• [Essentials]

The demonstrations of July 1999

Policies of President Khatami

Prospects for Political Change

A Change in Atmosphere

Economic Weakness

The Government’s Response

Hoping for Foreign Investment

[Essentials]

The demonstrations of July 1999

The second week of July this year saw the most serious violence there has been in Tehran since the years after the Islamic Revolution of 1979. Some ten thousand students held demonstrations to call for greater freedom for the press and freer, more open government. They were confronted by the police and hard-line vigilantes recruited from the bazaar. Several students were killed and many more wounded or arrested. Although the students received little material support from other members of the public, they had the moral backing of most other young Iranians and of most of the middle classes of all ages. The episode was seen, in Iran and abroad, as showing how frustrated young Iranians had become with the incompetence, corruption and repressive social attitude of their government.

The build up to the confrontations can be traced back to the autumn of last year, when reforming elements in the administration of the relatively liberal President, Mohammad Khatami, proposed that the bonyads, the "charities" established with assets confiscated from the Shah and other members of the old régime, should be supervised more carefully by central government. The bonyads, or their directors, had become extremely rich, they were answerable to nobody and they were known to be very corrupt. The proposal was that they should be properly audited.

Soon after this issue was raised six writers, of secular or liberal Islamic views, were murdered, and it was speculated that the killings had been ordered by the bonyads themselves, or more likely by some other "dark element" in the régime that had links with them. It was suggested that somebody wanted to give a warning to reformers against further interference. Investigations into the crimes moved slowly, but in February 1999 four members of the secret police were arrested, and the Information Ministry, which runs this body admitted that some "misguided people" had taken it upon themselves to do the killings. In June the most important of the four suspects, Saeed Emami, a former deputy Minister of Information, died in prison. It was said he committed suicide by drinking an arsenic-based cleaning fluid when his jailers allowed him to take a bath alone.

The Information Ministry accompanied news of the death with the release of the other three suspects’ names and the announcement that a total of 20 other people had been linked to the killings. Then the radical newspaper, Salaam, published documents prepared by Mr. Emami which seemed to suggest that orders for the murders had come from the top of the Ministry. The newspaper named a former Minister of Information, Ali Fallahian. This led the Ministry to insist that Salaam be closed, and the Special Clerical Court obliged. At the same time the parliament, the Majlis, gave a majority to a first reading of a new restrictive press censorship bill. Out of 270 members, 125 voted in favour, 90 against and 55 abstained. The bill is due to have a second reading before the end of this year.

It was the banning of Salaam and the Majlis vote that brought the students onto the streets. They were disappointed by the slowness of reform by President Khatami’s government, by the President’s reluctance to confront his hard-line opponents, and by a general feeling that in the previous few weeks hard-line elements had been getting the upper hand in the long running battle between conservatives and reformers within the government. They were particularly unhappy about Khatami’s failure to speak strongly against the press censorship bill or demand to know why 55 members had abstained from voting on it.

On the first day of demonstrations police stormed dormitories at Tehran University and killed as many as eight students, according to student leaders. The official figure for deaths was one. There followed a further five days of demonstrations, in Tehran and ten other cities. Eventually the protests were broken by police and various vigilante groups – particularly the Ansar e Hizbollah (Supporters of the Party of God), which was no more than a party of paid thugs, hired for the occasion. The last of the week’s events was a massive demonstration in support of the régime, in which thousands of loyalists, reportedly including soldiers in plain clothes, were bussed into central Tehran, to carry Iranian flags and pictures of the late Ayatollah Khomeini, shout "death to America", which was blamed for having instigated the student protests, and listen to a speech by Hassan Rowhani, the secretary of the Supreme National Security Council. Rowhani declared that those arrested during the riots would be tried and punished as mohareb (those fighting God) and mofsed (those spreading corruption), which would make them liable for the death penalty.

Both the moderate faction in the government, including the President, and the conservatives backed the restoration of order and the final demonstration. For Khatami the whole affair was an embarrassment. He could not openly support the students because, though he sympathised with them, their confrontational approach was the opposite of his own careful step by step policies. Yet it was difficult for him to condemn them. It was annoying for him that the protests had happened as soon as they did, some nine months before the next Majlis elections, which were expected to bring a reformist majority.

