THE POLITICS OF PRIVATIZATION IN IRAN

Headnote

Following two decades of failed economic liberalization programs since 1989, Iran has stepped up its privatization policy. This article explores the factors that have motivated the government of President Ahmadinejad to push for privatization, despite its anti-capitalist rhetoric and lack of adequate economic preparations, and whether this policy can bring the intended results.

Aside from the controversial presidential election in June 2010 and the ensuing political turmoil, privatization has been one of the most debated topics about Iran in both domestic and foreign circles. The Islamic Republic has embarked on a large-scale privatization effort and now competes not only with Middle Eastern countries but also with Western European nations in terms of selling off state assets.

Despite the shift toward economic liberalization, privatization in Iran is not new; it had already begun in the late 1980s, when the phenomenon was becoming common in both developed and developing countries. The policy was created by the first administration of Hashemi Rafsanjani in 1989. It has since been continued with its ups and downs throughout the Rafsanjani, Muhammad Khatami, and Mahmoud Ahmadinejad presidencies. For over two decades of privatization and economic liberalization policies in Iran, however, the state (including revolutionary and religious foundations) has remained the dominant force in the country's economy.

All businesses, whether public or private, depend at least as much on the whims of government regulators as on business acumen. For years, profits came primarily from privileged access to foreign exchange at the ridiculously low official rate. However, since the unification of the exchange rate, significant profit has come from access to bank loans at interest rates well below the inflation rate. In addition, Iran's economy remains highly regulated, with much opportunity to protect favored firms (e.g., the recent decision to raise the already sky-high tariff on automobiles, in order to protect Iran's car manufacturers).

Has the Islamic theocracy in Iran any real faith in market system and liberal economy? Despite its anti-capitalist rhetoric, why has the Iranian political system engaged in a largescale privatization? What are the major driving forces behind this policy, and why did the previous measures taken fail to bring desirable results? Does the Iranian government privatize for economic reasons, or are there other, noneconomic motivations behind this strategy? While Iran's economy and its institutional structure are not quite ready for speedy privatization, do Iranian officials truly wish to relinquish the state-controlled economic policy? This article seeks to answer these questions.

Privatization in the Islamic Republic of Iran is examined herein as a process with significant political and economic dimensions. Concerned with the interaction of political and economic factors that have shaped privatization policy in Iran, this article investigates the issue using a political economy approach. Thus, it focuses on the country's political and economic processes and the interactions between the two, the distribution of wealth and power among different groups and individuals, and on the mechanisms that create, sustain, and transform these relationships over time.

The distribution of power in society determines the ability of various groups and stakeholders to acquire special ownership benefits within a privatization program. The political economy approach implies that Iran's privatization policy cannot be separated from the political factors that motivate it. A political economy orientation helps to explain the Iranian government's decision to limit the state's role in the country's economic affairs and to improve the role of market forces. Privatization has important politico-economic dimensions because it involves changing ownership patterns, which unavoidably affect income distribution, employment patterns, and control of crucial economic sectors.1

First, the role of natural resource revenues in increasing the state's presence in the Iranian economy is evaluated. Second, the Islamic Republic's 1979 nationalization policy and the decade of statism that followed will be examined. Third, the article discusses the main reasons for the implementation of the economic liberalization and privatization policy as well as impediments to its success from 1989 until 2010.

THE RISE OF STATE CAPITALISM IN IRAN

Here, the concept of "state capitalism" is employed to explain the changes in the nature and the role of the state in contemporary Iran, particularly its economic intervention and regulation since the 1960s. State capitalism emphasizes the state's role in accumulating capital and its means of controlling the economy. A distinctive feature of state capitalism is that the major means of production are owned and run by the state. While a private domestic capitalist sector in commerce, industry, agriculture exists, it is small and weak.2

The flow of resource revenues in Iran since the late 1950s and early 1960s has consolidated the government's indispensible role in collecting capital and managing the economy. Since the 1960s, natural resources have played a major part in Iran's domestic and foreign affairs, including in political, social, and cultural developments.

Despite Iran's long history of capital accumulation, industrial development, and the existence of non-energy resources, since early 1960s, natural resource revenues-oil in particular-have gradually come to dominate its economic structure, and dependency on oil revenues has in fact increased under the Islamic Republic. While the Iranian state has long played a central role in the economy, the growing importance of state-controlled oil revenues led to expanded state intervention. Therefore, control of the capital accumulation process inevitably moved from private capitalists to rulers and public sector bureaucrats.

