none of

these countries also faces exclusion from



Buying Time in Tehran

the world's largest market and largest

foreign investor.And U.S. sanctions are

not likely to be lifted in the near term. Infact,Washington iscurrently ncreasingits pressure on Iran due to Tehran's al

leged pursuit of nuclear weapons. Still

more pressure may be brought to bear as

international human rights groups such

asHuman Rights Watch and Amnesty

International-which ulledtheir uncheson Iranduring Khatami's era-renew their

sharp criticism of the country, calling on

the European Union to impose penalties

on Iran for its persistent political repres

sion.Meanwhile, theJuly2003 killingof Zahra Kazemi, an Iranian-Canadian

journalist,nd thesubsequentover-upmay undermine what were growing busi

ness ties between Canada and Iran.

Even if the external climate were

friendlier, ran's rospects or economic

rejuvenationould be uncertain. goodexample of the failure of Tehran's state

directed economic ventures is the status

of the country's natural gas industry.With

theworld's second-largest reservesof nat

ural gas, Iran should, by the end of the

decade, be able to claim around ten percent

of this increasingly vital energy market.

But as the veteran Iran energy watcher

Vahe Petrossian has noted, Tehran isunlikely tomeet this goal, thanks to a

late start and a lack of skilled negotiators.

Meanwhile, Qatar, which shares natural

gas fieldswith Iran, is now poised to be

come the leading natural gas supplier in

the area.

Successfilllydopting heChinamodelwould also require large infusions of foreign

investment, and on this score too, Iran'sprospects look bleak. In addition to the

uncertain climate created by theMajlis'

scrappingf the20ooForeign Invest

ment ProtectionandPromotionAct,twohigh-profileforeign nvestments

have recently become ensnared in thefamiliar mix of ideological, political,

bureaucratic, and personal rivalry that

often paralyzes Iranian politics. On

May 8, a Turkish-led consortium, which

had won a contract to operate the newly

openedImamKhomeini InternationalAirport, found itscontractabrogatedon the first daywhen the Revolutionary

Guards shut the airport down. The

guards said thathaving foreigners operate

the airportwas "an affront to Iran'sdignity"

and charged that theTurkish consortium

had tieswith Israel, a charge the Turks

deny.Another explanation was that the

Revolutionary Guards wanted one of

their own companies to get the contract

and hoped to embarrassAhmad Khorram,

the reformist ransportation inisterdetested bymost hard-liners (and cur

rently under impeachment threat in the

Majlis).Whatever the reason, utureinvestors will be wary.

Indeed, it is not surprising that foreign

direct investment in Iran continues to

lag behind that in other players in the

region,suchasEgypt,Tunisia,Morocco,and the PersianGulf sheikhdoms. Al

ready, the tiny emirate of Dubai, witha population of just over one million,

attracts farmore foreign investment

than Iran. In fact, many businesses that

sell to the Iranian market prefer to locate

in themore business-friendly Dubai or

send goods tomore efficient Dubai ports,

where Iranian tradersandDubai merchants

do brisk business in re-export to Iran.One

Dubaimerchantexplained,"WebenefitfromIran'sovernmentncompetence."Not only are they incompetent, but

many hard-line Iranian officials also still

F O R E IG N AF FA IR S November/December 2004 [15]



AfshinMolavi

view foreignnvestorss "exploiters."ran'sconstitution tselfreflects hissuspicion,

virtually anningall foreign nvestment.The hard-liners fear that foreign money

wouldmean givingstrangersontrolovertheircountry. ranian oliticaldiscoursereflectshissuspicionswell, distinguishingbetween"insiders"khodi)nd "outsiders"

(gheyr-e-khodi).nsiders regenerallythought o include ll revolutionarylayers(includinghereligiouseformersround

Khatami) and to exclude secular democrats

and nationalists. Now the hard-linerswant

to restrict the political and business playing

field stillfurther, eepingout everyoneexcept ike-mindedndividualsith socialor family links to those in power. Already,

such thinking has produced a version of

crony capitalism that can be called khodi

capitalism: a system dominated by Iran's

Islamic apparatchiks and business elites,

whomaintainincestuoususiness elationships thatmix the public and private

sectors and reward only those with the

rightconnections.Despite theconservatives'estefforts o

sabotage investment, Iranwill continue

to attract foreign interest in its oil and gas

sector. Still, beyond its natural resources,

the prospects arebleak. China c-anat least

offerforeignbusinessesthe tantalizingprospect of amarket with more than a

billion consumers and an army of cheap

laborers. Iran,with only 70miUlion people

and an unproven labor force, promises

much smaller rewards.

A "Chinamodel lite" could marginally

improve Iran'seconomic prospects if oil

prices remain high and at least limited

reforms areundertaken. Thus far,however,Iran'shard-liners seem to understand the

repressive side of theChina model better

than its reformist side. Iran's economy

is likely to remain afloat, buoyed by oil

money. But the country will fail to live up

to its enormous economic potential andwill do just enough to get by, frustrating

Iranians,nriching nsiders,ndalternatelytemptingand repelling oreign nvestors.

Given the long-term facts of Iran's de

mography, ramatic hangesare inevitableat some point in the not-too-distant future,

despite the present public apathy. In the

meantime, however, hemullahs seemlikely to do just enough to avoid the

abyss.Major economic reform is not

likely,but neither is a serious collapse.@

[i6] FOREIGN AFFAIRS Volume83No.6

2004 Buying Time in Tehran Iran and the China Model

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