For the conservatives the week’s events were only advantageous in a short term, tactical sense. For the longer term they were a reminder, to the more intelligent, that the youth of Iran wants change. The country’s leader, the Imam, Ayatollah Ali Khamenei, who is the successor of Khomeini and the nation’s supreme spiritual guide and commander of the armed forces, was not wholly on the side of the reactionaries during the crisis. He criticised the police attack on the student dormitories; he is a member of the Supreme National Security Council that ordered the dismissal of the two police chiefs responsible. Twice in the weeks before the demonstrations he had made speeches saying that the judiciary must be seen to have the support of the people.

The Imam and Khatami are not quite at opposite political poles, as they are sometimes represented as being. They both see a need for change, and from time to time on particular issues they work together. Where they are different is in the constituencies they represent, and in their ideas on what sorts of changes are needed and how quickly they should be introduced.

Policies of President Khatami

The change in Iranian politics, which has led to the battle between reformers and conservatives, began when Mohammad Khatami, a former Minister of Islamic Guidance, was elected President two years ago. Khatami won the presidential election of May 1997 unexpectedly and by a landslide – he took 69 per cent of the vote. He appealed particularly to the urban young and the better educated members of the middle class. He stood for the relatively left wing, socially liberal, popular face of the revolution, whose backers believe that within a basically Islamic context the government should be helping the people build the freer, more open society they appear to want. Many of those who hold this view were once quite hard-line revolutionaries. They have now realised that the clergy, which has dominated the government since 1979, has not been particularly competent and has come to be seen by the people as an oligarchy, out of touch with the population, preoccupied with its own interests, and in parts corrupt. One hears it said among Khatami supporters that if the Islamic Republic is to survive and if the religious establishment is to retain any influence at all over government, the clerics must move back to the mosques and seminaries. It appears that many of the people who hold this view are influenced by their children, born around the time of the Revolution and now in their late teens and early twenties. One of the ironies of the July demonstrations is that many of the students involved were the sons and daughters of clerics. It has been the government’s policy to favour these young people in awarding university places.

Khatami as President has not embarked on any major legislative programme of social reform, nor has he been able to introduce changes by decree. He does not have the unfettered authority that presidents in other Middle Eastern states have, because Iran is a democracy (albeit in a limited sense) and he has to contend with other centres of power. Chief among these is the Imam, whose office has an independent budget drawn directly from the state’s oil revenues. It is the Imam’s Office, rather than the Ministry of the Interior – a relatively liberal body – which controls the police. Other conservative centres of power are the current Majlis, the Council of Guardians, a body which vets legislation for its conformity with Islam, and the judiciary.

What the President has done is appoint liberals to many of the important posts in his cabinet and as much as possible pursue liberal policies. Helped by the Minister of Islamic Guidance he has allowed the emergence of a very free press, based on the 1979 Constitution’s provision that the press should be free but not affront Islam – a vague proposition lending itself to different interpretations. His government has licensed some hundreds of new magazines and newspapers. In the last two years the circulation of newspapers has increased from 1.2 million daily to 2.7 million. The press has become so outspoken that opposition papers abroad have taken to copying its stories.

The conservatives have steadily opposed Khatami. The struggle for influence has been most visible in battles over the press. The spring of 1999 saw conservatives in the judiciary ordering the closure of newspapers and the arrest of journalists. One paper, edited by Faezeh Hashemi, the daughter of the former President, Ali Akbar Hashemi Rafsanjani, was suspended for publishing a message for the New Year (in March) to the Iranian people from the former Empress, Farah Diba. After the ban the paper, Zan, tried to continue publishing, but was shut down.

Other papers received warnings for publishing photographs of unveiled women, mostly foreign film stars, for articles deemed to be "pro-Zionist" or too critical of factions within Iran’s domestic politics, and in one case for covering a controversial meeting at Tehran university. Typically in these cases the journalists would be arrested for a day or so and the newspapers’ editors summoned before a court. Then the paper might be ordered to fire the journalist but be allowed to continue publication – or it might be suspended for a limited period. None of these actions seemed to have much effect on the behaviour of the press, though they certainly made the conservatives less popular.

In May impeachment proceedings were brought in the Majlis against the Minister of Culture and Islamic Guidance, Ataollah Mohajerani. The motion was narrowly defeated – after giving Khatami and his minister opportunities to explain their cultural policies and further embarrass the conservatives. Some hard-line members of the judiciary were more successful in securing the conviction of Mohajerani’s brother-in-law, Hojatolislam Dr. Mohsen Kadivar, a cleric who had begun research into jurisprudential sources to see if the Iranian system of government was working properly. He had announced that his initial conclusion was that it was oppressive. On being convicted he was sentenced to 18 months in prison.

