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Pseudo-Privatization in the Islamic Republic: Beyond the Headlines on Iran’s Economic Transformation

When discussing the current state of Iran’s economy, commentators, activists, politicians, and the U.S. government all seem to agree on the massive role played by the Islamic Revolutionary Guard Corps (IRGC).  Stanford University Professor Abbas Milani told an audience at the Carnegie Endowment in Washington, D.C. in June 2010 that this “military junta” controls “minimally about 60% of the economy.”  Green Movement leaders Mir Hossein Mousavi and Mehdi Karroubi have lamented the IRGC’s economic takeover in their perennial letters and interviews.  Even many conservatives in Iran’s narrowed but still fractious political elite have protested the transferring of state-owned enterprises and land to military-linked companies.  Among the general population, the influence of the IRGC has become so well known that any cab driver in Tehran can identify the highways and tunnels being built by the organization or its affiliates.

Common knowledge, however, has a tendency to steamroll over nuances, especially in the echo chamber that public discussions on Iran resemble today.  While it is certainly true that Iran is undergoing a major economic transformation, in which the IRGC is playing a substantial role, there are other developments that remain largely unaddressed, particularly within the opaque process known to Iranians as pseudo-privatization.

Regardless of their partisan political affiliations, few current Iranian politicians have expressed opposition to privatizing the economy.  Indeed, these actors often describe the privatization of Iran’s state assets as a veritable panacea for the country’s economic woes.  Yet in the wake of numerous scandals in 2009, notably the sales of Tehran’s International Exposition Center and Iran’s telecommunications network to government-linked conglomerates, the Islamic Republic’s privatization efforts have come under public scrutiny to a greater degree than ever before.  What has become clear is that it is not just the IRGC that is emerging as an economic actor, but rather that a whole host of para-governmental entities, including banks, government-linked investment and holding companies, religious foundations, and pension funds, are becoming the main recipient of state asset transfers.

Despite growing rumors of an impending IRGC monopoly over the economy, the reality of the situation seems to be quite different.  The Iranian regime appears to be decentralizing its social and economic responsibilities, resembling a “subcontractor state.”  Instead of a bureaucratic takeover, we are witnessing a bureaucratic disintegration.  While this may not be the government’s intent, this transformation reveals a breakdown of its administrative capacity, as it becomes more willing to accept ad hoc, temporary solutions to the country’s social and economic problems.  The economic transformation of Iran, hardly a militant monolith, is also a mixed result of a legacy of a war-forged but stagnating social compact that promises a wide array of welfare benefits to citizens within various social classes and recalcitrant political warring between factions that use the language of economics to mask their attacks against each other.

Privatizing the Islamic Republic (IRI): A Brief Overview

Iran has planned to privatize state-owned enterprises, in some form or another, since the late 1980s.  In July of 2006, Supreme Leader Ali Khamenei issued a decree to accelerate the implementation of the country’s privatization law (known as Article 44) and called for 80% of state-owned assets to be transferred out of the public sector.  His intervention was seen as an implicit critique of the slow pace of privatization within the country, a process which had barely begun during the tenure of President Mohammad Khatami (1997-2005) and which had ground to a halt in the first year of President Mahmoud Ahmadinejad’s administration.  The absence of effective privatization was generally attributed to the prevalence of cronyism and patronage within Iranian politics, but these factors alone do not provide an adequate explanation.  For example, corruption was also commonplace in Latin American and African countries during their push to privatize in the 1990s, but it did not impede these governments’ ability to shift their economies to the private sector.

To understand Iran’s stunted efforts to move away from a state-controlled economy, two parallel transformations that have occurred in the country since the 1980s need to be understood.  First, many of Iran’s Islamic leftists from the revolutionary period have gradually turned into economic liberals.  Whereas in the 1980s it was the political right that called for minimalist state intervention in the economy, by the time Khatami assumed the presidency in 1997 a large part of Iran’s Islamic left had also become convinced that the state should disengage from most economic activities.  This created a rare consensus among Iran’s oft-bickering factions, which favored the discourse of privatization.  This was further strengthened during Ahmadinejad’s first term, when he put his own spin on the sale of state assets via his “justice shares” program.  These developments have produced a seemingly genuine commitment on the part of the political elite to reduce the state’s role in the economy.

Second, the expansion of Iran’s para-governmental sector, which is mistakenly associated only with Iran’s revolutionary foundations (bonyads) and military organizations, has continued unabated since the late 1980s.  While the bonyads and the IRGC have a burgeoning presence in the economy, the roles of other institutions, such as large pension funds belonging to Iran’s “non-governmental” sector, are equally important.  These institutions are not simply corrupt networks of patronage that redirect funds back to state officials.  In some cases, they boast large memberships among ordinary Iranians and even compete with one another in obtaining state assets.

These two factors have culminated to create a “pseudo-privatized” Iranian economy, one in which the Iranian government is decreasingly the main player, but where private and public organizations with substantial state ties have come to control the economic heart of the country.

