Directorate of !atellite*ce
Iran's Economy:
A Survey of Its Decline (u)
A Kactrct Ptper
Iran's Economy:
A Survey of Its Decline (u)
Iran's Economy:
A Survey of Its Decline (u)
Living conditions ate significantly worse for most Iranians today thanwhen Ayatollah Khomeini came to power9 An indication economic descent is the fall in its GNP since thc revolution. In
constant terms. Iran's per capita GNP40 was il percent lower than it wasore direct indicators of living conditions alsoramatic decline Inflation has surged ahead of wages, forcing most to seek second and often third sources of income to get by. Unemployment has worsened sharply since the Shah's era and currently hovers aroundercent The level of public services has deteriorated generally, and such services have become more expensive:
real per capita spending on education0 wasercent lower than it was0
funding for health care droppedercent.
for housing fellercent.
Iran's mortality rate has risen since thc revolution, and drug addiction has become epidemic, reflecting in pan increased hopelessness among young Iranians about education and employment prospects Wealth is becoming increasingly concentrated in the hands of those with the financial and political resources to benefit from currency arbitrage, speculation in scarce goods, andof which have flourished under thc clerical regime,
Iran's economy was dragged downariety of forces, some of which were beyond the control of the clerical regime and others the direct result of its policies. Thc fall in oil prices and the Iran-Iraq war. which cost0 billion, consumed increasingly scarce resources. The clerics'of most economic institutionsariety of subsequent policies, such as maintaining multiple, overvalued foreign exchange rates,private investment Government revenues plummeted, forcingcuts in spending on public-sector enterprises and social ^gS^
Tbe regime's radical polilical posture and its efforts to encourage Iranians to marry young and have large families resulted in additional drags on Iran's economy,evere brain drain and unprecedentedgrowth.illion Iranians, including many of Iran'shave fled the country since the revolution, and few of the skilled have returned. Iran desperately needs this lost human capital to guide and manage an industrial recovery. Iran's population, which is likely to pass the
,
illion mark9 and ts currently increasing by moreillion every seven months, has steadily raced ahead of thc economy's abilityupportr*:
President Rafsanjani's efforts to unify Iran's exchange rates and increase private participation in Iran's mostly state-run economy signal his concern that worsening economic conditions could undermine his power and Iran's regional ambitions. This concern almost certainly was heightenedave of economic protests and labor strikesafsanjani is struggling not only to formulate appropriate reforms but also to implement them at tbe right pace. If he moves too quickly, the resulting pain couldpopular and political sentiment against him. Proceeding too cautiously could allow the country to drift toward economic disaster and lead to the same politicalf)
Rafsanjani has improved thc clerical regime's economic and political relations with many West Europeanrend lhat is likely to continue and probably will include cautious attempts to improve relations with the United States. Although Western Europe and East Asia can provide all the resources Iran needs. Rafsanjani probably fears that, as long as US-Iranian relations are poor. Washington will use iu influence with these states to impede Tehran's efforts to obtain economic resources. fc^lT
The USSR represents an alternative source of some goods,ilitary, but the economies of the two countries are uncomplementary. Both nations have energy resources to export, and they both need bard currency to finance purchases of industrial and consumer
in
Content*
Summary Forces Behind the Fall
Oil Revenues Plummet
Iran-Iraq War Adds to Burdens
Nationalizations Scare Investors
The Overvalued Exchange Rate
Massive Brain Dram
Population Growth Races Ahead of Economy
The Toll on GNP
Industrial Sector Stumbles
Agricultural Sector Runs in Place
Commerce Buoys Services Sector
Per Capita GNP Plummets
Living Conditions Deteriorate
Budget Reduction Hits
Education
Health
Wealth Becoming More
Civilian Imports. Purchasing Power] 2
Unemployment
Iranians
But Trouble
Treacherous Road
Iran's Economy:
A Suney of (is
idioi.xr-iet of lhe West mhoxattwtU-fy/itf pe'tm-sl com/oK. andj!-fence Islam leathet seU'-tacrtfice
Iranian middle school lejrhcok
Iranian President Rafsanjani is:ryngmprove tne economic well-being of Iranians through decentriIication ind Western participation in recon-strtction His efforts reflect concernranians have suffered since the rr-eiution
continue and could cost him his kacership. This concern almost certainly *ai heightened' Iranian protests aad labor unkssj Lhat were sparked ay unrelenting economic pressures Mthough Rafsanjani appears to be overcoming har-ui.ncto his market-oriented economic agenda, most of Inn's economic problems are complex and deepi/ entrenched and "ill berty impossible toin the short-to-medium term. Even over the longer term, he probabiy will achieve onl> mtxed
Forces Behind ih< Fall
Iran's economic troubles are the resultariety of factors, some of which were beyond thc control oTthe clericaley developments were theof oil prices since ihend the Iran-Iraq war08 Although Iran'salmost certainly would have faced difficultiesesult of these factorsariety of policies implemented by the ciencs following theparticularly those (hat expanded state control over the.seriously worsened its troubles
Oil Roenurs Plumose!