A similar battle was fought over the new Tehran municipal council, elected at the end of February. Twelve of the 15 Tehran seats were won by Khatami supporters, and none of the other three councillors returned could be regarded as a conservative. The acknowledged leader of the councillors was Abdullah Nouri, whom conservatives forced Khatami to replace as Minister of the Interior last year. Immediately after the election it was suggested by a member of the Council of Guardians, which has a rôle in vetting election candidates, that five of the 15 did not have proper Islamic credentials. In this case the councillors got the support not only of the President, but also of the Imam and other conservatives, and they were allowed to keep their seats. The episode was one of the events that prompted a group of leftist students to write a long open letter to the Imam, criticising the Council of Guardians and the rest of the judiciary for acting against the interests of the people. Long passages of the letter were reprinted in the newspapers.

Another trial of strength involving the Tehran local government concerned the case against General Gholamreza Naqdi, who is the head of the Security and Intelligence Department of the Police. Naqdi was arrested after charges were brought against him by a number of managers in the Tehran municipality, who said they were tortured when they were taken into custody last year. Their detention was linked to investigations into the corruption of the extremely effective former mayor of Tehran, Gholamhossein Karbaschi, and their claim is that they were tortured to get them to make confessions. Before the trial began Abdullah Nouri wrote to the then chief of the judiciary, Ayatollah Mohammad Yazdi, to ask him to confirm that the trial would be held in open court. Yazdi replied that it was being held "in accordance with the law" and should be allowed to "run its course".

As all these episodes show, Khatami’s methods in dealing with his hard-line adversaries are to use the law and public opinion. He places emphasis on the rule of law and the proper enforcement of the Constitution, and on the whole process being transparent. The Iranian Constitution, like many other Middle Eastern constitutions, guarantees its people most normal human rights and in so far as these rights are not respected this is the fault of politicians, the police and the judiciary. Khatami reasons that if the law can be properly applied, and be seen to be applied by a free press, his supporters will win most of their battles. The main pro-Khatami casualties associated with this policy have been people who have been corrupt, notably Gholamhossein Karbaschi, who was sent to prison in April.

Khatami’s use of public opinion relies on his insistence that the press be allowed to operate freely. If people can see what is going on he knows they will back him and not the conservatives. And the more they are told about government, the more liberalising pressure they will bring to bear – through votes for their local and national representatives, through letters and petitions and through buying more newspapers. The conservatives do not have a ready response to this strategy – other than to try to impose censorship on the press. The idea that public opinion is important never occurred to them before Khatami became President.

It seems also to be Khatami’s hope that his open approach will gradually undermine the more sinister elements in the government. There are still many people in the ministries and other state agencies who are poorly educated, suspicious and aggressive. They inhabit a world of their own which is distrustful of anything which looks like foreign influence or which they think might damage the positions of relative power and security they have achieved since the revolution. Any foreigner who goes to Iran on business sooner or later discovers such people behind the urbane, Western educated characters who front for their ministries in dealings with the outside world.

On the extremist fringes of these cadres there are various "black elements" who will resort to violence to frustrate government policies of which they disapprove. In 1991 they wrecked a rapprochement between France and Iran by organising the assassination in Paris of the Shah’s last Prime Minister, Shahpour Bakhtiar. During the 1990s, led by a body known as the Bonyad of 15^th Khordad, they have hindered an improvement in relations between Iran and the world in general by issuing calls for the implementation of the death sentence on the author Salman Rushdi. Last year it was such elements in the intelligence service who killed the six writers. And in June this year it seems to have been some similar people in the intelligence service or judiciary who arranged the arrest in the southern city of Shiraz of 13 Jews, whom they charged with spying for Israel. If tried and found guilty the accused could be executed. The arrests put Khatami in an extremely difficult position. He could not be seen to intervene too vigorously of behalf of alleged Israeli spies before they were put on trial, but he and his supporters know that nothing would damage Iran’s improving international image more than the execution of the 13 men. That would have a catastrophic effect on relations between Iran and America. It was accepted in Iran that the arrests were made precisely because they could be very damaging to Khatami.

