Sanctions economic incompetence = trouble for Iran

By Thomas Lifson

The Economist reviews the struggles of Iran's economy under the rule of Ahmedinejad and the mad mullahs. Certainly "madness" is an appropriate descriptor of the economic policies being followed, which, along with American-sponsored sanctions are crippling the economy. The magazine notes that but for the political obstacles, Iran should be booming:

... the world oil price has soared from $62 a barrel when he was elected in June 2005 to $72 a barrel in recent weeks. Iran, which has a young, well-educated workforce, along with the world's second-largest reserves of both oil and gas, should be on a roll. Instead the economy is struggling.

In the view of The Economist, the sanctions are overshadowed by the incompetence of the economic policies, particularly the price subsidies which distort the economy, and which now account for 25% of the GDP. Keeping domestic refined product prices low encourages consumption, diminishing the exports, and discourages local refining, a serious problem now. In addition, the magazine suggests that widespread smuggling of cheap products overseas (reportedly by the Revolutionary Guards among others) subsidizes foreign consumers (though perhaps not by nearly as much as it enriches the smugglers, who may mostly be politically-connected).

The government accounts for a majority of the GDP, but Iran is talking about privatization. That's likely to be ineffective:

Iran's rigid labour laws will make it hard for new owners to squeeze any profits out of the bloated companies coming to market. Investors may also fear that those who owned these firms before nationalisation will want their assets back; and wonder who, in the absence of an established pro-business political party, can protect them from future arbitrary interventions by the state. The likely upshot is that a fair amount of privatisation will take place, but not at prices that will rescue the public finances, and not in a manner that will do much to boost productivity.

Still, the magazine does not see sanctions, which it calls American "bullying" as bringing down the regime, for Iranians know how to "muddle through" thanks to their experience with the catastrophes brought by the revolution. It does, however, acknowledge that by making it increasingly difficult for Iran to maintain oil production, much less develop new fields (thanks to sanctions scaring off foreign investors and sources of technology), Iran's ability to use oil to insulate it from its own economy is headed downward. Still:

Without this investment, all of Iran's big plans for a prosperous energy-fired future would be put in jeopardy. But Iran still has a few years to sort this out, whereas its mastery of uranium enrichment may be only a matter of months away.

Hat tip: Ed Lasky