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How President Rouhani and Ayatollah Khamenei could reform Iran

Iranians and Westerners see hope in President Rouhani's UN visit today. But even with the backing of the supreme leader, reforming Iran's economy will be a difficult task for Rouhani, especially as he must challenge the power of the Revolutionary Guard and intelligence services.

By Hossein Askari, Dariush Zahedi, Ali EzzatyarOp-ed contributors / September 24, 2013

An Iranian street money changer holds Iranian banknotes in the main Bazaar of Tehran Jan. 26, 2012. Before leaving for New York and his UN visit, Iran's President Hasan Rouhani urged Western leaders to heed his appeals for greater dialogue and take steps to ease sanctions.

Vahid Salemi/AP/File


Washington, D.C. and Berkeley, Calif.

Hasan Rouhani is being hailed as the new face of Iran, especially as he makes a highly anticipated trip to the United Nations in New York today. Iranians are expecting miracles from their new president; others see hope for diplomacy over Iran’s nuclear program.

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It will take far more than symbolic visits and gestures, however, to restore Iran’s struggling economy or sense of justice. With Iran’s economy in total ruin, it will take unprecedented vision and courage. Even with the backing of Supreme Leader Ayatollah Ali Khamenei, Rouhani’s task will be difficult, especially as he must challenge the power of the Revolutionary Guard and Iranian intelligence services.

Iran’s economy suffers from a trifecta of economic malaise that has grown continuously worse since Iran's revolution in 1979. First, the state-dominated economic system is epitomized by ineffective institutions, an incompetent bureaucracy, and a weak and dependent private sector. And this system is dominated by corrupt quasi-government bodies with a vested interest in maintaining the status quo.

Second, the economy is badly mismanaged. Policymakers are often drawn from the ranks of the loyal with limited technical skills and experience. They have failed to remedy the high unemployment and inflation despite a steady stream of oil revenues (albeit declining from oil and gas fields that are in escalating disrepair).

Finally, crippling international sanctions have taken a toll on the Iranian economy over the last seven or so years, reducing export revenue, increasing the import bill, squeezing government coffers, and leading to a collapse of the Iranian currency. Rampant corruption continues to grow as income and wealth disparities widen.

The average Iranian has great difficulty purchasing basic supplies and goods, and per capita economic growth has shown no growth in real terms since 1980. This has encouraged Iran’s best and brightest to leave for the West, Southeast Asia, and elsewhere.

To begin to remedy this, Mr. Rouhani needs to break down the corrupt state system that has also benefited him as an Islamic Republic insider. Western commentators have largely ignored the growing importance of the Iranian Revolutionary Guards and the intelligence services in the economy.

With the support of respective presidents, especially under Mahmoud Ahmadinejad, the Revolutionary Guard muscled its way into the economy, receiving lucrative no-bid contracts for oil and gas development and big infrastructure projects. Many of these were in turn subcontracted for a large fee, creating a circle of nepotism among the government elite, undermining the contracting process and impoverishing the economy.

Dialing back this influence on the economy will not be easy. For one, Rouhani may favor the Iranian intelligence services because of his role in building them after the Iranian Revolution. And while Rouhani has an unprecedented opportunity to affect change, he will face pressures, especially from conservatives.

The Revolutionary Guard and the intelligence services are above the law in Iran, and these two organizations will continue to compete with each other under Rouhani, staking their claims on oil revenues and contracts and threatening to prolong Iran’s structural impediments to reform. Rouhani must reduce the role of these entities in the economy to ensure that new publicly funded projects are put through a free and competitive process where the fledgling private sector can participate. Investors can then begin to have confidence in the security of their investments, protected from political pressure.


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