Prospects for Political Change

Since the spring of this year the political struggles in Iran have been conducted with all participants having an eye on the Majlis elections due early next year. The popular expectation has been that these will produce a big increase in the numbers of liberal reforming deputies, probably giving them a parliamentary majority.

The options for the conservatives in trying to stop a liberal landslide are limited. They can continue to obstruct the press – though they know this can be counter productive. The extremists can play "dirty tricks". In theory they have the option of bringing their own "supporters" onto the streets, but they know the public will realise their people are being paid to demonstrate.

The conservatives’ best and most constitutional ploy might be to encourage the Council of Guardians to eliminate most liberals from the lists of candidates next year. This has become a particular concern of the reformers since the July demonstrations. How actively the Council should be able to intervene has been the subject of heated debate for several months. The Imam is saying that the Council’s authority should be unrestricted, the liberals that, whatever its powers might be in theory, intervention to eliminate candidates is undemocratic and shows contempt for the will of the people. It is possible that the Council will follow the instincts of its own members (six clerics and six lawyers) and their conservative friends and intervene heavily to eliminate candidates, but it seems more likely it will act with restraint. There will be pressure on it to say why it refuses to let a person stand for election, which it has never had to do before.

At some point after the election there may be further change at the top of the government. Since he left the presidency early in 1997, Ali Akbar Hashemi Rafsanjani has remained an important presence in the background of Iranian politics. The base of his power has been the Expediency Council, which is supposed to mediate in disputes between the Majlis and the Council of Guardians or other branches of government, but he has friends and supporters in many important bodies, including the Office of the Imam. It may well be that, in spite of his image having been somewhat tarnished by the corruption and nepotism that was associated with him during his two terms in office, Rafsanjani would like to return to top level politics. He could do this by running against Khatami in the presidential elections in 2001, or, more shrewdly, he might be waiting to see if he can replace the Imam, Ali Khamenei. The current Imam enjoys nothing like the prestige of his predecessor, Ayatollah Khomeini. He is hardly learned enough to be accepted as an ayatollah and during his time as the ultimate arbiter of Iranian politics the people’s disenchantment with their government has grown. For some time it has been being suggested that the rôles of the Imam might be split, with somebody better religiously qualified taking over the rôle of the nation’s spiritual leader, possibly from the holy city of Qom, and another person being the supreme political leader. That person might be Rafsanjani.

With or without a change at the top, the election of a new Majlis early next year could lead to a period of very fast change in Iranian politics. The country wants change and for most of the last two years the conservative clergy has been on the defensive. Until the suppression of the demonstrations in July, a reformist majority in the Majlis next spring was being taken almost for granted – and if this is what was going to emerge it was not difficult to think of scenarios which would have Iran evolving rapidly in a liberal and secular direction. This would affect particularly the rôle of women in society. Now the outcome of the elections is a bit more difficult to predict. In the two weeks after the demonstrations the reformers, in government, the press and elsewhere, regained much of their confidence, but it still seemed possible that the conservatives would find some way of preventing them winning the elections. If that were to happen the power struggle of the last two years might continue for a few years more.

But for the long term a demographic revolution is making the tide of change look unstoppable. In the early years of the Islamic Republic there was an explosion of the birth-rate in Iran, and there are huge numbers of children and young teenagers who will become politically conscious in the next few years. It is assumed that these people will have much the same attitudes as the young people now aged around 20, and they will exert an ever greater pressure for reform.

A Change in Atmosphere

Whatever may be its short term political prospects, Iran under Khatami has been a much freer, happier place than it was in the early 1990s. It has also looked more prosperous. The change is noticed particularly by foreigners. The Iranians themselves agree that the atmosphere is different but say it is hard to pin down the exact reasons. Certainly the statistics show the country is not richer. Much of the impression of prosperity in Tehran and Esfahan comes from the two cities having had energetic mayors who have pushed through cleaning and repair programmes. Tehran’s streets and parks are now carefully swept, the sidewalks have been repaired and lawns and flower-beds full of roses have been planted on patches of waste ground.

In northern Tehran a number of new, smart, tall buildings have recently been finished or are nearing completion. Some are financed by capital brought back from Europe and America by Iranians who left after the revolution. The high rise building and the beautification of the city have gone together, because the former mayor, Karbaschi, made developers pay the local government for permission to add extra storeys to their buildings. Some of the Iranian returnees have opened "consultancy" businesses aimed at helping foreign companies install themselves in Iran. These give the foreigner the impression of activity, but they have injected little capital into society. Not much money has been put into new industries providing jobs.

