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.

Vahid Salemi/AP/File
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.

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.

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.

He will need unprecedented courage to keep the quasi-governmental wolves at bay, and put a dent in corruption in his first six months in office and to set a precedent. He will need to appoint competent ministers and department heads of policy organizations to develop policies and establish a strong independent cadre of bureaucrats to implement them. There is some hope in this area: Most independent commentators have found Rouhani’s cabinet so far to be well balanced and more technocratic than recent predecessor governments.

Can President Rouhani deliver? Unlike his predecessor, Mr. Ahmadinejad, Rouhani enjoys the support of important power centers, including the Supreme Leader Ayatollah Ali Khamenei, former presidents Hashemi Rafsanjani and Mohammad Khatami, and the Larijani family, an important political clerical family that is close to the epicenter of power in Iran. These connections and support give him much more leverage than Ahmadinejad had. 

Similarly, the supreme leader recognizes the need for economic reforms, and will back Rouhani on this front to the extent that he can. Economic conditions today are posing a serious problem for the regime, as never before. Rouhani needs to restore economic prosperity at least to the extent that people can feed their families. This much the supreme leader understands. But there are limits to even the supreme leader’s power. He and Rouhani cannot simultaneously threaten the economic interests of the intelligence services and the Revolutionary Guard. He needs their loyalty and support.

The average Iranian has hope that with better external relations and the removal of sanctions, economic prosperity will quickly follow. Of course, the United States and the European Union are unlikely to lift sanctions quickly and unconditionally. Even if sanctions are loosened, it will take time for average Iranians to see any benefits. Further, respite from sanctions will afford Iran only short-term breathing room, while sustained economic growth and prosperity will require institutional reforms that must include the rule of law.

Such reforms are politically difficult – the establishment of effective institutions, the reduction of corruption, the deregulation of markets, limitation of the economic grab of the Revolutionary Guard and the intelligence services, and a framework of consistent economic policies that carry over from year to year under the careful watch of professional civil servants and from one administration to the next.

Indeed, Rouhani showed little inclination to tackle these problems when Iran had more leeway and the government enjoyed more credibility and support some 20 years ago. Neighbors, in particular Saudi Arabia, will assert whatever influence and leverage they have with the US, the EU, China, and with the large multinationals to hold back cooperation with Iran. All the while, the Revolutionary Guard and the intelligence services are unlikely to surrender their economic gains and interests in the name of national sacrifice.

So while we feel all of these factors make a quick and miraculous economic turnaround and sustained growth unlikely in Iran, there is an avenue for modest progress. But even this avenue will require a level of courage and personal sacrifice that Hasan Rouhani has not displayed before. But he has the rare opportunity – because of widespread popular support and the backing of the supreme leader – to prove whether he is the courageous reformer many are billing him to, or yet another in a line of disappointing Iranian presidents.

Hossein Askari is the Iran Professor of Business and International Affairs at George Washington University’s Elliott School of International Affairs.

Dariush Zahedi is the director of the Berkeley Program on Entrepreneurship and Development in the Middle East at the University of California, Berkeley.

Ali Ezzatyar, a lawyer, is the executive director of the Berkeley Program.

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