Women hold posters showing portraits of late Iranian revolutionary founder Ayatollah Khomeini, and Supreme Leader Ayatollah Ali Khamenei in the holy city of Qom, Iran, on January 3, 2018. (Photograph: AP/PTI)

Iran: Why This Time Is Different, And What’s Next

BloombergQuintOpinion

What is happening in Iran, why, and who is involved?

In the last 40 years, Iran has endured five convulsions.

The first, the 1978-79 Islamic Revolution, led by Āyatollāh Ruhollah Khomeini, succeeded in his goal of replacing the Shah’s 2,500-year-old Peacock Throne with an Islamic Republic. By 1983, he and his supporters consolidated power, shoving aside moderates. But the economy was wrecked, thanks in part to a costly 1980-88 war with Iraq, triggered by Saddam Hussein’s invasion of Iran. Sour relations with America owing to the 1979-81 hostage crisis didn’t help revive the economy.

In July 1999, thousands of students spearheaded protests after the judiciary, dominated by hardliners shuttered a reformist daily newspaper, Salam (Peace). Centered in Tehran, Isfahan, and Tabriz, between 5-17 people were killed, and 1,200-1,400 arrested. The goal of changing Iran to a secular democracy was crushed.

Ten years later, in June 2009, students again led a protest, this time joined by millions, shouting: “Allāhu Akbar” (God is Greatest) from rooftops in Tehran and across the country. The goal of this Green Revolution, also called the Persian Spring, was to challenge the controversial Presidential election result that saw an incumbent conservative — Mahmoud Ahmadinejad — win a surprise victory over a moderate — Mir-Hossein Mousavi — amidst widespread irregularities. Roughly 110 people were killed, and 10,000 arrested, with no change at the top.

Then Mayor of Tehran and presidential candidate  Mahmoud Ahmadinejad shakes hands with his supporters as he leaves a polling station during Iran’s first ever presidential election runoff in Tehran, Iran, on June 24, 2005. (Photographer: Ramin Talaie/Bloomberg News)
Then Mayor of Tehran and presidential candidate Mahmoud Ahmadinejad shakes hands with his supporters as he leaves a polling station during Iran’s first ever presidential election runoff in Tehran, Iran, on June 24, 2005. (Photographer: Ramin Talaie/Bloomberg News)

Two years thereafter, in February 2011, The Day of Rage against the government turned into massive protests that lasted for weeks into May. At issue, again, was election fraud, as well as freedom of speech and human rights. The timing was no accident: protestors expressed solidarity with the contemporaneous Arab Spring movements in Tunisia and Egypt. The result was the same, too: multiple deaths, approximately 1,500 arrests, and no government concessions.

Just days after Christmas 2017, pan-Persian protests erupted. Already, 24 are dead and over 1,000 arrested. But, this time is different. Of all chants resonating from today’s protests, none is more revealing than “The people are begging, the clerics act like God.” What’s happening in Iran now is fundamentally an economic revolt driven by the masses. With no central conductor, spontaneous street choirs sing in a bass tone that Iran is neither just a theocracy nor just a plutocracy, but both, and that its theo-plutocratic economy is base.

In other words, the Islamic revolutionaries of the late 1970s have become the establishment.
Demonstrators from Iranian opposition group PMOI protest near the Iran’s embassy in Paris, on January 3, 2018, in solidarity with those demonstrating in Iran. (Photograph: AP/PTI)
Demonstrators from Iranian opposition group PMOI protest near the Iran’s embassy in Paris, on January 3, 2018, in solidarity with those demonstrating in Iran. (Photograph: AP/PTI)

Their economy, a ‘Theocratic Plutocracy’, is frail, and their self-declared policy of an ‘Economy of Resistance’, is failing. The choirs of protests sing for sustainable, inclusive growth. For that to happen, Iran should consider transforming its economic structure to ‘Theocratic Capitalism’, and shifting its policy to an ‘Economy of Acceptance.

Non-Standard Disclaimer

Before proceeding, a disclaimer is essential.