Oil exports are vital to the Iranian economy, and declining oil earnings since theharp financial Now to the clerical regime In additionfalling prices, declining reservoir pressur- and deteriorating surface facilities throughout Iran's ail
Faced with declining hard currency earnings. Irani financial opttccs were limited Besses slashingas oii exports fell.ould draw flown its foreign assets or see* foreign loans. Tehrai tad already drawn down its foreign assets frctn Si? billion toive tnontss' worthather than borrsw abroad, which most regime leaders viewed as antithetical to the revolution's commitment to financial independence. Tehran pared imports further idHMk
Tae Iran-Iraq War10
The Iran-Iraq war dealteavy economic biow in part by farcing Iran to spendard currencyiliury imports We estimate Iran's foreign military purchasescvears aver-iced itcut S2 billion annually]
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^Although Iran spent muchJesscrT military imports than did Iraq, we estimate Iran's iota! bill for thelost oii revenues0 biil.cn
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hu miignificant peace dividend since(ne 'ran-ffaq .ar. Irani miliury hardware
uoel.es were heavily damaged by ihea.id Tehran warns to rebuild them to reestablish Iran a* the preeminent regional power. Tneists 'ucled this interest because itare ocoortu-nuy for Iran to regain lost ground toward military mnty tjfco Iraq Trtnn ins aanouitcM -jiansaend SIDdur-ng the aoaimnoru. buteheve Iran, tura currsmo resource* will restrict secr-ding to aboutillion annually JfiWi
Naiie-uliuriom Scare lawon The clerical reg>mcice rings af policies that have turned potential investors jwiy trom tenon that are criticalmploymentrowth mcb as manufactaring One or' the
first sheets to Iran'seconomy wasnca;auona.iiauon of aii pniturv iconsmi- institutions, including banxi. insurance aad service- companies, and all major industrial unitsPrivate ownership wu honorra in the new. revc-utiCfl. ary institution, but legal protection against additicn-aiccriation *as=es
esult, private t: is factorsi revolution
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Figure 1
Iran: Index ofixed
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Now: Prlvueryeacatfy mmjaci atai* SO ptruBiofrv-
capital investment wasercent lower duringeriod than it waiormer Iranian industrialistress interview in0 said he had no intcresi in fixedin Iran because "the government is forever earning up with new rules andould always be worried about expropriationbuiiocssmen and merchants have little faith in Iran's economic future and do not invest in Iranian industry, according to ern press reporting
The decline in private investment was rendered rnore serious than it might cscerwae have been by tbe governmentfalling revenues and thus us decreased ability to serve as an engine of economic growth.
(government spending on
filed investments at ihe end ofaserceni lower inreal terms than it was at the beginning.