Resource revenues were not only a source of competition for influence and wealth; they caused a reallocation of human capital from productive entrepreneurship to destructive rent-seeking. The concentration of sources of wealth in the government's hands strengthened the state and the bureaucracy at the expense of a prosperous private sector.3 Oil revenues provided the rentier state with economic power and financial independence from the society, making it a distributor of economic rent rather than collectors and redistributors of tax.

At the same time, resource revenues played a crucial role in the country's rapid economic development and growth rate during the 1960s and 1970s. During the period between 1960 and 1977, Iran's real growth rate was almost 9.6 percent, a record that few other countries achieved in that period.4 The oil revenues and the government's increasing capacity for sound economic management were behind this achievement. Thanks to its successful economic policy, by 1979, as many as a million foreign workers were employed in Iran, a majority of them skilled and experienced. In 1977 alone, 60,000 work permits were issued to foreign nationals.5

The former regime's ambitious development plans also increased the state's involvement in the economy and enlarged public sector participation in those parts that were not attractive to the private sector, from building massive dams to providing industrial credit. The rise of the capitalist state as part of an intensive development process has been marked by the fact that between 1949 (when Iran launched its development plan) and the beginning of the Fifth Development Plan (1973), the government's investments in economic development increased 1,000 fold, from US $68 million (1949-1955) to $68.6 billion (1973-1977)6. As a result of the state providing some 70 percent of the total investment funds in the economy, during the period of 1959 to 1977, the average growth rate of non-oil GDP in constant prices was more than ten percent annually.

ISLAMIC REPUBLIC AND MASS NATIONALIZATION

With the fall of the Pahlavi regime in February 1979, state involvement in the Iranian economy became even greater. In the summer of that year, the Provisional Revolutionary Government nationalized banks, insurance companies, and many large manufacturing infrastructures. The private banking system was hard hit by the state intervention; by early summer 1979, some 37 banks (14 of which had foreign partners) and 10 insurance companies were nationalized.7 Such nationalization acts were direct orders from the Revolutionary Council, which happened even before the Constitution of the Islamic Republic had been written. Meanwhile, the Revolutionary Islamic Courts also confiscated the assets of close associates and "anti-revolutionaries" who were loyal to the former regime, and bonyads (foundations) were set up to manage those assets.

Moreover, foreign trade was nationalized, and the government tightly controlled the export of financial capital and the foreign exchange rate. Before the new regime had celebrated its first anniversary, the nationalization and confiscation process resulted in the public sector owning at least 70 percent of the nation's capital. Within a short time, virtually all large-scale enterprises in agriculture as well as industrial and service activities in Iran became state-owned or controlled by a revolutionary foundation. This resulted in a nearly centralized economy.

As soon as the Pahlavi regime had disappeared, the economy became a source of rivalry among the various political forces. Though there was no consensus for the adoption of an appropriate economic model for the new system, two competing economic management positions soon emerged. The first position supported the role of the private sector, the protection of property rights, and limited nationalization policies. This was the attitude of political forces such as the National Front and the Liberation Movement, the bazarris (private merchants and those powerful businesses in the private sector who were key allies of the clerics in 1979), and non-partisan industrialists and entrepreneurs. Those among this group with political power and influence were quickly expelled from the political arena.

The second position favored state interventionism and imposing serious restrictions on private property rights. Political groups of the revolutionary fundamentalists and the leftist factions were the main proponents of this approach. Supporters of this position included such influential figures and political heavyweights as Ruhollah Khomeini, Hussein-Ali Montazeri, Muhammad Beheshti, Rafsanjani, and the current Supreme Leader Ali Khamene'i. A portion of the political forces in this group were eliminated, while some of the others later resurfaced as pragmatists, reformists, and conservatives. Members of this group were also the founders of various revolutionary foundations.8

Finally, the emergence of the new political system in Iran was followed by a complete change in policy in all sectors of the economy, as stipulated in the constitution. The new fundamental law clearly indicated that all of the country's civil, penal, financial, economic, and administrative rules and regulations should be in accordance with Islamic principles. Furthermore, the constitution recognized "the economy as a means, not an end" and categorized the private sector as a residual that would supplement the major state and cooperative sectors.9

WELFARISM AND STATISM

In his first public speech upon returning to Iran in February 1979, Khomeini promised the nation free piped water, free electricity, and free public bus transportation. He further stated, "We are for Islam, not for capitalism... and Islam will eliminate class differences." Thus, with the goal of self-sufficiency and surpassing both the capitalist and socialist models, the Islamic Republic promised to create a full-fledged welfare state. This objective was highlighted both in the constitution and in the public speeches of top officials on numerous occasions.

