Consumerist: Is This Why Iranians Are Leaving Iran And fleeing To Other Countries Including Malaysia?

Dato Jacob George

Why Iranian Are Leaving Iran And fleeing To Other Countries Including Malaysia!

A Comprehensive perspective!

To get some perspective on the state of the Iranian economy, it may be useful for us Malaysians to begin by providing a few benchmarks.

Did you know that in 970, Iran’s gross domestic product (GDP) was US$10.6 billion (ranking 27 among all countries), while the commensurate figure for South Korea was $8.9 billion (32nd).

And ten years on, Iran’s GDP was $90 billion (19th) and Korea’s $63 billion (28th); and in 2005 sadly, Iran had sunk to 31st in GDP ranking at $190 billion and Korea had climbed to 13th, with $791 billion.

Moreover, for Iran, real per capita income growth in the period 1980-2005 was about zero; and although it increased after 2005 because of rapidly rising oil prices, over the long haul there has been insignificant growth in real per capita incomes over the past 30 years since the Revolution.

As for oil, Iranian and Saudi Arabian oil production in selective years show a position of effective parity four decades ago transforming into one where Saudi output was almost double that of Iran last year: in 1970, Iran 3.83 million barrels per day (mbd) and Saudi Arabia 3.8 mbd; in 1975, Iran 5.35 mbd and Saudi Arabia 7.08 mbd; and in 2009, Iran 4.04 mbd and Saudi Arabia 8.25 mbd.

For natural gas, although Iran and tiny Qatar have about the same level of reserves (Iran ranking second and Qatar third globally) largely as a result of a joint gas field in the Persian Gulf, Qatar became the world’s largest exporter of liquefied natural gas (LNG) quite some time ago and is expected to export 105 billion cubic meters of LNG in 2010, while Iran does not export any LNG whatsoever.

In fact, Iran has recently abandoned its two LNG projects (because of funding and needed technology transfer) in the natural gas field that it shares with Qatar, and is instead hoping in the future to become a big gas exporter through pipelines.

In oil, then, Iran’s output has not kept up with Saudi Arabia’s, and if we look at sustainable production capacity (because of low investment) and oil exports (because of rising domestic consumption), Iran has fallen even further behind Saudi Arabia.

Now lets us look at natural gas development and LNG exports!

Here, Qatar, although quite backward in all areas of energy development, today simply dwarfs once mighty Iran.

In terms of gross domestic product, to compare Iran’s performance with South Korea may appear unfair given their present strengths, but the difference in performance is striking.

In 1970, Iran had an economy that was about 10% bigger than Korea’s; by 1980, around the time of the 1979 revolution, Iran’s economy was about 50% bigger (in large part because of rising oil prices and revenues).

Yet a mere 25 years later, in 2005, Korea’s GDP was more than four times that of Iran’s; and because of rapid population growth, Iran’s per capita performance compares even less favourably to South Korea.

To say that the Iranian economy has underperformed since the Shah’s overthrow in 1979 would be an understatement.

Of course, certainly emigration from Iran affords one reasonable overall verdict on economic (and political) conditions in Iran.

Under the Shah if you remember, emigration was a trickle and was in large part motivated by political repression.

But since the revolution, emigration from Iran has become a torrent driven by political, social and economic considerations; especially for the university-educated youth of Iran, the dearth of economic opportunities and hope for a better future has become the main motivating factor to emigrate.

And according to the International Monetary Fund, Iran ranks first in brain drain among developing countries, with roughly 150,000 Iranians leaving Iran every year, and with about 25% of all Iranians with post-secondary education now living abroad in developed countries.

It has been estimated that brain drain is costing Iran about $40 billion per year.

It is strange and inexplicable that Iranian officials dismiss the importance of the country’s brain drain as inconsequential, but they do so at their own peril because the importance of a highly educated class for economic development and growth has become indisputable.

Another broad verdict on Iran’s economic conditions is the size of foreign direct investment (FDI); this is an indicator of how foreigners perceive Iran’s economic conditions and promise.