Ahmadinejad, Iran’s Conservatives, and the Cause of Privatization

In Iran, just as in other developing countries in the late 1980s and the 1990s, advocating privatization of state assets became the thing to do.  The source of contemporary social problems, many leaders in Latin America and Eastern Europe were arguing, was precisely the state itself, which had become so central to everyday life in the Third World.  It was not surprising, then, that most of Khomeini’s left-leaning supporters in the 1980s — Mousavi, Karroubi, Khatami among them — found themselves praising the magic of the market in the 1990s.  The conservatives were the only faction that remained outside this growing embrace of privatization.  Although they took a relatively laissez-faire position on private ownership in the 1980s, arguing that an Islamic state should not interfere in the private sector, the conservatives had never presented this stance as essential for the country’s development.  After the election of Ahmadinejad, this changed.

Ahmadinejad represented a new brand of Iranian conservatism.  Running on a platform of pious competence, his image as an educated, technocratic engineer was strategically cultivated to resonate with Iranians tired of a seemingly useless state apparatus.  Once elected, Ahmadinejad lost little time in promising to bring the benefits of privatization to the Iranian people, via a program known as “justice shares.”  All Iranian citizens could apply to participate in the program, through which dividend-paying shares of state-owned companies would be given to the poorest strata of the population, including villagers and nomads.  In the first round, 5.5 million individuals received shares, which paid a reported $80 each in 2007/8.  Subsequently, the government claimed that a total of 41 million people had received justice shares through the second round of distribution, receiving a reported $40 each in 2008/9.1

The actual source of these dividends became a subject of great debate in the Iranian press, with the newspaper Etemad claiming, “justice shares are shares without profit.”2  This meant that the program was simply a way of channeling money to shareholders and not the result of any profit accruing to the companies themselves.  Regardless of whether it was a sustainable business model, the program has important symbolic value, reflecting a growing trend in support of privatization within Iran’s political factions.  By the time Khamenei issued his July 2006 decree on privatization, Iran’s entire political elite was in support of it, at least at the level of discourse.

Pseudo-Privatization: It’s Not Just about the IRGC

The IRGC is just one of several significant state-linked players in Iran’s pseudo-privatized economy.  Other power players include a wide array of entities with a variety of investment strategies and ownership forms, including banks, investment conglomerates, and pension and healthcare funds in both the public and private sectors.

Many of these organizations work to maintain Iran’s substantial welfare system.  Among the most influential of Iran’s para-government investment entities is the Social Security Investment Company (SHASTA), one of the largest management conglomerates.  SHASTA was created in 1986 to manage a portion of the money held by Iran’s Social Security Organization (SSO).  Responsible for growing and maintaining the asset pools that pay for health and pension costs of SSO beneficiaries, SHASTA is often mentioned in the Iranian business press.

Few well-known experts on Iran seem to mention SHASTA or the SSO, yet together these organizations form one of the largest economic entities in Iran, larger than any bonyad.  In 1989, up to 80% of SSO’s investment portfolio was in the form of bank deposits.  By 2000, mostly as a result of SHASTA’s efforts, this share had decreased to 10%, while 70% of SSO’s total portfolio was now composed of direct and indirect investments in non-bank assets.3  In January 2010, SSO head Ali Zabihi announced that over 27.5 million Iranians lived in households receiving SSO payouts, and that SHASTA, as the SSO’s main investment management company, oversaw $8.4 billion (around 2.5% of Iran’s GDP in 2009) in investments within various companies.4

By 2000, companies owned by the SSO already produced 43% of the pharmaceutical and hygienic products, 36% of the cement, 35% of the televisions, 25% of the fireproof products, 31% of the refrigerators and freezers, and 35% of the rubber in Iran.  The SSO used its hefty funds to purchase government bond issuances, finance public construction projects, and funnel cash into the banking system.

Rather than a conspiracy to keep the economy under state control, the growth of the SSO’s ownership within the economy has had much to do with the government’s own welfare obligations.  Because the government is required under Iranian law to insure that SSO pensions are fully funded, the state consistently hands government assets over to SHASTA instead of cash.  In 2001 alone, for example, the government transferred assets worth $400 million to the SSO to cover the IRI’s constitutionally mandated obligations to pensioners.5

Attacks from Within: Backlash against the Para-Governmentals’ Economic Takeover

Critiques of Iran’s confusing pseudo-privatization process have come from a variety of corners, with conservatives in Iran’s Parliament (Majles) leveling perhaps some of the most pointed criticisms.  In a July 2009 interview with Etemad newspaper, Iranian MP Hamid Reza Fuladgar, head of a special commission on the implementation of Iran’s privatization law, spoke candidly about the activity of various quasi-governmental companies and institutions.  According to Fuladgar, while these economic entities technically work within the law, “they also form a wall against and are stopping private capital . . . the capital that is circulating is the government’s itself.”6  Another member of the commission, Ali-Asghar Yusefnejad, warned “the state economy must not turn into a semi-state economy.”7

