Oil-Centric Economy

Amidst the economic constraints of Iran outlined in the introduction of this discussion, Radio Farda examines the second constraint, which is dedicated to the "oil-centric economy." Perspectives on oil are not uniform. On one side, it is referred to as "black gold," which, by creating a significant revolution in the energy sector, has accelerated the wheels of human civilization and aided the development of many poor countries around the world. On the other side, it is described as a dirty and foul-smelling liquid that has elevated a minority composed of owners in the most corrupt countries of the world and major shareholders of multinational companies to glory. The impoverished people of the Niger Delta in Africa, who have received nothing from oil except its pollution, naturally do not have a good opinion of this fossil substance, and the fluctuations in its price in global markets are indifferent to them. In contrast, Nigerian and Gabonese billionaires, who owe their existence to oil, wake up and sleep with thoughts of this commodity's market. Juan Pablo Pérez Alfonso, a Venezuelan statesman and one of the founders of OPEC in 1960, referred to oil as the "devil's excrement" late in his life, based on what he believed oil had done to his country's economy, adding, "We are all drowning in the devil's excrement." If Juan Pablo Pérez Alfonso were alive today and saw the state of his country, Venezuela, his belief in the accuracy of the term he used for oil would likely increase. However, an emotional approach to the phenomenon of oil does not lead us anywhere. In fact, the experience of the last century and a half shows that oil is not inherently "gold" or "curse." Americans made the best possible use of their oil resources in the second half of the 19th century and the first half of the 20th century, just as the exploitation of North Sea oil later served the economic development of England and Norway. In the Middle East and Africa, however, a large portion of the wealth generated from oil has been poured into dictatorship, corruption, and war. Yet, in this great degradation, responsibility should not be placed on oil, nor should it be considered an inherently evil substance. What is referred to as the "oil curse" is, in fact, the nefarious and criminal use of this substance by some political leaders of the "Third World" due to their greed and folly. In Iran, too, the struggle over whether oil is a "blessing" or a "curse" is not insignificant. One hundred and nine years ago, on June 5, 1287, with the roar from the eruption of oil in well number one in Masjed Soleiman, this substance entered the lives of Iranians and became intertwined with their lives and fate for a very long period, which continues to this day. After World War II, the ups and downs of the economic and political lives of Iranians became increasingly intertwined with oil, from the nationalization movement of the oil industry and the events of August 28, 1953, to the oil shock of the early 1970s, the astronomical increase in Iran's foreign revenues from oil in the last few years before the Islamic Revolution, and the dire consequences of the reckless injection of these revenues into the country's economic veins, the Islamic Revolution, and the war, as well as the subsequent fluctuations in oil revenues for the domestic economy and politics and the international relations of the Islamic Republic, and the impact that the distribution of oil rents has had on the formation of power factions in Iran. Oil and the Iranian economy today still play a major role in financing the internal politics and foreign orientations of the Islamic Republic. In the economy, it is also the most influential factor affecting annual budgets and foreign trade. Of course, the percentage of Iran's budget and foreign trade dependence on oil fluctuates according to the increase or decrease in revenues from oil exports (in relation to the boom and recession of the global market for this commodity). In Iran's foreign trade arena, oil also holds a dominant role. The World Trade Organization reported Iran's total exports in 2016 to be $66 billion. Crude oil and oil products (gas condensates and petrochemical products) constitute eighty percent of these exports. In other words, Iran is still considered a somewhat single-product country, with manufactured goods playing a very marginal role in its exports. Over the past five years, the Iranian government's expert sources have estimated the average dependence of Iran's annual budget on oil to be around 35 percent. This estimate only considers the direct share of oil in the budget. The indirect share of this commodity in the budget must also be accounted for. For example, part of the budget revenue comes from customs duties and taxes on imports, and we know that most imports are financed with currency obtained from oil exports. In other words, if there is no oil, the revenue from customs duties and taxes would also decrease significantly. For this reason, based on various calculations from domestic and international sources, the direct and indirect share of oil in Iran's annual budget is estimated to be between fifty-five and seventy percent. In Iran's foreign trade arena, oil also holds a dominant role. The World Trade