The social change is more real. Iranians are smiling more, it is now the fashion – as well as being in everybody’s economic interest – to be friendly to foreigners. People say they feel freer. Much of the change is related to the way the régime treats women. There has been no official relaxation of the Islamic dress code – women are still required to cover their hair, arms and legs, and not wear make-up – but the rules are being less rigorously enforced. Many women are wearing more colourful clothes, and make-up – sometimes quite heavy – and are letting their scarves slip well back on their heads. It is still possible for them to be arrested for this behaviour, and when they are arrested, though they may be detained for only 24 hours or so, the conditions in which they are held are unpleasant. They may find themselves in overcrowded cells with drug addicts and prostitutes and no access to toilet facilities. Men can be held in similar conditions if they have been arrested at parties where there have been music, alcohol, women and dancing.

The difference in the last year or so is that the chance of anyone being arrested is now small. The vigilante committees which used to make the arrests have been integrated into the regular police force. Part of the reason is that this makes them less visible, and therefore less vulnerable to attacks by citizens who resent their interference; but one of the consequences is that their self-righteous zeal has been moderated by the fairly secular minded police. They have become more tolerant.

It is not only in the matter of dress that life for women is easier. Women now find that men are more likely to address them directly and openly in public. In taxis drivers and fellow passengers laugh and joke with women; in shops assistants look at women they are serving. In the 1980s it used to be the Islamically correct fashion in some establishments for shopkeepers and their staffs to avert their eyes when dealing with female customers.

The treatment of women is an important issue because in Iran and elsewhere it has become one of the ways in which an Islamic state defines itself. An Islamic state – revolutionary or conservative – that wants to create the sort of society that is recommended in the Koran has difficulty in finding precepts that it can translate into solid policies. It cannot simply tell people to be "good" or "Godly", nor can it easily install Islamic systems of government or economic management, because the Koran does not offer precise instructions on these matters. It tends instead to focus its attention on four limited areas: the criminal provisions of the Shariah, which it introduces into the legal system, alcohol, which it bans, bank interest, which with some difficulty can be replaced by an Islamic system of risk sharing, and women. In Iran from the beginning of the revolution women have been allowed to work (which they are restricted in doing in Saudi Arabia), drive, vote, take seats in the Majlis and play other rôles in politics. Where they have been "Islamised" has been in their being obliged to dress "properly" and separate themselves from men as much as possible – particularly in buses and at parties. Any liberalisation in these customs represents a major change of policy in an Islamic society.

What most reminds a foreign visitor that Iran is still supposed to be a revolutionary Islamic state are the huge paintings he sees on the sides of buildings. These depict "martyrs", political leaders or particularly brave or politically zealous soldiers, who were killed in the 1980s, either in the war with Iraq or in bombings by the revolutionary left-wing Mojaheddin e Khalq Organisation. The captions with the pictures contain verses from the Koran; the scenery in the background often represents an Islamic view of Paradise with gardens, waterfalls and fields of flowers. The paintings, mostly well executed but very sentimental, are kept clean and in good condition because they form a link between the government and the families of the martyrs, most of whom come from the class of the mostazafin, the dispossessed. These were the people whom the revolutionaries of 1979 and the early 1980s claimed to represent, and it is they whom the government is now unable to reward with a higher standard of living. The best it has been able to do is continue to promote the dead martyrs, as they would have been promoted if they had remained in the army alive, and pay their families small increases in their pitiful military pensions. In effect the paintings, which are a form of war memorial, are telling the families of the martyrs that their sons and brothers have not been forgotten. Nowadays other Iranians, particularly members of the middle classes, hardly notice them. They are regarded as something of a quaint revolutionary relic.

