Poor Policy, Not Sanctions, Weaken Iran's Economy

With the low price of oil and a global economic crisis eroding Iran's economic growth, some analysts believe the economy will emerge as a political liability for President Mahmoud Ahmadinejad as he seeks reelection in June. This leads some to argue that now is the time for the West to turn up the heat with new sanctions in an attempt to win concessions on Iran's nuclear program. But Djavad Salehi-Isfahani, a professor of economics at Virginia Tech and a former economist at the Central Bank of Iran, says these broad-brush observations miss the subtle realities of Iran's mature, if troubled, economy.

Iran has proven adroit at navigating U.S., UN, and EU sanctions in the past, he says, by seeking alternative buyers for oil and exports. And while Western restrictions on Iranian banks "have apparently had bite," Salehi-Isfahani says "Iran's economy is suffering from bad policies to begin with, and sometimes it is hard to tell what is causing what."

Iran is in the middle of a presidential election campaign. The incumbent, President Mahmoud Ahmadinejad, was elected in 2005 on a populist agenda, and promised to share the country's oil wealth with the masses. But today the president is often criticized for mismanaging the economy. How has he failed?

When oil prices are high, Iran uses its wealth to buy imports, which often compete with goods that are produced inside Iran. While this practice might keep the populace happy with inexpensive products, it also has the potential to put Iranians out of business because they can't undercut the low-cost goods being imported. So the net effect could be negative. In an attempt to bring the oil money to the people's dinner table, as President Ahmadinejad had promised, the guy at the head of the dinner table may lose his job.

This has happened in a couple of instances that people have written about, like textiles. Iran's textile industry has pretty much been wiped out because of cheap [imports], and the sugar industry has suffered hugely because of increased imports of sugar. A lot of farmers [were hurt] because they were producers of the sugar beet, which is the input into the sugar industry. So bringing oil money to people's dinner table is not the best way to spend the oil money. If Ahmadinejad had done more of it, things might have gotten actually worse.

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source: crf.org