TWa Rate
Thc clerical regime bas regulated Iran's importsystem of multiple, extremely overvalued exchange rates. The Central Bank's cjfBcial exchange rate for the Iranian rial has been maintained at aboutials per dollar since the revolution, but it has been trading for as littleials to thc dollar in rcccni years on private currency markets. Iran has also maintained several additional discounted rates that arc higher than the official rate bui far below
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market rates. Rafsangam has been stepping cautiously toward unifying rates and devaluing Iran's currency.
to maintain atiscountedN'1
Iran's foreign exchange system not only inhibitsindustrial activity but also encourages investors to divert scarce resources to speculation
Iran's Minister of Heavy Industries in December IWO complained pubiidy about an Iranian car producer's ability to import rearview mirrors, whichach in hard currency, for only TOO rials each. Iran's Central Bank sold the necessary hard currency to the auto company at the low official rate ofials per dollar because autos are scarce in Iran and rearview mirrorsegal requirement Iranian manufacturers could produce rearviewbut not for lessals each. Unable to compete with the import cost, local producers have no incentive to produce the mirrors.
Iran's United Bus Cooperative was granted access to hard currency at the official exchange rate in9 to import buses, according to Iranian press reporting After the buses were delivered, theremoved and sold the air-conditioners on Iran's open market for enough nals to cover the initial, subsidized cost of tbc entire buscs.^fjfr
Despite the negative effects of Iran's exchange rate system. Tehran has maintainedart, we believe, because of the profits government officials earn from their access to foreign currency at preferential rates. Corruption was common throughout thearge body of pressuajflBbVeporting indicates it has grown rapidly since ibeidely respected Iranian economic journal in0 summarized the situation in blunt terms: "Thc use of political power or position for material gain has reached epidemic proportions. More than half the political establishment is on the take *tfSr'
Another key political obstacle to unifying therate is the fear thatove wouldhc elimination of major subsidies, causing popular
unrest If access to cheap hard currency were cut off. the local prices of many essential goods would jump sharply In addition to angering the general public,rice rise almost certainly would encourageoliticalroposal by Rafsanjani toasoline price subsidy in1 prompted radicals in Iran's legislature lo virulently attack the plan, according to Iranian press reporting, apparently forcing Rafsanjani to compromiseanfl
Brain Drain
The revolution and the Iran-Iraq war prompted many of Iran's best-trained professionals to leave the coun-
U million people left the couniry
77 Emigration surged in the years of unrest leading to the revolution, thcr- slowed0I.3 emigration jumped sharply again andnnuallyndicating growing numbers of Iranians had lost faith in thc regime and had become exhausted by the Iran-Iraq war Although some emigres have re* turned
away were scientists, engineers, and financial experts, whose skills were readily marketable abroad
The clerical regime intensified the negative impact of this emigration by placing supporters in professional positions for which Ihey were not qualified. Forerious lack of technical expertisereat deal of mismanagement exists throughout Iran's Ministry of Industries. Many of the Ministry'swere appointed because Of their religious and politicallP
Tehran has repeatedly trsed to lure emigres back to Iran, but few have been convinced by tbe clerical regime's promises^.
Thc skills of some senior Rafsanjani appointees who are represented in Western media as technocrats with solid economic backgrounds are questionable!
Population Growth Race* Ahead or Economy Iran has experienced unprecedented population growth during the clerical regimes rule, further reducing thc economy's ability to meet demands for goods and services. Iran's indigenous population grew by almostercent6ccording ic6 census. Tbe addition during that period ofillion refugees, most of whom are Af^ ghans. pushed toul growth to almosttsercem annual growth rate. Iran's population ofillion will addillion wuhin seven months and willillion9 The influx of Kurdiih refugees following the Gulf war has worsened the Situation and angered many Iranians, already frustrated by the increased competition for employment and particularly housing and public services caused by Afghan refugees IU
Although Rafsanjani has publicly acknowledged thc seriousness of Iran's population problem and has quietly implemented efforu to slow growth, similar attempts have met with little success in tbc past Amid harsh criticism from some Iranian clerics snd radical members of Iran's legislature. Rafsanjani
reversed the clerical regime's stance against family planning9 and began encouraging birih conirol with efforts that include dispensing free condoms The Shah also attempted to slow Iran's popuutKin growthelatively rigorous birth control programwhich Ayaiollah Khomeini angrily abolished afier seiringthe slightly reduced growth rate he achieved stilloubling time of only 22
years.