FDI in Iran outside the energy sector has been paltry, and even in the energy sector it has been small relative to Iran’s potential (as indicated by its reserves of oil and natural gas).

The reasons are many: Iran’s historically unattractive policies toward FDI, its sub-par economic performance and outlook, negative press coverage, a less-than-attractive business climate, and US sanctions.

The failure in the energy sector (oilfield development, natural gas development in the Persian Gulf, Caspian Sea oil and gas development, pipeline development for Iranian exports as well as for transit) has been largely a result of US unilateral sanctions, shortage of capital and Iran’s negotiating tactics.

To be fair, one should begin by acknowledging that on the eve of the revolution, the Iranian economy had a number of structural deficiencies that were much like those of other developing countries of the time.

The economy was heavily protected from foreign competition and import substitution was seen as the way to develop and grow; at that time, this was the norm, or the perceived prescription, among developing countries, even among countries in Asia that have since excelled.

At the same time, because of its dependence on oil exports, the public sector played a dominating role, in part stifling private sector development.

In retrospect, however, the low quality and inefficiency of Iranian institutions may be seen as Iran’s major deficiency for economic growth at the time of the revolution.

Although economists have been latecomers in recognizing the obvious, namely the importance of institutions, the contributions of institutions as the foundation for development and growth is today indisputable.

In any part of the civilized world, without efficient institutions, such as the legal system and the rule of law, confidence is diminished, and with it the desire to save and invest in long-term projects.

Sadly, the revolution not only did not support and enhance institutional development, instead, and as will be discussed later, it has even eroded what was in place in 1979.

But why has the revolutionary government of Iran failed so? And is there any hope for a turnaround anytime soon?

Now why did Iran regress after the revolution to be where it is today?

In the aftermath of the revolution in 1979, the regime nationalized much of the private sector. Nationalization increased the role of the government even further and stifled the nascent private sector that it had inherited from the previous regime.

Nationalized industries were handed to newly created foundations run by political cronies.

Import substitution policies were continued by the revolutionary government, but more forcefully than ever before because political cronies were inept managers and needed more protection from foreign competition to survive. Thus nationalization increased structural inefficiencies further and impaired economic growth.

Explicit and implicit subsidies, such as high tariffs, have supported most of Iran’s industrial and manufacturing production.

Although privatization policies to reverse these adverse trends started in the 1990s, they have achieved little like in Malaysia!

There has been more talk, political rhetoric and statements but little at all of tangible comprehensible action.

Today, the public sector is responsible for well about 65% of Iran’s total employment. In fact, with the increasing economic role of the Islamic Revolutionary Guards Corps (IRGC), the role and potential of the private sector may have been dealt a mortal blow

Iran’s economic failures have been exacerbated by widespread, regressive government subsidies and administered prices.

Although these were in part a legacy of the Iran-Iraq War between 1980 and 1988, they have been continued for political expediency.

The regime has used subsidies to hide its economic failures and to gain support of the less-fortunate Iranians who have become dependent on government handouts because the economy has not created sufficient well paying jobs.

The single largest subsidy, namely that for gasoline, was in the range of 10% to 25% of GDP during 1997-2008; the cost of this subsidy has varied largely because of fluctuations in world oil prices, which are used to calculate the extent of the subsidy.

The explicit (budgeted) consumer subsidies, for staple food items, water, electricity and the like, have amounted to another 5-10% of GDP in recent years. If everything were added up, subsidies have, on average, probably amounted to about 25-30% of GDP during the period 2000-2008.

These large subsidy expenditures, besides being inefficient by encouraging waste, have severely limited the resources available for investment in education, healthcare, infrastructure and industrialization.