Regime change, and regime defence, are Off Point. Also Off Point is pointing the finger at any individual.

It is for the Iranian people to express, peacefully, their aspirations for self-determination. The golden rule ought to differentiate legitimate foreign commentary from interference. How would Americans feel about unholy tweets from Qom, coupled with calls for a United Nations Security Council meeting about Confederate statues?

What’s On Point is a candid conversation about the boiled-over frustration of poor, lower- and middle-class Iranians.

Dreaming of studying and practising law, and ultimately serving Iran, some of them reach out to this columnist. Though eager, industrious, tech-savvy, and multi-lingual, they cannot find funding for overseas studies to enhance their human capital. Nor can they find jobs without an insider connection.

The official unemployment rate of 12.4 percent they face is deceptive.

Over half of Iran’s 80 million people are under 30, and the International Labour Organisation estimates the unemployment and underemployment rates among 15-24 year-olds are 26.7 and 12.4 percent, respectively.

Defining ‘Theocratic Plutocracy’ And ‘Resistance Economy’

Iran often is called authoritarian, in part thanks to Āyatollāh Khomeini’s view of liberal western democracy as undesirable. It also is dubbed a dictatorship, thanks to its poor human rights record. “Sponsor of terror” is another label tossed at the regime, especially by America, Saudi Arabia, and their Sunni Arab allies. None of these labels aptly explains the current protests. They are political epithets, whereas Iran’s lousy economy motivates the incantations of protestors.

What’s needed is an inclusive term for both the religious foundation of Iran’s political system and its dysfunctional economy.
Pedestrians and traffic pass a banner with a photograph of Ayatollah Ali Khamenei, Iran’s supreme leader,  and Ayatollah Ruhollah Khomeini, founder of the Islamic republic of Iran, on a road in Tehran, Iran, on Wednesday, August 26, 2015. (Photographer: Simon Dawson/Bloomberg)
Pedestrians and traffic pass a banner with a photograph of Ayatollah Ali Khamenei, Iran’s supreme leader, and Ayatollah Ruhollah Khomeini, founder of the Islamic republic of Iran, on a road in Tehran, Iran, on Wednesday, August 26, 2015. (Photographer: Simon Dawson/Bloomberg)

Theocratic plutocracy works. A theocracy is a state ruled by clerics, who may or may not be authoritarian or dictatorial. That’s embedded in Iran’s Constitution, which is based on the welayet-el-faqih doctrine — the governance of Islamic jurists — articulated by Āyatollāh Khomeini.

The Oxford English Dictionary defines plutocracy as “a government by the wealthy; a state or society governed by the wealthy; or an elite ruling class whose power and position stems from its wealth.” In today’s Iran, some leading theocrats, i.e., top clerics, are plutocrats, too. Others are clubby with secular plutocrats. The lyrics of street choirs are not blasphemous. Rather, they highlight ‘god-like’ theo-plutocratic status, and would not reference “begging” if benefits trickled down to them. But, that’s not how a theo-plutocratic economy operates.

Pricey Eggs And No Jobs In The Resistance Economy

In August 2012, Āyatollāh Ali Khameini declared a “Resistance Economy.” The resistance is to sanctions imposed by the United Nations, United States, and the European Union, and more generally to the West. To resist means to subordinate economic decision-making to national security doctrine. Avoid globalisation as much as possible. Try to be self-reliant. Regard Western countries as largely unreliable economic partners. Turn to the East for trade, investment, and financial relations. Anti-Semitism, and thus anti-Israel campaigns, lurk in the resistance.

Iranians chant slogans while they burn a representation of the U.S. flag during a rally against anti-government protests in Tehran, Iran, on January 5, 2018. (Photograph:  AP/PTI)
Iranians chant slogans while they burn a representation of the U.S. flag during a rally against anti-government protests in Tehran, Iran, on January 5, 2018. (Photograph: AP/PTI)

The resistance economy has not worked for Iranians outside the theo-plutocracy. Their street-level reality includes:

(1) Inflation

Central Bank of Iran (CBI) data show inflation at 11 percent in 2016, down from 31 percent in 2013, but projected by the World Bank to be at least 10 percent through 2020. Dis-aggregating the data shows the stress on everyday Iranians.

