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Paris, Tuesday, March 21, 2000

Tehran Maps Path To a Free Market

By Philip Bowring International Herald Tribune
TEHRAN - Iran started its new year this week, along with the third five-year social and economic development plan.

Such plans are usually forgettable documents redolent of an earlier era of economics. But this one matters because, although it has few detailed targets, the plan outlines the reformist principles of the government under President Mohammed Khatami.

The plan comes into force just after reformers won control of Parliament in elections they hope will speed Iran's transition from a tightly controlled, quasi-socialist economy into an open one where market forces and private ownership predominate. The economic strategy is also starting as the United States has begun to lift sanctions, which are likely to be gone altogether within 18 months.

The Iranian economy has been in dire straits, averaging growth of 2 percent over the past five years while the work force has been expanding at nearly 4 percent.

Inflation has been well over 20 percent a year. But social progress in health, education and other areas over the past decade has been impressive; now people want goods and jobs.

With oil accounting for 80 percent of Iran's exports, the economy has suffered in part from low oil prices, which only recently have turned around.

Other hindrances include government deficits funded by the central bank, an inefficient state industrial sector, multiple exchange rates, administered pricing for many commodities, negative real interest rates, indiscriminate consumer subsidies and a banking system that favors the state and the tax-exempt religious foundations that own many enterprises, including once-splendid but now-dismal hotels.

The goals of the plan include a unified floating-exchange rate, current-account convertibility, positive rates of return for savers, large-scale privatization, attraction of foreign investment, tax reform, reducing oil dependence, encouraging labor intensive industries, targeting of subsidies to needy groups, and the reduction of government deficits.

Goals for the financial sector include the creation of credit institutions - including private ones - to compete with state-owned banks, the issue of debt instruments to fund state deficits, and the further development of the Tehran Stock Exchange as a medium for privatization and new capital.

The five-year plan was mostly formulated a year ago when low oil prices were forcing Iran to radically rethink its economic system. There is a danger that higher prices will reduce the pressure for change, but political momentum is now strong.

High export revenues will make it easier to unify the exchange rate. Under the current system, rates range from 1,750 rials to the dollar for imports of some food and other essentials to a free market rate of about 8,500 rials.

Price reform will mean cutting the consumption subsidies, which are given either from the budget or through the exchange rate; both are the major cause of government deficits, inflation and the consequent low level of savings.

But it will not be easy because Iranians have become accustomed to bread and gasoline costing a fraction of international levels. With jobs hard to find and a rapidly growing work force, the government will have to find a way of protecting the poor while reducing the subsidy burden without relying on oil.

There is certainly now the theoretical will to open up the economy. But it will take time to overcome bureaucratic inertia, entrenched state enterprises and foundations and the socialist thinking that always formed part of the Islamic revolution in 1979.

As in China, workers in old organized industries have job security and many benefits while the small scale, informal and rural workers have little.

Privatization has long been on the agenda in Iran. But until recently it had been bogged down in constitutional and political disputes. Now it is moving again, with the ministry of industry publishing a schedule of sales of enterprises.

With private capital in such short supply, privatization has often meant the sale of one state enterprise to another, or to a state bank investment company. But this process represents progress because the growing enterprises are more commercially minded.

A growing number companies are also listed on the stock exchange, which provides a tax advantage and requires the companies to be more profit conscious.

Some Iranian companies survive because of cheap credit, high tariffs and import bans. But many make good profits despite these obstacles and will very likely show remarkable growth as economic reform proceeds.

If the government moves quickly in carrying out the plan's good intentions, gross domestic product could easily grow 6 percent to 7 percent annually in the next five years as Iran makes up for lost time.