Mr. Silva-Brown's Class Blog

AP 6 Blog Post #2: Iran

AP Comparative Government, period 1

Karl, Gianna, Johnny

22, October 2015

Economic System of Iran:

“Weak rule of law and autarkic trade and investment policies have long undermined the foundations of economic freedom in Iran. Political and religious interference in judicial matters is common. All investment must be approved by the government and is limited to certain sectors. Small-business entrepreneurs struggle to register businesses or acquire capital.”

----http://www.heritage.org/

The economy of Iran is currently in transition and is considered a mixed economy with a large public sector. A majority of the economy is centrally planned, with the Iranian government directly operating hundreds of state-owned enterprises and many companies affiliated with the nation’s security forces. Price controls and subsidies (particularly on food and energy) burden the economy along with widespread corruption and the smuggling of contraband, both of which undermine the potential for the growth of private sector, which includes small-scale workshops, farming, and manufacturing. Iran’s economy is characterized by a large hydrocarbon sector, small scale agriculture and services sector, and a noticeable state presence in manufacturing and financial services. Iran is the world’s eighteenth largest by purchasing power parity (PPP) and is ranked 29th by nominal gross domestic product (GDP) primarily because of its immense oil and gas reserves that account for a majority of annual revenue. Oil export revenues allow Iran to amass billions of dollars in revenue each year, therefore its economic activities are greatly dependent on petroleum products. A unique feature of Iran’s economy is the presence of religious foundations called Bonyads; which are charitable trusts in Iran that play a major role in the part of the economy that is not dedicated to petroleum. After the 1979 revolution, Bonyads were nationalized with the intention of redistributing income to the poor. Today, they control an estimated twenty percent of Iran’s gross domestic product and channel revenues to groups supporting the Islamic Republic. Exempt from taxes, they have been criticized for siphoning subsides from the government and providing inadequate charity to the poor. There is substantially less business freedom in the economy of Iran, as all investments are limited to certain sectors and must be approved by the government. As a result, it is difficult for entrepreneurs to acquire capital or even register their businesses. Despite these challenges, small consumer-run marketplaces called bazaars are common in nearly all regions of Iran. An example of the workings of a free market economy, bazaars are known as merchandising areas where goods and services are exchanged or sold. This network of merchants, bankers, craftsmen, and artisans operate with no government influence, and the rise of bazaars and stock trading centers in the Muslim world has successfully allowed the creation of new capitals.

However, economic sanctions imposed by the United States and the European Union in response to Iran’s nuclear weapons program has likely had the most devastating effect on the country’s economy. For example, petroleum exports,which provide about eighty-five percent of government revenues, declined to about 1.5 million barrels per day in 2012 from about 2.5 million barrels per day the year prior. Additionally, sanctions have reduced Iran's access to products needed for the oil and energy sectors, prompted many oil companies to withdraw from Iran, and caused a decline in oil production due to reduced access to technologies needed to improve their efficiency. The end of these economic sanctions on Iran would give Iran access to frozen assets that Obama administration estimates at roughly $56 billion, which the country could use to boost oil revenue, revive domestic industries, and reduce unemployment. Sanctions force the government to take more control, impeding the transition to the free market.

Although Iran’s economy is currently in transition from one that is centrally planned to one with more aspects of the free market, the evolution has been a slow and convoluted process marked by inefficient state policies, poor management of resources, internal conflicts, and sanctions.

An Iranian Bonyad advertisement.

An Iranian bazaar. Note the various colorful signs advertising their wares, a primary aspect of a free market economy.

A government controlled oil plant. All of the major resource production plants in Iran are directly controlled by the government, and the few private enterprises existing in those fields are under contract with the government.