Organization reported Iran's total exports in 2016 to be $66 billion. Crude oil and oil products (gas condensates and petrochemical products) constitute eighty percent of these exports. In other words, Iran is still considered a somewhat single-product country, with manufactured goods playing a very marginal role in its exports. To demonstrate the role of oil in Iran's economy, it is sufficient to pay attention to its decisive impact on the country's growth rate. In the early years of the 1390s in the Iranian calendar, with a significant decrease in Iran's oil exports due to international sanctions, the annual growth rate immediately turned negative, even reaching minus seven percent. In contrast, in 1395, due to the consequences of signing the JCPOA and a significant increase in Iran's oil exports following the lifting of sanctions, the country's economic growth rate, based on official statistics, increased to 12.5 percent. The fact that the most important macroeconomic indicator is only affected by one commodity with such severe fluctuations is a sign of the Iranian economy stagnating at a very primitive level. In Iran's foreign trade arena, oil also holds a dominant role. The World Trade Organization reported Iran's total exports in 2016 to be $66 billion. Crude oil and oil products (gas condensates and petrochemical products) constitute eighty percent of these exports. In other words, Iran is still considered a somewhat single-product country, with manufactured goods playing a very marginal role in its exports. It is not only Iran that has sunk into the quagmire of an "oil economy." Take a look at the fourteen members of the Organization of the Petroleum Exporting Countries (OPEC). You will see that almost all of them, despite having enjoyed vast oil dollars over the past fifty years, have failed to achieve a real economy and enter the club of emerging economic powers (South Korea, China, Malaysia, India, Brazil, Turkey, Taiwan, etc.). They continue to live off oil rents, their political systems are far from democracy, and they are often mired in corruption. Economists use the term "Dutch disease" to describe the situation of these countries. This mysterious disease, as its name suggests, was first recognized in the Netherlands, where its economy, due to the massive income from gas production and exports, fell into disarray. However, the Netherlands, as a developed country with a democracy, quickly overcame this disorder, but its experience under the title of "Dutch disease" has found its way into the political economy of development and has even been perhaps inappropriately applied to the oil economies of the Third World. This disease reflects the anomalies that arise from the massive injection of revenues from natural resources (especially oil and gas) into the veins of the country, affecting not only the economy but also social and political spheres. The signs of these anomalies can be clearly seen in several major oil-exporting countries, from Iran and Algeria to Nigeria and Venezuela, at a very severe level that has no relation to the economy of the Netherlands. Economically, a country afflicted by "Dutch disease" becomes dependent on oil revenues as the main source of government income, marginalizing taxes. Such a country, due to its addiction to oil revenue injections, remains deprived of real development, sacrificing its industry and agriculture, which should become the main sources of wealth. Politically, oil rent-dependent governments, with their vast oil revenues and lack of need for tax revenues, evade responsibility, accountability, and public oversight, consolidating their power through clientelism and the distribution of subsidies, thus closing the door to democracy. Among the social consequences of the oil rent disease, the spread of corruption and the intensification of inequalities must also be emphasized. The Islamic Republic regime, like other political systems in the Middle East and the "Third World," owes much of its survival to oil. However, the sinking of these countries into the oil quagmire should not create the false impression that oil and gas resources inevitably or necessarily plunge their holders into such a quagmire. Today, economists are aware of how to optimally manage oil and gas resources. A country endowed with these resources, if equipped with modern and efficient political and economic structures, can turn oil into a "blessing" and create the groundwork for establishing a "post-oil economy." A "post-oil economy," as it is used in the economic literature of Iran, does not mean an "economy without oil." Oil and gas are valuable assets that can and should be utilized for the development of Iran. There is no reason for Iranians to abandon oil to organize their economy. Such an act is neither beneficial nor feasible. Instead, Iran must one day achieve a "post-oil economy," meaning that it must transcend an oil-dependent economy and, in addition to a vibrant and flourishing oil industry, and even in connection with it, establish a diverse economy based on industry, agriculture, and services. Iran has missed many invaluable opportunities to achieve this goal, and its economy remains "oil-centric." Fereydoun Khavand, economist, economic analyst, and professor of economics in Paris, France.