The protests started in Mashhad over a 50 percent jump in the price of eggs.

Thanks to bird flu, Iran suffers a shortage of hens. Overall, basic foodstuff prices rose 40 percent in 2016. CBI figures show 30-50 percent declines in weekly average household consumption between 1996-2016 of bread (13.3 to 6 kilograms), red meat (1.5 to 0.8 kilograms), and milk (2.6 to 2.3 litres). And, with cuts in fuel subsidies, petrol prices are likely to rise 50 percent (from $0.30 to $0.45 per litre).

(2) Unbalanced growth

Iran’s Gross Domestic Product growth rate, which at 12.3 percent in 2016 is up from 1.4 percent in 2015, also needs to be dis-aggregated.

The oil and natural gas industry, liberated from non-financial sanctions after the July 2015 Nuclear Deal, accounts for most of that reversal. That industry is not labour-intensive. Non-hydrocarbon sectors must grow rapidly, possibly 5 percent plus, to absorb young labour market entrants.

(3) Poverty

Islamic property law champions the Vice Regency Theory, whereby people own assets as stewards for the Regent — God (Allāh). He entrusts people to use His bounties prudently, and share them magnanimously in reflection of His mercy. Yet, something was lost in the theory-to-practice translation.

Twenty million of Iran’s 80 million people are below the poverty line.  
A street  trader counts out rial banknotes in Tehran, Iran. (Photographer: Simon Dawson/Bloomberg)
A street trader counts out rial banknotes in Tehran, Iran. (Photographer: Simon Dawson/Bloomberg)

This includes, says the World Bank, 8.2 million subsisting on less than $5.50 per day in 2014, and Iranians became 15 percent poorer between 2005-2016 (based on CBI household budget statistics).

Theo-plutocrats blame sanctions for crippling Iran’s economy. Correct, but not the whole story when corruption is unveiled.

Corruption is a hugely significant intervening variable between the independent variable (sanctions) and the dependent variable (economic performance). Some theocrats behave non-transparently to promote their self-interests. That’s a temptation common across all religions. Ask Pope Francis, who is having a devil of a time reforming the Roman Curia (the Vatican bureaucracy). Some plutocrats cannot resist agglomerating ever-bigger piles of powerful assets. Consult the history of trust-busting President Theodore Roosevelt.

Put theocrats and plutocrats together, as in Iran, and corruption is more than foreseeable. The manifestations:

(1) Nepotistic Loyalism

Employment patterns are not merit-based. Government positions are staffed with family and loyalists, generating two agency problems. Some loyalist-agents act in their own self-interest, adversely to their theo-plutocrat principals. That’s petty corruption. Worse, those agents are not skillful to run the economy competently. That’s macro-corruption.

(2) Reliance on State-Owned Enterprises

Between March 2005 and March 2014, the Iran Privatization Organization divested 55 percent of state-owned enterprises through public offerings on the Tehran Stock Exchange.

That still leaves nearly half of the economy in state hands. Some of those hands are palm-up.

Transparency International ranks Iran as 131 (in 2016, tied with Russia, and bounded by Denmark at the top and North Korea at 176) in its Corruption Index.

(3) Inefficient Expenditures

Foreign military ventures are expensive. Arguably the second-most important street-choir lyric is “Let go of Palestine. Not Gaza, not Lebanon, I’d give my life [only] for Iran.” Arming Hezbollah with 120,000 Katyusha rockets pointed at Israel inflicts an opportunity cost on Iran’s poor, with no changes in any occupied territory.