Tbe Toll on GNP
Iran's GNP inthe first full year of Ayatollah Khomeini'saboutercent in realjectingelf-imposed cutback in oil exportstaW Tehran's decision to resume oil exports helped Iranrecover from this initial shockhen low oil pnees contributed toerCcnt fall in GNP.8 another gradual recovery began, and we estimate0 GNP of about SSO billion was aa percent above the low levels to which it fell0 Nevertheless, we estimate0 ONP wasercent below prerevcJuiionaryi
Industrial Sector Stumbles
Iran's nonoil industries performed particularly poorly Tbe fall in Iran's hard currency earnings sharply reduced Iran's ability to purchase foreign rawand machinery needed for domestic production.
^^aSanVauVaiBef Tehran allocated
illion tn hard currency to industryear when Iran's nominal oil export earnings peaked3 billion.8 bard currency allocations had fallen to0 million. reSectmg theil export revenues5 billion.
local ipending ba .'unci and operateenterprises also declined.grevenues. Goverasien:Iran's largeof -huh -eretheaniy fa.ied :afactory revenue* but also slippedundermining production. In consiaatbudget allocations for itate-iiwRedwereercent lower0 tnaa (hey were11
Tie lc--ered.ru rd and local currency speeding caused industna! output and capacity utilitaiiofl to fall.
Iran's industrial produc-tton in theerceni 'ower thart >t
. Tie per'caplti'fall in outputerce:
Agricultural Sector Runs In Place
Iran's ignculturai sector performed; Setterther areas af thedur.ngrani inabt:-it> to ^ee= itself "ad besi one of Khcmetnii ma;cr
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criticisms against (he Shah We estimate tha:of Iran's ^rain output inand53
percent higher ihan it was0
improvement reflects in part Tehran's continuedto development spending in this sector Tais achievement is muted, however, when population growth is factored in. Per capita gram output jn-creased byercent during ihe period
Despite the agricultural gains. Iran'sod bill nowarger portion of its export earnings than itecade ago because of the steadyopulation and lower export earnings We estimate Iranian imports of foreign food and agriculturalabsorbedercent of foreign9s9ccordingtradi
lummets
Iran's per capita GNP pe'formancst sine:uch more negative *icw than does overall GNP. Although Iran'* economic output inwas only ilighl.'y below7 level. Iran's reputation jumpedercent during this period, causing the goods and services produced io be spread much more thinly ic meet the demands of the much larger population0 per capita GNP ofas ai leastercenteal terms ihan it was? andcrcm!5 levels.
iomcP gains are losses when viewed in per capita terms Iran's real GNPercentS. but zte: capita growth that year wasercent. Iran has fallen from being numbered among the world's tcp one-third in terms of per capita GNP. to nearic.? frna
Li*ing Conditions Deteriorate
Although GNP By ttsdf provides few specific insights into living conditions, it often serveseading indicator of trends in quality of life. In Inn's case thc
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picture, particularly when viewed in per capita terms, strongly suggests that Irving conditiani have traded significantly for most in Iran since tbc clerical ime came to power. We
thai life in Iran hai be It since the
Reeteliw rials
Government spending in Iran since thc revolution has dropped dramatically, reflecting falling revenues from oil exports, state-owned enterprises, and taxes. Budget expenditures0 wereercent0 levels in constant terms andercent constant per capita tcrms.1
ipue Tehran's claims of spendingince Use Iran-Iraq war. per capita sx-ending intwo full years into Inn's postwarercent lower8 levels inten j*
Although it had promised to help poorer Iranians, tbe clerical regime's spending trends on social servicesear free-fall foiiowvng Use Shah's ouster Total spending in constant, per capita terms wasercent lower0 than it was0 and bit ihe education, health care, and housing sectors especially ff1