The Provisional Revolutionary Government under the leadership of Prime Minister Bazargan was, however, unable to deliver on its promise of free electricity, water, and public transportation. This failure stemmed from the fact that from the outset, the new political system and its top echelons lacked a clear vision regarding the course of economic growth and development it would pursue. Having seized control of the country's assets and natural resources, for the first time since 1949, the government failed to introduce an overall economic development plan.

The outbreak of the devastating eight-year war with Iraq (1980-1988) was a further blow to the welfare policies promised by the new political structure. As much as 20 percent of Iran's GDP went to defense during the course of the war. The war dealt a serious blow to the economy. There was a shortage of skilled workers for production and services; export and import patterns changed; trade routes were affected; there was a shortage of capital; and it produced a huge number of refugees, which placed an additional burden on the economy.10 Over two decades after the war has ended, Iranian leaders continue to attribute the country's serious economic problems to it.

As a result of the deterioration of the economic situation, throughout the 1980s, the government tightened its distributive policies and introduced a complicated practice of rationing and direct subsidies for a large number of goods and services. By the late 1980s, the country's poor domestic economic performance and the marginalization in international trade had led to a high-rate of unemployment, inflation, a serious deficit, and major trade gap. For instance, during the decade prior to 1988, national income per capita declined by nearly 50 percent, the average inflation rate was around 18 percent annually, and urban unemployment increased from 4.4 percent in 1977 to 18.9 percent in 1988.11

Direct state intervention in market operations and the politicization of the economy caused a decline in numbers of those employed in private enterprises. Private investors also became reluctant to capitalize on domestic projects other than lucrative trade and non-productive services with immediate benefits. As a result, by 1988, private investment was less than a quarter of the 1977 level.12 The situation forced the government to announce a comprehensive privatization plan in early 1988, but such a policy was not implemented until 1989, when President Hashemi Rafsanjani came to power.

THE PATH TOWARDS ECONOMIC REFORM AND PRIVATIZATION

By the late 1980s, inefficiency and mismanagement of state-run enterprises coupled with the debilitating economic effects of the eight-year war with Iraq convinced Iranian officials that they could no longer shoulder expensive social programs if the government wished to start a serious reconstruction effort. In a sudden break with the economic policy it had put forth for a decade, the leadership in Tehran began to reconsider state control over economy. Rafsanjani's government officially embraced a structural reform policy in 1989 whose goal was to decrease the state's role and to promote that of the private market.

In line with the pragmatism of the new leadership, for the first time in the Islamic Republic, a comprehensive economic plan was introduced. The plan was in fact copied from the same program the monarchy had carried out from 1949 to 1978. The First Five-Year Economic Development Plan (1989-1993) initiated by the Rafsanjani administration promised to turn the war-torn economy into a market-oriented, investment-driven, and more efficient system. According to the plan, these goals had to be reached through trade liberalization, wage-price deregulation, privatization of state-owned enterprises, as well as other economic reforms.

Based on the First Development Plan, the Rafsanjani's economic policy was designed to encourage the private sector to play a bigger role and to invest more than the public sector. Iran's private sector had long been an integral part of the economy, and it was the time to return it to center stage. As part of the government plan to reduce the role of the state in economy and to revitalize the private sector, some 800 publicly owned enterprises were to become privatized.13

Sub-article 32 of the First Development Plan clearly provided the legal ground to implement this privatization policy. Moreover, as a main component of the liberalization program, the Rafsanjani government revived the Tehran stock exchange, aiming to increase investment capital and to encourage greater participation from the private sector. Yet the economic reform program faced domestic backlash and other impediments. Thus, the Second Five-Year Economic Development Plan (1994-1999) pursued a new and vastly different policy. This policy was called tasbite eghtesadi, or economic stabilization, and advocated renewed regulation and economic controls. At the same time, however, the second plan continued to support the liberalization and privatization strategy.14

Rafsanjani left office in 1997 before the second plan was terminated. While Rafsanjani succeeded in removing some economic constraints, he was unable to overcome structural shortcomings, including heavy dependency on energy revenues, a weak production sector, uncompetitive markets, and an unsound national budgeting system. In general, his liberalization and privatization policy faced political, economic, administrative, and legal barriers-including the diktats of Article 44 of the constitution. Moreover, it did not achieve anything significant.