The conservative newspaper Alef commented that, by allowing the implementation of Article 44 and related laws to include the sale and transfer of large state-owned corporations to semi-governmental institutions, the government had made it difficult for private companies to expand.8  In November 2009, the Parliament Research Center (run by Ahmad Tavakoli, an economist and a conservative critic of the Ahmadinejad administration) released a report on these transfers.  Entitled Transition from the State to the Pseudo-State Economy, it outlined the main contours of the privatization process from 2004/5 to late 2009.9

According to this report, 264 state-owned firms with a total value of $54 billion were transferred between 2004 and 2009.  Of this amount, 68.5% was transferred in the form of “justice shares,” while only 12.5% was handed over in lieu of government debts and 19% sold on the stock market in blocks of company shares.  Only the latter two forms can be described as privatization in anything but name only.

More detailed data for the period of 2007-2009 showed that the shares of 82 firms worth $3.7 billion were transferred solely to para-governmental entities.  The handover consisted mostly of shares from seven large state-owned firms, including Mobarakeh Steel and the National Copper Industries Company.  Meanwhile, 46% of the total share amount went to only two para-governmental organizations, the Social Security Investment Company (SHASTA) and Iranian Mehr Eqtesad (related to Mehr Finance and Credit, formerly the Basijian Group).  Other para-governmentals that acquired public sector assets were IRI Shipping Lines and several public joint-stock companies.

Given the wording of Article 44, nothing about these transfers was technically illegal.  Mohsen Rezai, former Chief Commander of the Revolutionary Guards Corps and a presidential candidate in 2009, reiterated this point to the Iranian media.  He argued that, as a cooperative, the IRGC Foundation (one of the participating members of the conglomerate that purchased Iran’s telecommunications company in the summer of 2009) was technically classified as a “Non-Governmental Organization” under Iran’s Constitution.10  Because Article 44 allows the transfer of government assets to any entity legally stipulated to exist outside of the public sector — whether cooperative or private — these deals were within the letter of the law.

Notably, Tavakoli’s report, perhaps the most detailed information we have about the privatization process in Iran to date, does not single out the IRGC as the main culprit or beneficiary, but as just one of the numerous players in this transformation.

Conclusions

To grasp Iran’s changing economic system, the bonyad and IRGC-linked agents in the economy must be understood as existing within a larger structure of para-governmental ownership.  These include social welfare institutions, some of which protect Iran’s middle classes from economic risk through generous pension plans.  At the same time, it is important to realize that the IRI has never had a coherent single-party political apparatus.  Instead, its factional political field has persisted and become even more fragmented over the past three decades.  In this environment of fraction and weakness, there is little chance of an internal reordering of the political economy on a large scale.  Bureaucratic resistance, aggravated by those factions temporarily sidelined, has stymied attempts by each administration to merge or eliminate institutions.  Para-governmental organizations, in their very diversity, become temporary bases from which various political entrepreneurs can wait out a storm or generate dissent against those in power.  Ironically, a stronger, more authoritarian state would be better positioned to generate the kind of privatization for which the Iranian political elite is calling.

Perhaps most importantly, the significant role Iranians outside of the political elite have themselves played in this economic transformation must be understood.  There are many reasons why a pensioner, for example, given the general mistrust of the state common to people in many developing countries, would want the SSO to be a well-funded, economically powerful actor, regardless of whether this results in inefficiencies in the Iranian economy caused by the SSO and organizations like it.

In the end, the fate of the Iranian economy likely hinges more on the country’s fractured political situation, deteriorating social welfare institutions, and inadequate policy outcomes than on the IRGC bogeyman so many would have us fear.

1  Interviews by author at the Ministry of Welfare, Tehran, Fall 2009.

2  Etemad, July 18, 2009.

3  Etemad, January 7, 2010.

4  Etemad, January 7, 2010.

5  World Bank.  2003.  The Pension System in Iran: Challenges and Opportunities.  2 vols.  Middle East and North Africa Social and Human Development Group.  Washington DC: The World Bank.  Available at <go.worldbank.org/6NI05POO40> (Vol. 1) and <go.worldbank.org/QC50U7C7U0> (Vol. 2).

6  Etemad, July 4, 2009.

7  Jomhuri-ye Eslami, October 24, 2009.

8  Alef, September 27, 2009.

9  Detailed in Etemad, November 25, 2009.

10  Etemad, October 7, 2009.


Kevan Harris is a Ph.D. Candidate in the Department of Sociology at Johns Hopkins University.  He travels to Iran frequently and recently returned from a year-long stay in the country.  This article was first published by Muftah on 15 October 2010; it is reproduced here with the author’s permission.   Cf. Camila Piñeiro Harnecker, “Risks in Expanding Non-state Enterprises in the Cuban Economy” (The Bullet, 6 December 2010).




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