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eversal of the clerical regime's free education policy. Iranian parents are being asked to iuppor: public schoolsth tuition payments. Ininister of Education and Training announced that thc government hadlegislation that would requireo jay tuition for their scaooichiidr^
oelors the announcement lhat Iranian officials received frequent complaints from parents angered bv (he practice, in
Health Car', [ran* per capita spencing on health cars has droopedercenteadingteady decline in the availability of these services and
'shcrtajesural trsas. Moss hospitals in Trans
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remote Sisian va Baluchcstan Province, for example, are only partly operational or are closed because they lack surgeons and other skilled personnel, according to Iranian press reporting. Tw0 recentlybed hospitals in Baluchcstan have not opened because iheyufficient number of physicians to support the facilities. (SjfesALpcj
Homing. Public spending on bousing droppedercent0eading to serious housing shortages. Iran's Ministry of Housing and Urban Developmenttudy in8 thaithat remwo-bedroom apartment in Tehran's poorer section hadercenta and that rental security deposits demanded by Iranian landlords hadercent The same survey showed lhat Iranians were responding to the rising costs of housing primarily by making do withsmaller accommodations. Almost half of Iraniansare ainthat have two total rooms or less, andercent of rented accommodations orovide housing for three
fsanjam was shocked to find Iranianstraw hutsour cf several provincesccording to Iranian press reporting, (s
Wealth Becoming More CoaceaCratH
One of the proclaimed goals of the revolution was to redistribute wealth to poorer Iranians, but after initial progress the regime began losing ground. An indicator of wealth distribution is the Ciei coefficient ortatistical rneuurernent that reflect* perfect equalityating and perfect inequality*ation's wealth is becoming controlled by increasingly fewer citizens, its Gini coefficient will move closerhe clerical regime scored some early successes in improving Iran's Gini coefficient970argely by expropriating land and olher
" Tranr relax, MMM etu ea ifKOMey watt pronOrt
im Mm of dm ooefkifBi attMit* eaiain M i . ii*
.. receswuincome.income,oruantiMini
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personal property from wealthy Iranians andit to farmers and other poorer aniens As the economy has become depressed andin highly profitable opportunities for speculation for the relatively few Iranians with savings or surplusearlier trend has been reversed The World Bank06 Gini coefficient, which is almost as bad as tbe rating under thc Shah and placed the Islamic republic among the world's bottomercent,
Civilian Imports, Purchasing Power Down
Iranians havea sharp decline in nonmili-ury importsn0 terms. Iran's per capita civilian imports in theereercent lower than they were. when theynnually, according toirJde reportingim-pons turned slightly upward following the Iran-Iraq cease-fire, but the) wereercent lowerhan they were.
The fall in nonmihtary imports, ranging fromitems to machinery for domestic production, fueled shortages and helped push prices steadily ahead of
-prices rose
by an annual average rate ofercent28 We believe Tehran underestimates inflation by weighting consumer purchases outside of government price controls too lightly, and Iranian press reportingconsistently indicated Iran's inflation is higher than thc government estimates
'te-scctor urban wages28 rose by an annual average of onlyercent, significantly below official inflation estimates Government employees in urban areas saw thetrfall even further behind prices, risingercent annually on average, (s.