For instance, Rafsanjani's liberal economic policies received little support from the left, which until 1992 was the dominant force in the parliament. Roughly 40 percent of the members of the parliament were openly hostile to his new economic policy. 15 His administration attempted to engage the private sector. Within the private sector, however, people had no confidence in the system, and most were even afraid to show their wealth.16 Later, Rafsanjani and his extended family were accused of economic corruption and of being among the principal beneficiaries of his administration's economic liberalization and privatization program.17

ECONOMIC LIBERALIZATION AMID POLITICAL REFORM

By the time President Khatami came to power in August 1997, the economic liberalization and privatization policy had been put aside as a result of the perception and reality that such initiatives only benefited the privileged segments of society. The Tehran Times later wrote, "In the name of privatization, a number of healthy public industries and enterprises were transferred to hand-picked persons at peanuts prices... it was not privatization, it was auctioning of national assets."18 Moreover, despite the adoption of privatization as an official government policy since 1989, the number of major state-run enterprises had increased from less than 270 to more than 560 with less than 300 reportedly making a profit.

By the time the Second Development Plan came to an end, the Iranian economy was wrought with stagnation, high inflation, increasing unemployment, a weak national currency, and a growing socioeconomic disparities. In 1996, GNP per capita in Iran was only 73 percent of the 1977 level.19 In 1996, the budget of the 404 biggest public companies amounted to 38.3 percent of the GDP. These firms' shares in the general budget had increased from 53 percent in 1989 to 67 percent in 1996, while their borrowing from banks had risen from eight percent of all banks lending to 30 percent during that period.20

When President Khatami's first administration was inaugurated, the economy was still centralized, structurally distorted, and poorly managed. In August 1998, while presenting his Economic Recovery Plan to the parliament, Khatami told the members of parliament that "the country's economy is sick... it is sick in production, in distribution, and consumption." In 1999 Khatami's government announced an ambitious plan to privatize several major industries, including telecommunications, banking and insurance, power generation, and even the upstream oil and natural gas sector. The program was known as the Third Five-Year Economic Development Plan (2000-2005).

As part of the development plan, more than 500 state owned enterprises were to be privatized. 21 The plan authorized the participation of both the foreign and domestic private sectors in the privatization programs. The Khatami administration also established the Iranian Privatization Organization (IPO) in June 2001 in order to coordinate the plan. In 2001, one of the few economic initiatives of Khatami government permitted the opening of private banks, and foreign banks were authorized to operate in Iran's free trade zones for the first time since 1979.22

Khatami, however, paid little attention to the economic liberalization program, focusing instead on cultural issues and social liberalization. Nonetheless, his government continued the privatization policy, but the number of companies in the public sector actually increased during Khatami's presidency. Moreover, he failed to turn lossgenerating state-run enterprises into thriving ones. The third development plan thus fell short of its target, and privatization was totally dwarfed by the government's new public expenditures. In terms of overall openness to the world economy, Iran was ranked fiftyninth out of the 60 countries surveyed by the Economist Intelligence Unit.23

Khatami's main allies were reformist technocrats, who pushed for economic liberalization and growth, and populists in favor of state intervention and continued welfare subsidies. His ideological affiliation with the latter group, eventually led him to surrender to economic interventionists loyal to the supreme leader and who wanted to merge laissez-faire economics with social justice. Thus annual government expenditure to GDP rose from 24.5 percent in 1999 to 27.2 percent in 2004.24

The Khatami administration's privatization efforts were largely unsuccessful due to the lack of an appropriate political-economic environment, including policymakers' sympathy toward economic liberalization, the existence of an impartial judiciary, a competitive market and banking system, and an effective regulatory framework. Moreover, middle managers and top bureaucrats in stateowned enterprises strongly objected to the privatization plan, which would undermine their position and privileges. Revolutionary foundations were also a major obstacle to Khatami's privatization program simply because they were not willing to give up their rivalry with the private sector and their unfair access to many advantages that the private sector lacked.

REVOLUTIONARY FOUNDATIONS AND PRIVATIZATION

The presence of the revolutionary foundations and their huge conglomerates has long been a serious impediment to the successful implementation of economic liberalization and privatization policy in Iran. Several dozen of these institutions maintain control over a sizable portion of the Iranian economy and so far have been exempted from privatization policies. More important, not only have revolutionary foundations been de facto excluded from economic liberalization and privatization, but such steps toward reform have actually increased their monopoly over the economy.

