November 5, 2008


Iran also ripe for change (Hossein Askari , 11/06/08, Asia Times)

Iran already has one strike called against it - it is on the verge of an economic implosion - and is facing a second and a third strike in rapid succession over the next six months. Indeed, for the first time since the early days of the Iranian revolution in 1979, regime change, more accurately a "velvet" regime change, in Tehran may not be out of the question.

Iran does not have an efficient tax system and relies heavily on oil revenues to finance its expenditures. It is estimated that oil and gas revenues constituted over 75% of total central government revenues in 2006, with tax and non-tax revenues contributing the balance.

A modern government needs an efficient tax system to provide relatively stable revenues, a mechanism for effecting income distribution and a tool for macroeconomic management. In Iran, only government employees pay their complete income tax bill because the tax is taken out of their paychecks; the private sector does whatever is necessary to minimize its tax obligations and hardly anyone pays capital gains taxes. The absence of an effective progressive income tax and a capital gains tax have in turn been a major determinant of Iran's highly skewed income distribution, a large blot on the record of any revolutionary government.

Iran's economic shortfalls have been dramatically exacerbated by widespread and regressive government subsidies, and by administered prices. These were a legacy of the war with Iraq, but the subsidies have been continued for the sake of political expediency. The single largest subsidy, that for gasoline, was in the range of 11-22% of GDP during 1997-2006. Implicit and explicit subsidies typically have accounted for 15-25% of GDP. [....]

The lessons for the regime in Tehran are clear:

1. Immediately develop an economic and financial plan that assumes oil prices of $40 per barrel, with a clear eye and absolute commitment to urgent comprehensive economic and financial reforms. There is no time to waste. Get people who understand supply and demand on this project, not religious and political ideologues.

2. Be prepared to respond to thoughtful "sanction-like policies" that the new US administration might adopt - Iran should at least know its own vulnerabilities even if the US has not recognized them up to now.

3. Elect a president on June 12, 2009, who has little or no baggage, is thoughtful, intelligent and who could appeal to Obama and to the American people.

The regime in Tehran has taken a free ride for the last 20 years. It has put off needed economic reforms. As a result, the average Iranian has become dependent on wasteful subsidies and even then is still barely getting by, while a select few are amassing large fortunes, in the millions of dollars, in the hundreds of millions of dollars and even in the billions of dollars safely abroad.

A confluence of international economic developments and a thoughtful US president would severely test the regime in Tehran. Iran's leaders should keep a low profile, refrain from incendiary rhetoric and instead burn the midnight oil to come up with a viable economic, financial and social plan to face falling oil prices and a new American president.

The lowly forces of supply and demand and a new American president may achieve what the threat of mighty military force and high-profile economic sanctions did not achieve. In the end, Iran may no longer turn out to be the next US president's major foreign policy issue.

The key for a President Obama will be to offer to meet with Ahmedinejad's replacement.

Posted by Orrin Judd at November 5, 2008 4:13 PM
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