Thc drop in buying power has led an increasing number of lower- and middle-class Iranians to seek additional sources cf income, including crime.to an Iranian press article inrices havenightmare" for most Iranians, causing those with one job toecond and those
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tty
iwo jobs iqhird ^
ernmeni employees have resorted to drivingvehicles as taxis al night to sapp-emcniman)
Iranian males participate in the black market,their time on street corners selling anything for which they can find buyers^ largcbody of press
steadily growing percentage of young Iranians are turning iqercent of Iran's population is addicted toincome despite thc high risk of execution if ( "v
Uarmploynvnt Up
Unemployment has risen steadily in Iran throughnd represents one of ihc regime's mosi daunt-ing challenges Governmcni datahown Iran's unemployment at about IS percent, but an Iranian omciai6 admitted publicly thai thc number is probably closer toercent.emographics and development seminar organized by the Iranian Government inexperts estimated that Iran's unemployment was ai kailerceni. (ul
Tehran's ability lo meet the demand for jobs appears to be slipping steadily behind Iran's rapidly growing labor force. Rafsanjani's current five-yearplan calls for thc creationew jobs annually, but6 census indicatesoung Iranians are currently entering the work force annually. Anillion or more working-age Iranians are unemployed or
Iranians Tolerant
W'e believe Iranians have been relatively tolerant of the economic declineide variety of reasons Ayatollah Khomeini's teachings emphasized ihatwas necessary to remain independent and trulyrecept that many throughout Iran's mostly Shia population embraced, at lean initially. Inthc clerical regime won the loyalty of many poorer Iranians by giving them wealth expropriated from richer citizens and positions of responsibility unavailable to them under thes|pH>
During thc Iran-Iraq war. Tehran employed additional means of maintaining suppon. Ii successfully appealed to Iranian nationalism and patriotism and usedsymbolism to rally support The regime portrayed itself as providing for the massesrogram of rationing essentials at subsidized pnees andshifted responsibility for thc nation't declining nomic conditions to Baghdad and iu supporters.
Thc clerics beneiiied from the political exhaustion
became increasingly apathetic politically inhc revolution, hostage crisis, and war with Iraq wore
Iranians down, and many turned away from political activity ag^l
The regime's harsh oppression of dissent throughout the decade also helped keep its power intact. Political enemies were repressed brutally at borne and. if they went into exile, pursued by assassination souads. For example,9 prominent Kurdish critic Abd al-Rahman Qasemlu was assassinaied in Europe.
more educated citizens are not immune from ihc nation's worsening unemploymeniCgajjjpj graduates in iruTeaiirupydimculi to findrend that is contributing to drug use and suicide. Only I? percent of0 Iranians who graduated from college0 will readily find employment, according to Western press reporting jtjf^0P'
The absence of an effective leadership alternative worked against widespread dissent. Many Western-oriented Iranians whoecular government in Tehran probably viewed the revolutionisaster. We nidge that few want to try again, and most hope ihat Rafsanjani's pragmatism will result in improved Irving conditions. Hc boosted their morale by pushing
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opment program through Iran's leg-obture and continues to buoy their hopes by seeking western participation in trans
But Trc-oble Loocas
Despite tbe relative tolerance and popular good will Kafsaniant has no: escaped theiscontent over economic pressures.0 at leastarge strikes, demonstrations, or brawls erupted throughout the country:
- For nine days in January virtuallyof the Iranian Nationaloevisedof the Ministry of Ubor thattake-home
ta^B'rhc governmcni tfireaumed Se .inter, Hu, dismissal and arrestedndividuals suspected of helpingrganize the strike, which subsequently collapsed.
to<
Western press reporting, cancellation of
0UlCtl i0 Tchran0 people assembled in front of the stadium to set fire to three buses, overturn severalGuard Jeeps, and destroy pictures of Ayatollah Kborncirti and current Supreme Leader Khamenei.
An Arab newspaper reported io March that anti-regime demonstrations occurred in four Iranian provinces. Protesters in Esfafaan burned pictures of Khomeini. Khamenei, and Rafsanjani.
An increase in bread prices in August sparked
numerous brawls in Tehran, according to Iranian
press reporting. Rises in food and housing prices
icd three demonstrations
Ministry of Commerce -Do you know the only product constantlyby the Ministry of Commerce foroupon is not needed?
-Promises!!
trans* ffrrn comnmi on paoniar frustration wah mtomc condiUora M
In rnid-Novcmber virtually all primary and secondary school teachersmall number of other govern-moat employees in the Iranian cities of Yard and Shiraz staged strikes to protest low wi
1 The strikes spread to
Esfahan and prompted authorities to arrest all organizers.