Economic Weakness

The area in which there has been rather little change under Khatami – disappointingly little – is the management of the economy. The president admits he is not particularly interested in economic matters. He has said he was elected to correct a social, not an economic, malaise. His inclination against steering his government towards economic reform is reinforced by his having around him several advisers with leftish ideas. Since the revolution there has been a division in Iranian politics between those who have said that a true Islamic society should respect private property and the right of the traders to make a profit – as they were doing in Mecca and Medina at the time God revealed the Koran to Mohammad – and those who have said it demands social justice. The result has been that for 20 years Iranian economic policies have been neither free enterprise nor socialist, but an awkward mixture in which the emphasis has swung between the extremes. Not surprisingly, many of the social reformers in modern Iran are people who favour egalitarian economic policies. Khatami supporters have gone on record with such statements as "privatisation has come to a dead end", though in reality serious privatisation – as opposed to granting state companies and their subsidiaries a greater degree of independence – has hardly begun.

To complicate matters, there is no clear division between social reformers and economic leftists on one side, and conservative free marketers on the other. Khatami’s supporters include quite a large number of economic reformers, and many of the conservatives are not so much genuine economic liberals as people associated with the bazaar merchant classes who like the status quo. The most solidly pro-economic reform group – in a country where there are no formal political parties – are the Executives of Construction. These are the middle of the road backers of the ever pragmatic Mr. Rafsanjani.

The basic economic problem of the Iranian government is that it cannot balance its budget – by a wide margin. This is mainly because it has far too many employees in its civil service and its loss making commercial enterprises, and because it gives its people a huge array of subsidies, covering basic foodstuffs, fuel, cleaning materials and medicines. For years there has been talk of its cutting subsidies. There have been several long battles in the Majlis over the price of fuel, and in the last few months there has been a sharp increase – though by international standards the prices of both gasoline and heating oil remain extremely low. Last year there were some small reductions in the subsidies on meat, bread and milk.

Currently subsidies, many of which apply to imported goods, are thought to be absorbing the equivalent of $6/8bn and raw materials for state industries a further $2bn. These two items together take a major proportion of the government’s oil revenues, which are by far its biggest single source of income. The government does not release very accurate or detailed figures for its income, but it implies it has about 2.4m barrels a day of oil exports, which might give it oil revenues this year of $12–13bn.

The government is further burdened by debts. According to the Central Bank, which is believed to publish fairly accurate figures, the government’s total external obligations in January this year were $20.6bn. This figure was not in itself very serious for a country of Iran’s size; it amounted to no more than 21 per cent of GDP and 150 per cent of annual oil revenues. But the debt had an awkward pattern of maturity, being divided roughly equally between medium term loans and unconsigned letters of credit. The government had very heavy immediate debt service commitments and was being obliged to reschedule. In early 1999 it concluded rescheduling agreements with the governments of Germany, Japan and France, which are its main creditors. It would like to have some help from the International Monetary Fund, which would open its way to some long term borrowing, but if it makes a formal approach it is assumed it will be blocked – until there is an improvement in its relations with the United States.

Being unable to reduce its spending on salaries and subsidies, unable rapidly to privatise its industries and unable to increase its foreign borrowing – in every case for political reasons – the government’s response has been to print money. It does this by borrowing whatever it needs from the domestic banks, which are state owned. This has caused inflation to run for several years at around 20 per cent, and this year it is expected to reach at least 30 per cent. Ordinary Iranians, who are living on extremely small incomes – per capita GDP is only $1,660 – are suffering badly.

The government, of course, has no funds to invest in capital projects that require foreign currency. For this purpose it is looking to foreign contractors, suppliers and (in theory) investors to provide project finance, which it will guarantee. There is now great emphasis on the promotion of economic sectors in which it is felt the country has a real advantage – oil and gas, petrochemicals, mining, metals and agriculture. What the government is doing to encourage investment is to specify sums of new borrowing it will guarantee in each sector. Its budgets give figures for what it will authorise and guarantee in the coming three years. This process has become a central part of its budgeting. Most of the guarantees are being allocated to state corporations, such as the National Iranian Oil Company (NIOC) and the National Petrochemical Company (NPC), but some small sums are being earmarked for the private sector.

The state corporations, particularly in petrochemicals, have been moving ahead with some projects, but private Iranian investors have not been active. There is still much more emphasis on deal making, trading and particularly cornering the local market in particular products, than there is on long term investment. It seems there is still as much private capital leaving the country as there is coming back.

