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Economic Corruption and Barriers to a Free Market Economy

Interview with Professor Kamran Dadkhah

مهمترین مانع اصلاحات اقتصادی در ایران، ساختار سیاسی آن است

27 May 2007 Mohammad Tahavori
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Characterized by rampant economic corruption, widespread unemployment, unbridled inflation, bankrupt industries, risky investments, and capital flight, Iran’s “state-run economy” has largely failed. Both the regime’s high-ranking officials and its fiercest critics acknowledge this. From Khamenei’s eight-point declaration to fight economic corruption issued five years ago, to Hashemi Rafsanjani’s recent blunt criticisms of Iran’s economic policies, there is widespread agreement that this problem can no longer be ignored. And yet, despite these criticisms, no one seems to take the transition from the state-run economy to a free market economy seriously. Instead, attention is diverted toward Iran’s uranium enrichment program – as if all other areas of life should be put aside until Iran has realized its nuclear ambitions. Meanwhile, the transfer of ownership of factories and large development projects to the Islamic Revolutionary Guard Corps under the guise of privatization has only intensified the present economic crisis. Evidently, “the militarization of government” has taken precedence over any transition to market economy as the Revolutionary Guards have appropriated the most vital functions of the governmment.   
 
In this interview, Kamran Dadkhah, economics professor at Northeastern University, discusses the importance of transitioning to a market economy while describing the inherent corruption in a state-run economy. Previously, Dr. Dadkhah served in the Assessment and Management Department in Iran’s Ministry of Planning and Budget.
 
Mohammad Tahavori: I would like to begin our discussion by looking at the stages that led to the creation and development of the state-run economy in Iran. Dr. Ghaninejad, an academic, believes that the foundation of Iran’s state-run economy was first laid by Ali Akbar Davar, Reza Shah’s Minister of Economic Affairs and Finance. I do not wish to enter into an analysis of Iran’s economic conditions under the Pahlavi dynasty. Instead, I would like to ask why the revolutionaries, who were seeking radical changes, continued down the same path by maintaining the former regime’s economic system after the establishment of the Islamic Republic. Did they not believe in purging Iran’s state-run economy of corruption and mismanagement? Or did they view the economic corruption which characterized the Pahlavi era as unconnected with the maladies of a state-run economy?  
 
Kamran Dadkhah: Dr. Ghaninejad is right. In my article, “The Iranian Intellectuals and Economic Thought” I point out that when the Constitutional Movement was defeated, the idea of a state-run economy was proposed as a solution to economic problems, and the late Davar succeeded in laying the foundation of this economic system in Iran. This situation persisted until the Second World War. After the Second World War, the Iranian economy was characterized by “planning with guidance” by the Shah, until the beginning of the Islamic Revolution, and despite some bumps along the way, achieved notable economic progress. The main source of investment during these years was oil. After 1973, when the oil revenues rose considerably, the Shah and his government began to disregard the principles of planning and economic rationality, causing significant economic problems. But after the Revolution, contrary to the Islamic injunctions that endorse private ownership and private economy, a number of political groups and personalities, such as the Tudeh Party, the Mojahedin-e Khalq Organization, Banisadr, and Sahabi began to preach the merits of a state-run economy. In this atmosphere, Khomeini and his followers, who knew nothing of economics, took the country to the point of no return by embracing the state-run economy. Nonetheless, after the first years of the Islamic Revolution, another trend which was opposed to the state-run economy gained momentum as a number of clear-sighted economists, such as Dr. Ghaninejad and Dr. Rashidi, began to promote the idea of a market economy as the only way out of the economic slump that had crippled Iran.  
 
But the pursuit of a state-run economy by leaders of the Islamic Republic could also have been because they had no other choice. The former regime’s economic foundations and infrastructures were intact and the early all-out war with Iraq had deprived the Islamic Republic of the opportunity to drastically transform the system it had inherited from the Shah.
 
Even if we accept your theory, the present regime’s leadership could have decided not to exacerbate the situation. Keeping the foreign exchange rate artificially low, for example, only increased unrestrained corruption and gave way to terrible inflation. The regime could have circumvented these disasters with the gradual introduction of certain reforms to establish some balance in the economic arena. Many countries have experienced war, but their economies did not suffer the same as ours.
 
In your opinion, what factors make a state-run economy prone to the unjust distribution of wealth, bribery, inflation, and other economic malaises? Are these flaws directly connected with the intervention of the state in economy?
 
Before answering this question, I would like to give a brief introduction. When we talk about a “state-run economy,” we tend to think about the state’s total and unmitigated intervention in economic affairs. We also tend to think that private economy means the complete absence of state intervention. These are false assumptions. No economy exists without a minimum of state intervention. In the United States, a market economy, the state’s share in the gross national product is approximately 25 percent. The Cuban and North Korean economies are completely state-run and their poor conditions are obvious to everyone. On the other hand, state intervention in countries such as the United States, Canada, Australia, South Korea, and western European countries is minimal. These countries have thriving and successful economies.
 