Many schools operate in shifts because of a shortage of space. The availability of university education is limited and its quality has deteriorated since 1979. Public healthcare is of low quality and limited in rural areas. And growth outside of the energy sector has been painfully slow

Although strapped for resources when oil prices were low from the mid-1980s to the turn of the century, the regime in Tehran has been unable to adopt an efficient and equitable tax system to enhance revenues and has continued to rely largely on oil revenues to finance expenditure. It is estimated that oil and gas revenues constituted more than 80% of central government revenues in 2007.

The absence of an effective progressive income tax and a capital gains tax have in turn been a major determinant of Iran’s income distribution, which has only become more glaringly unequal since the revolution. The rich pay little or no tax. The poor have little income to afford taxes. As a result, the limited tax burden has fallen on government employees.

While institutions were inefficient and corrupt prior to the revolution, they have become even less effective and more corrupt under the revolutionary government. Corruption has permeated every level of society.

Under the Shah, corruption was more or less limited to members of the royal family, ministers and other senior officials.

In today’s Iran it is even at the level of the doorman to government buildings. To go anywhere and get anything done requires a payment.

Corruption can be seen even in the day-to-day policies of the government, and especially of the Mahmoud Ahmadinejad administration.

For instance, why have so many large contracts been lavished on the IRGC?

This might be justified if the IRGC was qualified for the contracts it contested and if the bids were fairly evaluated.

Even before the Ahmadinejad government took power in 2005, it was alleged the IRGC would routinely bid on contracts (such as developing gas fields and off-shore oil fields) where it had no expertise; it would then turn around and subcontract its “winning” bid to a foreign firm, invariably one that was not eligible either (due to factors such as propriety technology or financing), and then take a large cut from the top with the result that the senior members of the IRGC were enriched and then in turn supported the government (a very costly and roundabout way to enrich cronies).

President Ahmadinejad is alleged to practice the same policy more openly and taken it to new highs.

For example, while Bechtel developed Qatar’s gas field and built its LNG capacity with the most effective technology (Conoco Phillips), Iran relied on the IRGC and European companies that were not fully qualified; and the consequences are clear.

Over the past five years, a period when oil peaked at nearly $150 per barrel in July of 2008, the Iranian government spent oil revenues with no regard to Iranian law or to the impact on the economy.

In 1999, Iran established an Oil Stabilization Fund (OSF) to reduce fluctuations in government budget revenues through periods of rising and falling oil prices.

The Iranian parliament adopted strict procedures for the operations of the OSF.

Yet, while the holdings of the OSF should have increased significantly during the period of rapidly rising oil prices, they in fact decreased.

Moreover, although Iran adopted a law that would require the government to wean itself from oil revenues over a period of 10 years, its dependence has instead increased during Ahmadinejad’s presidency over the last five years.

The populist Ahmadinejad has ordered the central bank to withdraw funds from the OSF to support his expenditure policies.

Central bank governors who have not followed his orders have been summarily fired.

In fact, it is alleged that Ahmadinejad spends from the national treasury as he wishes, without parliamentary approval, to buy support as needed. In a country where the president behaves so, it is also alleged by sources the rule of law is only a mirage and affords no comfort to long-term investors.

Iran’s macroeconomic policies over the past decade have not been supportive. With rising oil revenues, the government has increased its expenditures freely, resulting in inflation rates that have been in the 20% to 30% range and real interest rates of minus 5% to 15% during the last seven years.

At the same time, the exchange rate, although categorized as a managed float, has moved in a narrow range of about 15% to the US dollar over the last 10 or so years.

Prices for imported goods have increased along with global inflation, but prices of non-tradables have increased at a much faster rate (with Tehran’s real estate prices increasing by about 1,500% to 2,000% between 1998 and 2008). The result has been a highly overvalued currency that has damaged Iran’s international competitiveness.

The wealthy have gained through a real estate bubble that dwarfs that of the US, prompting the rich to sell, with oil revenues subsidizing their capital flight at an essentially fixed exchange rate. The estimated size of massive capital flight over the last eight years has been about $250 billion.