The government would like to encourage private investment. This, and its need to draw more revenues from the private sector, has led it to talk of privatising some of the huge holdings it has in all parts of the Iranian economy. Some officials, and businessmen, talk of „privatisation" as if there is a programme already being implemented, but this is misleading. It is part of their efforts to attract foreign companies to do business with Iran. The government cannot launch real privatisation because of political opposition to the principle, distrust of the private sector and a lack of understanding of the idea. All that has happened so far is that some specialist companies, mainly in the oil and petrochemicals sectors, have been "spun off". Their managements have been made independent of the state holding companies, and some of their shares have been sold or distributed to senior managers, a few other private investors and the state companies’ pension funds.

Unless there are some major changes in economic management, Iran’s situation seems bound to get worse. Immediately after the revolution its population exploded. People were encouraged to have babies by the promise of better conditions and the mullahs promoting traditional family values, which emphasised the virtues of women staying at home, looking after their husbands and having children. This type of behaviour, the mullahs knew, would help perpetuate a society they understood, and which gave them political support. At the beginning of the 1990s it was realised that the increase in population was running out of control and the government reversed its policy. It introduced campaigns to encourage birth control and sterilisation, and pushed these quite ruthlessly. The result has been a very sharp drop in the birth-rate, but it has come too late.

The Government’s Response

If the government is to resolve its economic difficulties and prevent a continued deterioration in the standard of living of its people, it will have to embark on a thorough programme of structural reform. This will involve the sorts of changes that have been introduced by other countries that have been in similar situations: privatisation, the opening of doors to foreign investment, greater transparency in government, and bringing commercial law into line with international norms. For the moment these changes are almost unthinkable, though demographic pressures will probably bring them onto the government’s agenda quite soon.

The government’s current reform policies are concerned mainly with bringing its budget more closely into balance. It is trying to increase the sums it raises in domestic taxes. Last year it introduced a 2 per cent sales and service tax, though in general it is not thinking of new taxes or increasing the rates of existing taxes; the rates of income tax have remained unchanged since 1988. The thrust of its policy is towards stricter enforcement of the existing tax régime. It is aware that there is a huge black economy made up of traders and commission takers, and it is trying to identify these people and bring them into the tax net. It wants also to tax the bonyads. There has been talk of the government’s campaign increasing domestic tax revenues by 60 per cent, but it is unlikely that this figure will be achieved.

Another government stratagem is to increase, or at least maintain, its oil revenues. Iran still has huge oil and gas reserves, but its major fields are old and since the revolution have been neglected. The country has already had difficulty at times in recent years in maintaining its production at its OPEC quota level, which in 1998 was 3.9m barrels a day, and unless there is considerable investment in pressure maintenance and secondary recovery its output will soon start to decline. The government has not only to avoid this, it has to increase production so it can meet the rise in domestic demand, believed to be between 7 and 10 per cent a year, and keep the volume of its exports stable. At present, under a régime of OPEC cutbacks, it is consuming about 1.3–1.5m b/d and exporting up to 2m b/d. This would imply a certain amount of cheating on its OPEC quota of 3.3m b/d. In the longer term it wants to increase its production capacity to 6m b/d, which would not only give it a lot more revenue but would increase its bargaining power in OPEC and in regional diplomacy vis à vis Saudi Arabia.

To achieve its targets the government has come up with the idea of Buy-Back. Under this system it will have foreign companies put their capital into the development or redevelopment of fields, and then will repay them and give them an annual return of around 18 per cent by allowing them to take quantities of oil at reduced prices. The intention, initially, was that the duration of the deals should be quite short, around three to five years. The government insists that it or the National Iranian Oil Company (NIOC) should take the major management decisions, and should control the production rate, sales and pricing. It promises that if for any reason production from a redeveloped field falls short of the volume needed to pay back the foreign company, it will make it up from other fields.

The first round of buy-backs, involving eleven projects, was offered in 1995. It led to only three deals, one with a Franco-Italian consortium of Elf and ENI, one with Elf and Bow Valley of Canada, and one with the French company, Total. Total signed an additional, separate, deal for the redevelopment of the Sirri field, after the American company, Conoco, was forced by the Iran Libya Sanctions Act of 1996 to abandon its own scheme for investing in the field.

