Eroding a Regime

Economics, Politics, and an Empowered Voice of Dissent

In 2005, MahMoud Ahmadinejad ran for President in Iran under a populist, economy focused platform. He painted himself as a technocrat, someone who could rejuvenate Iran’s economy. However, much of his support has been based on government subsidies and handouts, rather than sustainable policy. Much of that is now becoming apparent, as the economy of Iran is beginning to struggle severely.

Iran’s official numbers state that at the end of last year the unemployment rate had reached 11.3%, though the actual number is likely higher.  While relatively high, this number has only been kept this low through practices that have caused Iran’s real economic danger: massive inflation. According to Iran’s official numbers, the inflation rate is a staggering 13.5%.  However, intelligence estimates of the actual inflation rate currently range as high as 25.60% (see chart below).

Caption: Iran’s Historic Inflation Rates According to the CIA World Factbook

Iran currently subsidizes gasoline, electricity, cooking fuel, foodstuffs such as sugar and bread, university and education for citizens, and other government programs.  Many of these policies do not fundamentally stimulate the economy, so they have contributed to devaluation of Iranian currency.  Also, Iran’s currency has been linked strongly to commodities, especially oil, which are trading much lower than years past.

These weaknesses have cause a budget crisis in the government. Ahmadinejad, faced with the collapse of his populist handouts, and in order to bolster his support base, has a plan that will make the economy of Iran worse. According to NEWSWEEK,  ”Come spring, the government plans to stop subsidizing basic goods and will instead give cash directly to poor families. That plan, as well as Ahmadinejad’s push to give out more loans, will expand the cash supply and likely drive inflation higher still.”  However, Ahmadinejad has only been able to save half of what he had hoped, as Parliament’s Speaker Ali Larijani has blocked part of Ahmadinejad’s plan to cut government programs to give cash to his supporters.

The banking system is also in crisis. 25% of Iran’s bank loans have gone bad, and since January the banks have capped withdrawals at $15,000 USD in order to prevent bank runs. Some inside the Green Movement have even suggested targeting the banking system in order to weaken the strength of the regime. However, it seems that the financial system in Iran is weak on its own.

In all of this discussion, I’ve skipped several key points. New EU, UN, and US sanctions are still on the drafting table. Though there are several varieties, these could make the situation significantly worse. Also, the Obama administrations commitment to increase internet access to the Iranian people, hypothetically empowering the Green Movement, will continue to erode Ahmadinejad’s political base.

The only clear way out of Iran’s economic and political turmoil appears to be the softening of hardline policies and values, including the persecution of political dissidents, international isolation, and populist recklessness to compensate for these other mistakes. Ahmadinejad is unlikely to soften his positions, however, and there is no evidence that Iran’s government is open to cooperating with the international community, so it is very likely that the Iranian regime will continue to erode.

Fall from Power ~ UncleBob47