This dates back to the parliament's fourth term (1992-1996), when the revolutionary foundations put pressure on the lawmakers to give them a share of the state-owned enterprises the government had earmarked for privatization. In 1994, the parliament passed a law granting the government permission to sell state enterprises to war veterans and family members of those who lost their lives during the Iran-Iraq War. Since these people lacked sufficient financial resources and the managerial expertise to buy and run state firms, the law accepted the revolutionary foundations as their representatives. As a result, the Foundation for the Oppressed and Disabled and the Foundation of the Martyrs and the Affairs of Self-Sacrificers were among the main revolutionary bodies that began to take over state enterprises.25.

The revolutionary foundations were created following the 1979 regime change in Iran in order to manage the assets confiscated from the Pahlavi regime's family and officials and wealthy people close to them. Reporting only to the supreme leader, the foundations have not been subject to government levies and audits or to public scrutiny. Due to their political connections and economic prowess, these parastatal bodies have enjoyed numerous advantages, including easy access to cheap exchange rates and bank credit, tax exemptions, lucrative government contracts, business monopolies, and regular financial assistance from the national budget.26 One of the main revolutionary foundations is Bonyade Mostazafan va Janbazan (BMJ, the Foundation for the Oppressed and Disabled).

The BMJ was established in March 1979 and immediately absorbed the Pahlavi Foundation, which had approximately $3.2 billion in assets prior to the collapse of the Pahlavi regime. The foundation also took over a bulk of the confiscated assets belonging to those with close ties to the previous regime, including the 51 families known as the country's largest industrialists at that time. Managing hundreds of farms and factories throughout the country, the BMJ has emerged as the largest economic entity in the Middle East27 and the second biggest economic sector in the Islamic Republic after the government.

In fact, the foundations control a significant portion of business activities and employment in Iran, while their actions are largely nontransparent and unaccountable to the government. Their strong connections with the political establishment make of them a powerful lobby with the ability to put pressure on the government in order to receive advantages and credits private businesses are easily denied. More important, effective privatization and a prosperous private sector in the long-term require that the revolutionary foundations not be excluded from economic liberalization and privatization.

THE POLITICAL WILL FOR PRIVATIZATION

From 1989 to 2005, the state's share of the Iranian economy gradually increased and the country was labeled "the most communist economy among non-communist economies." The major obstacles to the privatization process under the presidencies of Rafsanjani and Khatami included: misunderstanding, lack of a unified viewpoint among top officials, rivalry between various state-owned enterprises as well as revolutionary foundations and those in the private sector, unstable foreign exchange rates, fluctuations in stock prices, and inadequate domestic investments.28 One of the main obstacles was the lack of consensus among key political players on the economic reform policy, stemming from their ideological beliefs or economic interests.

From the time of its establishment, there were internal divisions over the Islamic Republic's economic policy. After 1989, the critical division was among the opponents of the liberalization policy-who supported populist policies, subsidies, and state interventionism-and the proponents of a laissez-faire approach to the economy. Thus, the economic liberalization initiatives-in particular the privatization policy-either failed or were delayed due to the lack of domestic political consensus in addition to other barriers, including the constitution.

Since any serious attempts for privatization programs were bound to bring about personal enrichment, rapid wealth accumulation, a huge income gap, and massive layoffs, this sparked serious debate among the political forces as to whether the political system was fully prepared to pay the political and social costs of such a transformation. The ideological camps that opposed the privatization process did their utmost to steer it into a dead end. Yet resistance also came from those officials who had greatly benefited from state control of institutions.

In 2004, Iran's Expediency Council, chaired by former President Hashemi Rafsanjani, reinterpreted Article 44 of the constitution, thus removing the greatest legal barrier to privatization. Representing the radical-populist faction of the revolutionary regime that came to power in 1979, Article 44 clearly mandates that key sectors of the economy remain in public hands. According to the Article 44:

The economy of the Islamic Republic of Iran is to consist of three sectors: state, cooperative, and private, and is to be based on systematic and sound planning. The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the state.

The Expediency Council's new interpretation paved the way for a widespread, all-encompassing privatization of the stateowned enterprises and enabled all major industries, manufacturing, and service sectors to be ceded to the private sector. Rescinding Article 44 technically heralded a new era of economic liberalization and market reform in Iran. The amendment allowed for the privatization of 80 percent of state's assets, because under the new interpretation, public ownership was replaced by government supervision.

