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7/28/2019 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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7/28/2019 2004 Buying Time in Tehran Iran and the China Model
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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]
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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
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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]
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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
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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
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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]
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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