Sanctions Relief: Iran’s Economic and Monetary Policy Options
Three speakers discussed the impact of the sanctions relief package, recently approved in Geneva, on the Iranian economy and consider whether Iran's economic policies of the 1960s and 1970s can provide a guide for addressing Iran's current economic problems.
On December 13, 2013, the Middle East Program at the Woodrow Wilson Center hosted an event, “Sanctions Relief: Iran’s Economic and Monetary Policy Options: Could Iran’s Policies of the 60s and 70s be a Guide or a Lesson?” with Hassanali Mehran, former Governor of the Central Bank of Iran (1975-78), Hadi Salehi Esfahani, Professor of Economics at the University of Illinois at Urbana-Champaign, and Suzanne Maloney, Senior Fellow for Foreign Policy at the Brookings Institution’s Saban Center for Middle East Policy. Haleh Esfandiari, Director of the Middle East Program, moderated the event.
Esfahani described the economic circumstances in Iran as a case of stagflation. He believed that stagflation is not a result of international sanctions but rather of poor policymaking that caused negative economic growth and high inflation. He attributed two causes of Iran’s circumstances: politics and “fiscal dominance.” Esfahani said that Iran’s political system is set up in a manner that causes poor governance and poor decision-making. He cited the example of former President Ahmadinejad’s populist policies, which were meant to keep Iran’s various constituencies appeased. Ahmadinejad was able to finance these policies because of the “fiscal dominance” that Iran’s political class has over the Central Bank. Because of the influence that the political elites have, the Central Bank has no autonomy to set sound monetary or economic policies. Esfahani said that politicians have ignored the “laws of economics,” believing that the next group of leaders will fix the economic issues. He noted that President Rouhani’s government is aware of the situation and is attempting to address some of the issues by reforming generous subsidies programs for the poor and reducing energy subsidies so Iranians pay market prices.
Maloney stated that Iran is a very wealthy country. In terms of its economic development, she compared Iran’s growth in the 1960s and 1970s to China, noting that much of Iran’s economic growth was triggered by the non-oil sectors. According to Maloney, the growth of the oil sector created the instability and circumstances that caused the 1979 revolution; yet the same problems remained after the revolution. She described today’s issues in Iran as echoes of past issues such as the economic crises in the early 1980s and 1990s. Only the current situation is complicated by the presence of international sanctions. Maloney said that proposed reforms such as austerity measures included in President Rouhani’s recently announced budget are not popular and that debate over how to address the economy is more contentious than over the nuclear program. Maloney discussed the recent nuclear program deal reached in Geneva, noting her surprise at how modest the deal was economically for Iran. She attributed sanctions to preventing Iranians from getting letters of credit or engaging in simple trade. Maloney noted that much of what the Obama administration has said regarding the deal was not directed at Tehran, but at Capitol Hill where politicians have been skeptical of negotiations.
Mehran suggested that Iran’s economy should be judged based on the last 100 years. He cited the 1908 discovery of oil in Iran, which had a profound impact on Iranian politics and economics. Mehran said this was the birth of the idea that foreigners were only interested in exploiting Iran for access to its oil. He noted the 1950s nationalization of the oil industry, and how the Shah even blamed the oil companies for his removal. Mehran identified the success of the oil industry as a problem and a curse, questioning what a state does with its oil wealth. In Iran’s case, according to Mehran, as oil revenues increased by the 1970s national spending increased at the same rate, creating new expenditures and projects that could not be reduced. He made a comparison to Norway, a country that invested their oil wealth, which Iran could do as a highly developed state with a small population. This has not been an option for Iran since it is a developing country that needs to spend money in order to address its problems.
By William Drumheller
Former Governor, Central Bank of Iran (1975-1978) and former President, Central Bank of Aruba (1986 and 2007-2008)
Professor of Economics, University of Illinois at Urbana-Champaign