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The brier oil price boon1 following Iraq's invasion ol Kuwait allowed Rafsanjanirovide limited relief, but signs of economic stress remain. In March (he Speaker of Iran's legislature, the Minister of Energy, and several officials of Iran's Martyrs' Foundationouthern Iranian city tothe problems of families of war dead and other deprived people in tbcccording to Iranian press reporting. In the past, senior Iranian officials have rarely made personal visits unless public unrest threatened ia^ff
Treacherous Road Ahead
Allhough we believe Rafsanjani is trying to improve Iran's economic conditions, the country's ills are complex and entrenched and cannot be cured quickly or painlessly. Higher oil prices would allow Iran io increase imports, ease inflation, and push forward on some reconstruction projects- They wouid do little to address the economy's underlying
Rafsanjani has begun toariety of economic reforms that he probably hopes will jump-
start the economy, but tbc results of his efforts have
been limited:
He ordered his Minister of Economic Affairs and Finance0 to unify Iran's exchange raies. Three rates now exist instead of ihe former six. but two of tbc three rates remain overvalued
Rafsanjani has iried to sell state-owned enterprises, but few of these mostly outdaied. inefficient, and money-losing operations have attracted buyers.
He has made some progress in increasing Iran's access to foreign financing, but the large multi-bill ion-dollar loans Iran desperately needs to rebuild its crumbling industrial base have not beer, forthcoming
He has offered tax breaks to Iranians for investment in industry, but speculation in scarce goods and real estate continues to be much more profitable and emails less risk of expropriation^tirT
Rafsanjani probably recognizesenousrecovery will require sweeping reforms, but suchreducing governmeniover foreign trade, dramatically increasingparticipation in reconstruction, and attackingfueling popular unrest and polilical attacks against his leadership. Not only arc tbe specific reforms he proposes important, but the pace at which be tries to implement them is critical. If he pushes reforms too quickly, he could ignite sentiment againsi him. but proceeding too cautiously could lead to the same result. Although Rafsanjani couldhis opposition, we believe he wants to avoid violent confrontations for fear of damaging theof his regime orallying cry for his opponents, ^gaw"
Even if Rafsanjani successfully navigates thc difficult policy waters ahead, implements economic reforms, and increases nonoil output, especially in thesector, wc believe Iran's population problems will continue toignificant drag on the economy.verall GNP would have toercent real annual growth through the0 for per capita GNP to return to the modest levels of the. With its population.expanding by almostercent everyenerally stagnant or even downward real per capita trend appears likely,some years will show improvement.
nfluence and strength in the region and internationally will remain linked, at leasi indireetlv to us economic fortunes. Despite Iraq's recent defeat Iran will find it difficult to become the dominant
IS
power in tbe Persian Gulf without tbe resources needed to rebuild its military, and worseningconditions probably will absorb much of tbeattention. Iran will retain significant influence over world oil markets, if only because of iu location Many states may continueiew Iran as alucrative market foris one of the largest markets in the Middle East- Iu failure to sustain economic growth will diminish interest by foreign investors. Although firms may probe for profitable construction contracts, we anticipate that many will be discouraged by their inability to secure financing or majority equity stakes in Iranian
Iran's economic pressures have prompted Rafsanjani to turn increasingly to the West for help His most receni efforu included holding an international oil conference in Iran inuring which he and several of his ministers told participants that Tehran seeks cooperation, not confrontation, and thaioonsiderations overshadow polilicallthough Western Europe and Easi Alia can provide al) tbc resources Iran needs, we believe Rafsanjani fears that, as long as US-Iranian relations are poor. Washington will use iu influence with these states to
impede Tehran's efforu to obtain economic resources This perception will probablyautious attempt by Rafsanjani to improve relations with the United States ^kjf
The USSR presents Iran with an alternative source of some resources, particularly military goods, but it cannot replace the West at an oil export market or provide Tehran with the credit and industrial goods it wants. Soviet arms deliveries tothcodernnd Tehran probably is paying for them in part with natural gas. which it resumed exporting to the Soviet Union inespite ihe recent trade improvements, the uncomplementary economies of the two nations sharply limil thefor bilateral economic cooperation. Both countries sell energy resources and need hard currency purchase industrial and consumer
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