Another important point is the calculation of costs. We must take into account the cost of public projects, which must come from a country’s economic resources. In other words, what path should we take in order to achieve our goals? For example, if we decide to provide each resident of Tehran with a car and a life of luxury, we need to understand that this will have a profound effect on people in other provinces who will be destitute. Let me illustrate this point by using another example: if we give $250 million to Hamas or Hezbollah, our “charity” in this case is equivalent to not building at least 2,500 schools in poor regions in our country. Economic growth requires that the right incentives be in place in order for economic success to occur.
 
Now, to answer your question, I would like to assess the consequences of state intervention in five major areas:
 
1. Respect for private property. The bedrock of economic reform is respect for private property because the most immediate consequence of the violation of private property is economic insecurity and capital flight. The right to private property should not be violated unless it is in the public interest. And even in this case, the state must observe the law and purchase the privately-owned property at a market price.
 
2. Market economy or planning. Most countries, even China and the social democratic countries of Europe, have realized that a market economy offers the most efficient allocation of resources. Some people believe governments always work to protect the interests of their people, but that is a misconception. The situation of the Aral Sea in Kazakhstan, for example, shows how the actions of governments can lead to the devastation of natural resources. Once the world’s fourth biggest inland sea, the Aral has shrunk significantly as a result of the ill-conceived policies of the former Soviet Union; only now are attempts being made to revive it. Iran’s proclivity to cling to a state-run economy in the last 28 years also exhibits the disastrous consequences of a government’s erroneous policies.
 
3. Regulations and the role of the state in gross domestic product. While most professions are governed by regulations or laws, the “freedom of profession” is a fundamental right. That is why professional associations and unions have strived to develop and “govern” according to work-related regulations without the intervention of governments. Regulations are, of course, necessary, but any unwieldy bureaucratic administrative system can interfere with economic development and breed corruption.
 
The state contributes a share of gross domestic product in all developed and developing countries. What matters, however, is the extent of this share. In a country like Iran, the government’s share of gross domestic product should not be more than 30 percent. But since the Iranian government plays a significant commercial role by engaging in trade (both on the export and import side), it tends to intervene in the economy in a substantial way. This has fatally wrecked the Iranian economy. Even Ibn Khaldoun believed that if a ruler meddles with trade, he will destroy his country and subjects. After the 1979 Revolution, numerous foundations and organizations came about and, alongside the government, became entangled in economic affairs. Most of these organizations are not accountable to anyone and records of their expenses and profits are sparse. The regime’s military and security organizations have also added to corruption by recklessly participating in economic activities.
 
4. Taxes as a safeguard for government. A government’s success depends on its relationship with the people. A government which manages a country’s affairs by relying on people’s taxes is always accountable to those people. But if it does not depend on people’s taxes for its survival, a situation similar to the unhinged condition of Iran will ensue.
 
5. Combating social problems. Assuring an equal distribution of possibilities and opportunities is the state’s duty as it enables people to generate wealth by their own means. One of the functions of modern governments is to mitigate citizens’ social concerns by helping to create equal opportunities for everyone in the areas of education, employment, and social rights. In addition, the government has a duty to assist the individuals who are struck with unfortunate circumstances, such as incurable diseases and physical and mental disabilities. But none of these issues should interfere with the smooth functioning of a market economy. A government is capable of resolving social problems only when it has a growing economy, and sustained economic development is not possible without a market economy. The government must maintain a healthy market economy in order to address the needs of the vulnerable segments of society in an effective way.
 
But some believe that in a society like Iran, where a significant portion of its income comes from oil, the privatization of oil industry will only widen the gap between the rich and the poor. That is why they argue that the oil industry should remain nationalized. How can we distribute national wealth justly?
 
This is a very complex issue and requires a lengthy discussion. To put it in a nutshell, a state-run oil industry begets more corruption. Part of this wealth should be directed to government reserves and a major part of it should be used for investments in order to benefit society. If the oil industry is owned and managed by the private sector, the government can provide oversight over the distribution of its revenues. On the other hand, if the government itself operates the oil industry, who has the power or authority to supervise its activities?
 
Certain attempts have been made in the past to move the Iranian economy in the direction of privatization and a market economy. During his two terms as president, Hashemi Rafsanjani, in particular, took certain steps to initiate privatization. Unfortunately, his policies widened the gap between the rich and the poor. Do you think the widening of this gap is inherent in the nature of privatization or do you think Rafsanjani’s plan was executed crudely?
 
In addition to progressive aspects, every period of transition also has inescapable negative consequences. If certain mistakes occur and corruption runs amok because incompetent people are in charge, the period of transition will experience even greater problems. Apart from these problems, another difficulty that the Islamic Republic faced immediately after the war was a tremendous increase in demand. This increase created inflation, compounding the problems of an already ailing economy. Now, to minimize the damage, we need sound planning to take slow, calculated steps through a determined period of transition.
 
Unfortunately, no real transition to a market economy has ever taken place in Iran. Instead, the government has sold its properties to various foundations and organizations or, as is the case today, it is handing over the control and ownership of many of its assets to the Revolutionary Guards. This is not privatization because the government still plays a decisive role in the economic arena. In fact, the government has been caught in a continuous cycle of taking one step forward and two steps back. It is just like our democracy: there is so much talk of democracy, and yet the country is not democratized. Despite all this, people have come to realize that privatization is not a bad thing.
 