In line with the formation of political will for economic reform, in a public speech on May 22, 2005, the Supreme Leader of the Islamic Republic called for the privatization of state-run enterprises. His address endorsed the results of the Expediency Council's proposed economic policies. Later, in August 2006, he issued another decree ordering privatization of banking, mining, industries, and transport companies, comprising about 80 percent of the state's economic assets. In his letter, Khamene'i also warned that "those who are against these policies will lose their interests and influence."29 In spite of this, the pace and extent of the privatization policy was to some degree shaped by a significant change in the executive branch of the political system, which occurred with the June 2005 election of Ahmadinejad as president.

PRIVATIZATION AS A NATIONAL PRIORITY

Despite promises to uproot the "oil mafia" and of "bringing the oil money to people's dining room tables," President Ahmadinejad took office in August 2005 without presenting any comprehensive economic plan to extricate Iran from its dire economic situation. In mid- May 2006, Ahmadinejad said he wished to reverse privatizations carried out by the former government of Khatami. In reference to Khatami's administration, he stated that "within the framework of privatization, public properties and factories worth billions of rials (millions of dollars) were sold off at cheap prices to some groups.30"

Ahmadinejad's first term in office coincided with the commencement of the Fourth Five-Year Development Plan (2005- 2010), according to which privatization could bring about economic and social change. Despite Ahmadinejad's commitment to the privatization policy, however, in the early years of his first term, the privatization pace was rather slow. For instance, in 2006 and despite the supreme leader's decree, his administration sold off state assets worth about $640 million, meeting only nine percent of the government's privatization plans, while from 1989 to 2005, the average transfer of state-owned enterprises had been $1.8 billion annually. 31 . By June 2008, only about 30 percent of government enterprises had been privatized.

Instead of focusing on selling off state enterprises, Ahmadinejad attempted to tackle two of the major problems related to privatization, i.e., state subsidies and the labor law, which his two predecessors had failed to resolve. In late June 2007, the Ahmadinejad government finally started to impose gasoline rationing. The Islamic Republic pays roughly $100 billion a year in direct and indirect subsidies for goods ranging from fuel to food and from electricity to medicine.32

The Ahmadinejad government has also taken steps to remove the restrictions of the Labor Law of 1990, including abolishing the minimum wage and letting private sector employers hire and fire as they please. The labor law also makes it difficult to dismiss workers, and its revision has long been a serious demand of the private sector and entrepreneurs in Iran. The gradual elimination of several state subsidies and the revision of the labor law may reduce the role of the welfare system, motivate the private sector, and force Iranians to face the market realities more than ever.

In 2010, the Ahmadinejad government accelerated the privatization program, selling off the assets of 50 companies, which had been worth around $110 billion during the April-November 2009 period.33 The Iranian Privatization Organization (IPO) called the 2009-2010 Iranian calendar year (March 2009 to February 2010) the "golden year of privatization," as the privatization program came to include such strategic sectors as telecommunications, transportation, electricity, fuel, steel, and banking.34

Soon after the beginning of his second presidential term, Ahmadinejad expressed his commitment to the privatization policy, which he called a "national priority." His government intended to privatize 80 percent of state-run industries by 2010, the end of the Fourth Five-Year Plan. This plan includes the transfer of two giant Iranian automakers, Iran Khodro and Saipa.35 The National Iranian Oil Company (NIOC) also announced the country's plans to privatize 47 firms in its energy sector worth $90 billion by 2014.36

While the Ahmadinejad government claims the Islamic Republic is doing better than European and other Middle Eastern countries in terms of selling off state assets, critics argue that the rate of privatization in Iran has garnered more attention than the quality of the process. They contend that during the Rafsanjani and Khatami presidencies, companies affiliated with state banks, social security organizations, pension funds, and some revolutionary foundations were the main beneficiaries of the privatization projects. Under Ahmadinejad, security and military organizations, particularly the Islamic Revolutionary Guard Corps (IRGC), and the institutions and companies affiliated with them have been offered a lion's share of the privatized assets.

