Opinion

How 40 Years of Mullah-nomics Have Failed Iran

War and sanctions did a lot of damage, but nothing compared to the inefficiency, corruption and revolutionary stubbornness of the country’s leaders

An Iranian woman holds an effigy of US president Donald Trump, during a rally marking the 40th anniversary of the 1979 Islamic Revolution, in Tehran, Iran, Monday, Feb. 11, 2019
Ebrahim Noroozi,AP

The Iranians who couldn’t attend the celebrations marking the Islamic Revolution’s 40th anniversary because they were waiting in line for a chance to buy meat for their families shouldn’t be surprised at their situation. The revolution’s guiding light, the Ayatollah Khomeini, famously said that “economics is for donkeys.”

I’m not sure whether he meant that any idiot can run an economy, or that people who are overly concerned with material prosperity are contemptible. Khomeini implied the latter when he said, early on in the revolution, “I cannot believe that the purpose of these sacrifices was to have less expensive melons.”

Khomeini was much more interested in Islamic jurisprudence and in hating the Shah than he was in how his future Islamic Republic would ensure a modicum of prosperity. He wavered between an economic conservatism based on Sharia law, and a sort of Islamic populism rooted in a visceral desire to help poor Muslims. But he evinced no understanding of how economics really work.

Today marks 40 years since the day the Shah’s regime came to an end and the Islamic Republic took its place, and the revolution still hasn’t delivered the cheap melons, or much else, for ordinary Iranians.

Turkey of an economy

A comparison of Iran’s economic performance done by Nadereh Chamlou for the Atlantic Council puts the situation into stark relief, belying all the parades, fiery speeches and boasting now under way in Tehran.

Chamlou compared Iran with Turkey, South Korea and Vietnam. He found Iran’s performance since the 1979 revolution to be lagging far, far behind the others.

In 1977, the last normal year for pre-revolutionary Iran before mass protests broke out, its economy was 25% bigger than Turkey's. Four decades later, Turkey’s GDP is 2.4 times that of Iran.

Forty years ago, Iran's economy was 65% bigger than South Korea’s economy. Now South Korea's economy is 7.2 times bigger than Iran's.

Looking at Vietnam, in 1977 its economy was 70% the size of Iran’s. Today it's nearly five times bigger.

Regime apologists often stress that Iran’s per capita GDP more than doubled from 1980 to 2018, but that’s not particularly impressive: in that time, Turkey’s economy grew five-fold, and South Korea's by19 times.

In this time, Iran has made some marginal progress on income inequality and reducing poverty, but even today about 40% of Iranians are at poverty or near-poverty levels.

Let’s cut the mullahs who run the country a little slack. Iran was forced into a bitter, destructive war with Iraq in the 1980s and has been subject to repeated and often severe sanctions led by the United States. But neither provides enough excuse.

The war with Iraq ended in 1988. Thirty years is enough time for any economy to recover, especially when like Iran, it has oil, a large domestic market and an enviable location between the economic powerhouses of Europe and Asia.

The sanctions hurt, but if Iran’s leaders had sacrificed their dream of spreading revolutionary Islam and their abiding hatred of America, the sanctions would never have happened. Washington could make peace with a quietist Islamic regime (witness Saudi Arabia), but this week’s anniversary celebrations make it starkly clear that America's past support for the long-dead Shah remains too fresh for Iran to let it go.

Compare that to Vietnam, which certainly has its fair share of claims against the U.S. but has consigned that all to history and happily does business with its former enemy. 

The regime’s unwillingness to compromise on revolution is only one problem. The other is Khomeini’s economic legacy.

Like Lenin, who until he took power was preoccupied with ideological battles with other Marxists and hatred of the czarist regime, Khomeini’s revolution had surprisingly few ideas how the Islamic Republic would actually work. That applied to the economy, too.

As hated as the Shah was, he was a modernizer who among other things presided over economic development led by an emergent class of entrepreneurs. The revolution branded them Shah cronies and the mullahs nationalized their businesses.

In their place a quasi-state-controlled economy arose, dominated by the business empire of the Revolutionary Guard Corps and by religious endowments.

A new generation of entrepreneurs has never arisen because it can’t. How much of the economy is controlled by this state sector and the inner workings of these business empires, no one really knows. One estimate (admittedly from a think tank lobbying for regime change) is that it’s as much as 40%.

Whatever the share, the state controls the important part of the economy – energy, construction, international trade and big industry and it doesn’t do a good job. The World Bank’s latest Doing Business survey, which measures how easy it is to start and run a company, ranks Iran is128th among 190 countries. In Transparency International’s index of perceived corruption, Iran is ranked 138th among 180 countries.

Not surprisingly, during the brief interlude between the 2015 signature on the nuclear accord and Trump’s decision to re-impose sanctions last year, Iran’s economy achieved little traction. Oil exports resumed because Iranian oil is as good as any oil, but the rest of the economy barely budged.

The “resistance economy” that Iran’s hardliners prefer over concessions to America and increased foreign trade and investment that would come with it benefits the elite of mullahs and Revolutionary Guards. Alas, for ordinary Iranians, they aren’t about to surrender it to an onslaught of competition from McDonald’s restaurants or Korean construction companies.