But the Supreme Leader’s edict regarding the implementation of Article 44 of the Constitution and the Expediency Council’s persistence have given impetus to the hope that the establishment of a market economy is imminent. Unfortunately, when it comes to turning over the control of economic affairs to people, there is a lack of will on the part of the government as it seems averse to any thought of relinquishing power.
 
The implementation of Article 44, which Hashemi Rafsanjani is pursuing, is a necessary and positive step, but it is not enough. Privatization should be carried out in a systematic way. The distribution of government’s wealth among the aqazade-ha (children of important men) and the Revolutionary Guards as “the shares of justice” is not “privatization.” Privatization occurs when the state ceases to interfere with the economy and allows private citizens to run it. In such circumstances, the state will be in a position to say that certain poor and indolent social classes have not profited from privatization, and that it must intervene in their behalf. Unfortunately, the government sometimes makes promises that raise hopes. Not only does the government repeatedly fail to fulfill these promises, it often takes divergent courses of action. For example, the government privatizes the banks but it also dictates the interest rates to them. What kind of privatization is this?
 
To what degree is the state-run economy responsible for the increase of unemployment, inflation, and capital flight?
 
All these flaws are obviously directly connected with the government. The government aggravates inflation by printing money and implements misguided policies which contribute to unemployment and scare away investors and their capital.  
 
Can proper oversight of the government’s performance prevent economic corruption? Will corruption still occur if the Members of Parliament as the representatives of people carefully inspect the government’s activities while other supervisory bodies perform their duties diligently?
 
Parliament cannot prevent the corruption that infects a state-run economy, even through attentive supervision. In fact, the state-run economy hinders Parliament from discharging its responsibilities. In addition, Parliament itself adds to the expenses of the state-run economy. Of course, this is not a problem unique to Iran; even the United States Congress incurs heavy expenses. What, however, needs to be stressed here is that people as consumers should directly supervise the economy through their own independent choices.
 
“Globalization” has been a hot topic for some time now, and Iran is trying to adapt to it, to such a degree that it has demonstrated willingness to join the World Trade Organization. Do you think a state-run economy has the capacity to compete in the world market?
 
Joining this organization is a good objective for Iran, but it is not practical at this point. One could even argue that if Iran joins the World Trade Organization under present circumstances, its economy will collapse completely. Joining the World Trade Organization requires a long process, and Iran is in no way prepared to enter this process at the moment. To reach this ideal stage, Iran must devise and carry out a five-year plan to transform the country’s economic structure.
 
Another question that Iranians seem to ask these days is why our national revenue in 2006, the year we produced the most oil, was no different from the 1996 revenues. Do you think this is the result of the widespread corruption and bribery that occur at various levels of government, or is this the natural outcome of a state-run economy?
 
Undoubtedly, it has never been clear what has happened to a huge portion of Iran’s oil revenues. Even the Central Bank seems incapable of compiling a report to show how the oil revenues have been spent in the last 28 years. There is no question that Iran’s bloated government devours a massive part of this income. On the other hand, look at the United Arab Emirates, Canada, and Australia. To a certain extent, these countries’ economies have grown by relying on Iranian capital. Instead of attracting capital, the state-run economy scares them away. That is why it looks like oil revenues have disappeared.
 
In your opinion, what is the greatest obstacle to Iran’s transition to a free market economy?
 
The greatest obstacle is Iran’s political structure, especially since some groups, which wield significant economic power, do not tolerate any change at all. These groups have close ties with Iran’s political leadership.
 
What future do you predict for the Iranian economy?
 
Economics is not separate from politics. With the kind of policies that define the Islamic Republic, one cannot imagine any bright and hopeful future for Iran. The current ideology governing Iran is not concerned with the national interest; that is why any optimistic view about Iran’s future seems far-fetched at this point. Today’s ruling ideology sees nothing wrong with diverting the money, which should be paid to Iranian workers, to Hezbollah, or Hamas. As long as our policies are “Palestine-centered” and defy democratic principles, our economy will not grow. Unfortunately, we are nearing the calamity of another war, in which case nothing will remain of the Iranian economy. Of course, I hope my prediction is wrong and, instead, we achieve a collective rationality that places national interest first.

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About author

Mohammad Tahavori

Mohammad Tahavori

Mohammad Tahavori currently works as a freelance journalist with publications in many newspapers and magazines. In 1998, he began his work in journalism and until 2005, Tahavori served as Iran newspaper’s correspondent, editor, and advisor to the executive director of the communications board of the Iran Culture and Journalism Institute, which publishes the Iran Newspaper. His articles have appeared in the Washington Prism, E’tebar Monthly, Rooz Online, Zamaaneh Radio, Dehkadeh, Advar News, and Iran Newspaper. Tahavori is at The Fletcher School of Law and Diplomacy at Tufts University for his M.A. Full bio