Many within the Islamic Republic have voiced concerns regarding Ahmadinejad's policies, particularly during the months following the June 2009 presidential elections, stating that despite his early promise to fight the "black mafia," under his government's control and its privatization program, a new mafia has emerged made up of senior IRGC officers and their business partners.37 These critics view the transfer of state assets to a semi-governmental sector as a contradiction to Article 44 of the constitution and believe this must be prevented. 38 Some observers have even called the recent privatization, in particular the sale of Telecommunication Company of Iran (TCI), "a nail in the coffin of Article 44 of the Constitution."39

On September 27, 2009, in the largest ever flotation on the Tehran Stock Exchange, 51 percent of shares of TCI worth $7.9 billion was bought by the Etemad Mobin Consortium in just 30 minutes. As a quasi-governmental entity, the consortium includes three companies, Mobin Electronics Development Company, Shahryar Mehestan, and Tose'e Etemad Investments, all affiliated with the IRGC. 40 During the TCI flotation, other contenders for the shares were disqualified on security grounds or lack of sufficient finance. This ignited widespread criticism from policymakers, analysts, civil society organizations, and others.

The TCI privatization had clear political considerations. The state regulatory bureaucracy's (the IPO) actions in privatizing TCI had little to do with market competitiveness or the functioning of telecommunications sector, but rather were focused on the security and political ties of the firms involved. The deal has thus been widely criticized as a prearranged transaction to extend the control of the security and military organizations over the Iranian economy.

In November 2010, Gholamreza Kord- Zanganeh, head of the IPO, said that since 2005, the assets of 275 companies worth about $630 billion had been transferred, from which roughly $210 billion dollars had been sold off to the private sector, $80 billion to nongovernmental sectors, and $340 billion to the cooperative sector. 41 According to his statement then, only one-third of the privatized assets had been transferred to the private sector by the Ahmadinejad administration. These figures also contradicted other parts of his statement when he said that "since 2005 the share of the government in the economy has reduced from 65 percent to something between 40 to 45 percent and its share of the GDP has decreased by 15 percent."42

Thus, the Islamic Republic's privatization projects and the economy's transition from a state monopoly to a state-sanctioned oligopoly have been seriously criticized. In June 2009, Muhammad Nahavandian, head of Iran's Chamber of Commerce, said that less than 25 percent of all privatized state assets in Iran had been transferred to "a real private sector."43 In fact, Iranian officials sometimes use the word "vagozari" (transfer) instead of "privatization."

Ahmadinejad's revolutionary guard background, the IRGC's power in political and economic arenas in recent years, the republic's weak institutional environment, and Iran's large underground economy have led to warnings about the emergence of a new nongovernmental monopoly and its potential damage to the private sector. Through its conglomerates, this rising oligopoly has penetrated all of the economic sectors. Commenting on to this problem, in October 2009, Hassan Rohani, former secretary general of Iran's Supreme National Security Council, stated that "the private sector in Iran had long been hurdled by the government sector, but it is now stuck in hands of a semi-governmental semi-military sector."44

CONCLUSIONS

Under the Islamic Republic, the Iranian economy has been characterized by an extensive state presence; a complex relationship between public authorities and private interests; and politicized approaches to economic management, credit allocation, subsidization, and price control. After over two decades of economic liberalization and privatization, Iran's economy continues to be dominated by state-run enterprises, unregulated revolutionary foundations (bonyads), and an emerging paragovernmental sector under the invisible control of security and military organizations, in particular the IRGC. This has significantly retarded the growth of an independent, competitive, and market-based private sector in Iran.

Many privatized firms have been lossmaking and are sustained by loans from state banks, which may never be paid back. The privatizing of these firms-and taking bank loans in order to hide their losses-has been a means to understate the government's role in the economy. It has also considerably weakened the banks.

Despite various privatization programs to promote efficiency and economic growth, political interference in business will likely continue. In some cases, the change of ownership appears to have advanced the interests of politically well-connected business elites, which are not even likely to be potential entrepreneurs. This is because the real economic power lies with a minority in the top echelons of society, and the reform policies, including privatization, have sustained and even advanced its interests.

Real privatization in Iran is not likely to occur any time soon; because real privatization would require the end of state interference in the economy, the rule of law, transparency, and participation of foreign capital and encouraging entrepreneurship. Without addressing these fundamental issues, private ownership may not enhance efficiency or improve productivity of privatized assets in any significant way. In fact, it is management and competition-and not necessarily ownership per se-that promotes efficiency and growth. After all, the promotion of economic liberalization and private sector participation in the economy entails providing security and high profit potentials for those who are willing to invest their capital.

Footnote

NOTES

1 Susan K. Jones, "The Road to Privatization," Finance & Development (March 1991), pp. 39-41.

2 Karen Pfeifer, "State Capitalism and Development," MERIP Reports, Vol. 9, No.7 (1979), pp. 3-11.

3 Daniel Heradstveit and Helge Hveem (eds.), Oil in the Gulf: Obstacles to Democracy and Development (Aldershot, UK: Ashgate Publishing, 2004), p. 11.