From the Golan Heights, looking left to Lebanon, and right to Syria,  (Photograph: Raj Bhala)
From the Golan Heights, looking left to Lebanon, and right to Syria,  (Photograph: Raj Bhala)

Transforming To Theocratic Capitalism

It’s standard fare that capitalism assures the most efficient allocation of factors of production — land, labour, physical capital, human capital, and technology — and generates the largest volume of consumption opportunities. Thanks to the price discovery mechanism, these production and consumption gains happen in every market for goods or services in which the government allows unfettered operation of the mechanism.

Once transformed to theo-capitalism, Iran’s price discovery mechanism will be unblocked.

Theo-capitalists can rely on familiar light-handed levers to assure markets find their most optimal equilibria, and correct market imperfections such as monopoly, oligopoly, and monopsony. And, they can implement the Vice Regency Theory to avoid the worst excesses of laissez-faire capitalism.

Towards An Economy Of Acceptance

Were Iran to take seriously its application to accede to the World Trade Organization, first lodged in July 1996, and which neither the United States (since May 2005) nor Israel is blocking, Iran would then be asked by WTO members to accept market-oriented reforms that would move it to theocratic capitalism. The accession package would have the imprimatur of 164 members, 80 percent of which are developing or least developed countries, and include:

  • Dismantle state-owned enterprises, and mandate that remaining ones operate on commercial principles.
  • Slash tariff and non-tariff barriers, and open on a Most-Favoured-Nation basis to imports and foreign direct investment.
  • Stabilise macroeconomic fiscal and monetary policies.
  • Adhere to scientifically based sanitary and phyto-sanitary standards, which would help avoid bird flu.

Note the obvious: the WTO cannot delete ‘theocratic’. It’s the un-level competitive playing field of the ‘plutocracy’ that worries members. Unfettered, transparent price discovery across goods and services markets facilitates non-discriminatory treatment.

Accepting these reforms would encourage merit-based hiring. Iran’s companies need the best to compete with foreign enterprises. Conversely, foreigners want to staff offices in Iran with the best locals.

In the multilateral WTO setting, would Iran have to accept dealing with Israel?

The legal answer is “no,” because Iran could invoke the “Non-Application” rules in WTO law. But, the economically rational answer is “yes,” as the Saudis answered when they joined the WTO in December 2005. The Saudis agreed to drop participation in the Arab League Boycott of Israel, and have spent the remaining years quietly finding common ground with Israel, ironically about Iran. Who knows what Iran’s WTO accession might do to bring Iran and Israel on common ground?

The Alternative?

Power is longest preserved, and most widely admired, when it is let go.

The bigger the grasp, the tighter the clasp, the stronger the fist, the weaker the power.

The counter-intuitive challenge for the powerful is to let go of rigged markets — or be swept away in economic revolt.

Already Iran’s theo-plutocracy senses these truths. That’s why Iran’s reformist-minded President, Hassan Rouhani, intoned: “I believe that what happened in recent days was apparently a type of threat, which should be turned into an opportunity.” [emphasis added]

He’s right.

Hassan Rouhani, Iran’s president, waves as he arrives for a press conference at the presidential offices in Tehran, Iran. (Photographer: Simon Dawson/Bloomberg)
Hassan Rouhani, Iran’s president, waves as he arrives for a press conference at the presidential offices in Tehran, Iran. (Photographer: Simon Dawson/Bloomberg)

Iran’s Islamic Revolutionary Guards Corps, which have served the theo-plutocracy since their founding in 1979, cannot be wholly trusted to quiet the choirs of street protestors. The Guards are conscripts, many hailing from the same socioeconomic ranks as the choirs. Conscripts might not sympathize with the urban, upper-crust elites, as they did not during the anti-government disturbances in 1999, 2009, and 2011. Intellectuals can be an emotionally-distant target for tear gas, water cannons, or bullets. Now the Guards might empathize with singers and songs from their neighbourhoods.

With the legacy of Persian civilization dating to Cyrus the Great (553 B.C.), today’s Iran is the world’s only Twelver Shī‘īte country. This heritage and its modern expression can be cherished. But tomorrow, save for economic transformation today, only yesterday will endure.

Raj Bhala is the inaugural Leo S. Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.