The Iranian government talks of its having been too generous in the first buy-back round – and it says it is now making its terms tougher. It blames American pressure for the small number of contracts signed. Foreign companies say roughly the reverse – that at the beginning NIOC was inflexible and is now becoming more accommodating to foreign companies. Whatever the truth may be, the government is now offering a second round of 42 buy-back projects. It is talking to Shell, ENI, Elf, Total, BP, the British independent LASMO, Cepsa of Spain, Saga of Norway, and Atlantic Richfield, which is in the process of being taken over by BP. It is understood that NIOC may be willing to agree longer term sales contracts running up to ten years. This is to meet the companies’ objections that being repaid over a three to five year period made them little more than contractors. They were arguing that they would prefer to have their capital free to invest longer term, albeit at greater risk, elsewhere.

The Iranians would very much like to have some more major companies invest – initially Shell and BP. They want, first, to erode the already weakened Iran-Libya Sanctions Act and they believe that once the two giant European companies invest, the American majors will increase the pressure on their own government to let them invest as well. This would be convenient in re-opening Iran’s relations with America, without the Iranian government having to make any formal concessions. The Iranians also see that although the bigger companies bargain harder, they are easily able to provide finance from their own resources. So far minor companies and Iranian consortia interested in buy-back deals have found difficulty in getting finance from international banks. The banks have been put off partly by the degree of NIOC control of the projects. Changes in this and all other aspects of the buy-back deals are being delayed by fighting within NIOC. This is not just a matter of ordinary corporate politics, but of officials’ fears of taking decisions and being branded by others as too pro-Western.

Hoping for Foreign Investment

For the long term the Iranian government is pinning its faith on attracting foreign investment, which it sees in rather vague and optimistic terms. There is a feeling in both official and some business circles that once the door is opened a little bit – which is what is happening – investment will flow in. Talking to Westerners, Iranians still repeat the idea that "you need us as much as we need you". They have been saying this, as much to reassure themselves as encourage the foreigner, since the beginning of the 1990s. They still believe, or very much want to believe, that their oil and gas must be as important to the world as it was in the 1970s.

In fact, outside the oil buy back deals, very little investment is going into Iran. In spite of invitations by NPC, no foreign company has yet put money into petrochemicals. There have been some small European investments in food processing. What other investment there has been has involved projects that were begun in the Shah’s day. Foreign companies are still involved in some of these and have recently been putting in capital to expand or maintain their plant.

The simplest and probably most important reason for the lack of foreign investment is the ambiguity of the law on the subject. Article 44 of the Islamic Republic’s Constitution appears to reserve ownership of all "large scale and mother industries" to the state, and Article 81 prohibits the granting of "concessions" to foreign companies for the purposes of "trade, industry, agriculture, mines and services". The latter article refers to foreign companies not being allowed to establish themselves in Iran, but it is vague as to whether this prohibits the ownership of shares or minority holdings, or the establishment of joint-ventures or branches. The impression any foreign company would have from reading the Constitution is that its investment in Iran would not be welcome. What complicates matters is that in the early 1990s the government revived the Foreign Investment Law of the Shah’s day. Officials began to say that it was this document, which encouraged but regulated foreign investment, that was the applicable law – but they did nothing to define its relation to the Constitution, let alone change the Constitution. Until something is done to clarify these matters companies will continue to feel that Iran is at best lukewarm on foreign investment and that their assets in the country will not be secure.

Companies are further deterred by occasional reminders that there are elements in the government very firmly opposed to their presence. In the economy, as in social affairs, there are particular ministries and state agencies that are known to be liberal or pro-reform and others that are reactionary. The institutions, and the ministers who head them, may be completely opposed to each other’s ideas and do all they can to frustrate each others’ policies. This is what happens in relations between the Central Bank, which is liberal, and the Finance Ministry, which is hard left wing. It was officials in the Finance Ministry who earlier this year announced new regulations for the taxation of foreigners in the country. They announced that personal taxation would be levied on the basis of what the Ministry estimated the foreigners were earning, rather than on what their companies declared, and that the taxation would be backdated three years. After the announcement it was understood that a number of companies, including Japanese, Korean and Italian firms, which had established representative offices in Iran were thinking of moving, possibly to the Gulf state of Dubai.

Neither the law nor the behaviour of hard-line elements in the government will change until the power struggles within the régime are resolved. And until this happens there will be no question of Iran overhauling the rest of its commercial legislation, increasing the transparency of government or introducing any of the other policies that make developing countries attractive to foreign investors. Nor will there be much increase in investment by the Iranian private sector, which is another pre-requisite for attracting foreign companies. The lack of private sector investment in Iran not only gives the country a low growth rate, it shows how much Iranians themselves are still nervous about their own government.