4 Jahangir Amuzegar, "The Iranian Economy Before and After the Revolution," The Middle East Journal, Vol. 46, No. 3 (Summer 1992), pp. 413-25.

5 Ann T. Schulz, Buying Security: Iran Under the Monarchy (Boulder: Westview Press, 1989), p. 136.

6 Anoushiravan Ehteshami, After Khomeini: The Iranian Second Republic (London: Routledge, 1995), p. 81.

7 Economic Intelligence Unit (1979).

8 See Eva Patricia Rakel, Power, Islam, and Political Elite in Iran: A Study on the Iranian Political Elite from Khomeini to Ahmadinejad (Boston: Brill, 2009).

9 Ibid, p. 69.

10 Homa Katouzian, "The Political Economy of Iran Since the Revolution: A Macro- Historical Analysis," Comparative Economic Studies, Vol. 31, No. 3 (Fall 1989), pp. 55-66.

11 Sohrab Behdad, "From Populism to Economic Liberalism: The Iranian Predicament," in Parvin Alizadeh (ed.), The Economy of Iran: The Dilemmas of an Islamic State (New York: I.B. Tauris, 2000), pp. 100- 43.

12 Eliyahu Kanovsky, "Iran's Economic Morass: Mismanagement and Decline under the Islamic Republic," Policy Paper No. 44, Washington Institute for Near East Policy (1997).

13 Ehteshami, After Khomeini, p. 104.

14 Jahangir Amuzegar, "Iran's Economy: Status, Problems, and Prospects," Conference Paper, The Woodrow Wilson Centre and National Defense University's Institute for National Strategic Studies, November 16-17, 2004.

15 Rakel, Power, Islam, and Political Elite in Iran, p. 82.

16 The Echo of Iran (January 5, 1989), p. 15. The Echo of Iran is a monthly political bulletin published in Iran and the United Kingdom.

17 Behzad Yaghmaian, "Iran's Many Wars," Foreign Policy Journal (June 25, 2009).

18 Tehran Times, January 28, 1998.

19 Behdad, "From Populism to Economic Liberalism."

20 Djavad Salehi-Isfahani, "Labor and the Challenge of Economic Restructuring in Iran," Middle East Report, No. 210 (Spring 1999), pp. 34-37.

21 Babak Namazi, "The Legal Aspects of Doing Business in Iran," International Financial Law Review, Vol. 19, No. 2 (February 2000), pp. 23-27.

22 Reza Molavi, Oil and Gas Privatization in Iran: An Assessment of the Political Will (Ithaca: Ithaca Press, 2009), p. 119.

23 Jahangir Amuzegar, "Iran's Third Development Plan: An Appraisal," Middle East Policy, Vol. 12, No. 3 (September 2005).

24 Nancy Brune, Geoffrey Garret, and Bruce Kogut, 'The International Monetary Fund and the Global Spread of Privatization', IMF Staff Papers, Vol.51, No.2 (2004), pp. 195-219.

25 Eva Patricia Rakel, "Conglomerates in Iran: the Political Economy of Islamic Foundations," in Alex E. Fernandez Jilberto and Barbara Hogenboom (eds.), Conglomerates and Economic Groups in Developing Countries and Transition Economies (London: Routledge, 2006), pp. 109-32.

26 Jahangir Amuzegar, "Iran's Theocracy under Siege," Middle East Policy, Vol. 10, No. 1 (Spring 2003), pp. 135-53.

27 Behdad, "From Populism to Economic Liberalism."

28 Ettela'at Daily, December 8, 2000.

29 Radio Zamaneh, February 24, 2007.

30 The Daily Star, July 5, 2006.

31 Radio Farda, April 20, 2007).

32 New York Times, December 30, 2008.

33 Tabnak.ir, November 29, 2009.

34 Boursenews.ir, August 25, 2009.

35 Tabnak.ir, December 2, 2009.

36 Masha'l, The Weekly Publication of the Iranian Petroleum Industry, No. 384 (February 17, 2008).

37 Tabnak.ir, November 26, 2009.

38 Isna.ir, November 24, 2009.

39 Radio Farda, August 31, 2009.

40 Press TV, September 28, 2009.

41 Tabnak.ir, November 29, 2009.

42 Ibid.

43 Mehr News Agency, June 7, 2009.

44 Jomhouri Eslami Daily, (October 8, 2009).