In addition to all these failures, the government initially encouraged rapid population growth (later reversed) which resulted in roughly a doubling of the population between 1979 and 2001 and heavy pressure on infrastructure, education and healthcare.

Creating gainful employment for the country’s youth has been, and will continue to be, the major challenge for at least another 15 to 20 years. Iran’s official unemployment rate has been 10 to 17% over the last five years, with the true figure in the 20-25% range.

Given this depressing landscape, it is no wonder that the highly educated university graduates are attempting to leave Iran with little intention of coming back, with dire implications for the country’s future.

Besides these self-inflicted policy and institutional failures, Iran has had two other setbacks that have been to different degrees outside of its control.

First, the Iran-Iraq War took a heavy toll on Iran (as well as on Iraq).

In addition to a major loss of human life (exceeding 500,000) and the seriously injured (in excess of 500,000), the direct economic damage was high; most estimates are in the range of $600-$900 billion, with about $800 billion as a consensus figure.

Such damage is significant for an economy the size of Iran’s, representing about 150% of aggregate 1980 to 1988 GDP, and 160% of aggregate oil revenues earned by Iran from 1975 through 2000. Damage to Iran’s infrastructure alone – which amounted to $257.3 billion – was equal to almost half of the country’s aggregate GDP from 1980 to 1988.

Second, US unilateral sanctions (and to a much lesser extent United Nations sanctions) have had an impact on Iran’s development and growth.

While US sanctions on Iran have had a long history going back some 30 years and there have been several rounds of UN sanctions, two broad actions stand out for their effect on Iran: the Iran-Libya Sanctions Act (ILSA) adopted under President Bill Clinton (later modified to Iran Sanctions Act, or ISA), and the ever-tightening financial sanctions engineered by the US Treasury (especially since 2008).

The major impact of ILSA has been to slow down, and in some cases halt, the development of Iran’s oil and gas reserves.

The US has used its sway over the global economy and has adopted practices that go beyond its borders (extraterritoriality).

Energy firms have been threatened with US fines and sanctions if they invest in Iran’s energy sector.

This has essentially stopped the participation of US, European and Japanese firms in Iran; it has stopped the development of Iran’s interest in the Caspian basin; it has excluded Iran’s territory from being used as transit for bringing other Caspian oil to market (the least-cost route and again reducing Iranian revenues).

These measures have thus reduced government revenues. Whether this is all bad or good for the people of Iran is open to debate as corruption and government waste would have squandered these revenues.

The most effective and immediate sanctions on Iran have been the financial. The US Treasury has essentially tried to cut off Iranian financial institutions from the international payments system.

This has been done more deliberately and effectively since November 2008. Essentially the US has again used its extraterritorial powers to fine and threaten any financial institution that deals with institutions that the US has sanctioned.

Still the US has not gone all the way. It has not sanctioned the central bank of Iran and it has not used all its powers to pressure countries (over which it has influence) that still cooperate with Iran, such as the United Arab Emirates and Malaysia.

But even existing US measures have increased the cost of letters of credit and of all other financial transactions for Iran.

The broad impact has been to increase the cost of imports by about 20%, further pressuring the government budget and reducing the government’s room for manoeuvre and limiting its ability to buy support domestically.

Meanwhile, the average citizen suffers, receiving little benefit from the depletion of the country’s oil reserves. Iranian citizens and future generations have essentially been fleeced in favour of the wealthy and resources have been wasted in inefficient subsidies.

Simultaneously, the government touts its commitment to economic and social justice, while inflation and unemployment are high, good paying jobs scarce, social services limited and there is little hope for a better future.

All the while, Gulf Arabs, with the exception of Iraq, whom Iranians have historically belittled as Bedouins with little cultural heritage, prosper economically and move ahead of the once proud Persian people.

In short, the policies of the revolutionary government of Iran have failed the Iranian people miserably.

Economic failure and the resulting hardships are more of an issue than political repression for the average Iranian. Economic failure for some has become increasingly a question of survival and thus many are now leaving their homeland which includes Malaysia!