As the government of President Mahmoud Ahmadi Nezhad finally decided to give up introducing Value Added Tax (VAT), a decision that triggered the unprecedented strike of the Bazaar in several major cities, including Tehran, pundits and economists continue to analyse the reasons behind such a defeat.
Paris, 29 Oct. (IPS) As the government of President Mahmoud Ahmadi Nezhad finally decided to give up introducing Value Added Tax (VAT), a decision that triggered the unprecedented strike of the Bazaar in several major cities, including Tehran, pundits and economists continue to analyse the reasons behind such a defeat.
In a first article, we quoted “informed sources” saying that the Revolutionary Guards were one of the organs that “pushed” the bazaar to strike, becaue the introduction of such a measure would hard the Mollahrchy’s Praetorian Guard ”more than any other group profiting from the present ruling theocracy in Iran”.
In fact, it was the bazaar that, in connection with the clergy, bank rolled the financial expenses of the revolution,
Now, Mrs. Azadeh Kian-Thibaut, an Iranian researcher and analyst of the Iranian affairs at the French prestigious National Research Centre CNRS (Centre National de Recherches Scientifiques) examines the issues from several political, social and economic angles and argue the decision is “pitting the Government against the far right wing of the ruling right wing of the regime”.
Here is the English translation of her original article published on 28 October by the pro-reform, internet daily “Rooz”, based in London and Paris.
The government’s decision to impose a value-added tax on traders and the subsequent decision to delay the imposition of this measure for one year in response to bazaar’s widespread protests points to a significant political-economic change that it’s analysis seems to be necessary for better understanding changes in today’s Iranian society.
The importance of the role of bazaar prior and after the Iranian Revolution of 1979 is not something necessary for us to remind it. In fact, it was the bazaar that, in connection with the clergy, bank rolled the financial expenses of the revolution, and the bazaar’s contribution was not left unrewarded when the new regime took over. Following the overthrow of the monarchy, the country’s economy moved in a direction that satisfied the interests of the bazaar more than before and allocated to it a larger portion of revenues generated from sale of oil and through domestic and international trade.
Unlike the owners of industry and factories (who were subjected to the rage of revolutionaries as symbols of “capitalism”), however, the beneficiaries of this enormous income neither generated jobs nor paid taxes proportional to their income. As a result, in the years after the revolution, while those generating employment in the private sector paid heavy taxes to the government in addition to creating jobs, the bazaaris not only did not create jobs, but also failed to pay their fair share of taxes.
It was against this background that attempts undertaken during the Hashemi and Khatami administrations to expand privatization was met with resistance from the bazaaris and their allies in power and failed to bear fruit. Privatization required changing the direction of the country’s economy from a distributional and exchange economy - the service sector in economic parlance - (in which the bazaar played a dominant role) to a productive and industrial economy (in which owners of industry would have more power). Naturally, the bazaar and its allies resisted any attempts that would have led to the reduction of their political and economic power.
With the beginning of Ahmadi Nezhad’s term, the challenge of privatization remained present for the government. The difference was that the country’s reliance on oil revenues and lack of dependence on the private sector was more pronounced than ever before. In fact, despite a four-fold increase in oil revenues during this period, not only withdrawals from the foreign currency reserves account increased to finance the government’s increasing expenditure, but also non-oil sector export and job-creation and investment in the industrial sector decreased due to a host of domestic policies and international challenges.
As a result, the new administration clearly moved against the direction of privatization and reducing the role of government in the economy. This administration spent an increasing portion of oil revenues on expensive domestic and foreign policies and did not paid attention to the disastrous consequences of mounting imports and uncontrolled injection of money into the society, resulting in increased inflation and the decreasing purchasing power of citizens, particularly those dependant on monthly salaries, which dwindled to about 20 percent of what it was the previous year.
The result was that increasing oil revenues in the Ahmadi Nezhad era not only did not lead to the more productive investment or job creation or improving the public’s welfare, but instead increased inflation and government expenditure and led to further economic dependence on oil.
In light of what was discussed, it is not difficult to grasp why falling international oil prices since the end of summer has put the ailing Iranian economy in a critical position. The Iranian economy is one in which value added taxes is dependent not on production and the industrial sector, but on oil exports and import and distribution of consumption goods, and this dependence has increased in the past three years. In a situation like this, the sharp decline in oil revenues has severely impacted the totality of activities of a government whose dependence on oil revenues is more than ever before.
With the beginning of Ahmadi Nezhad’s term, the challenge of privatization remained present for the government.
The natural result is that the severe vacuum emerging in oil revenues of the ninth administration, which cannot afford to cut expenditure in the short term (at least until election time), has forced this administration to search and create new sources of revenue.
This is the principle that can at least partially explain the motivations behind the administration’s recent attempts to impose new taxes on guilds and bazaaris. This, coupled with the government’s attempt to access new sources of finding to offset the decline in oil revenues, can serve as the basis of an initial analysis regarding the reason behind imposition of new taxes on guilds. It is probable that Mr. Ahmadi Nezhad’s government has undertaken this costly and controversial act under heavy economic pressure.
However, can the government’s desire to increase revenues fully explain the controversial new tax policy? It is difficult to accept this assumption. Even if we assume that the Ahmadinejad administration did not take seriously any warnings about the temporary nature of high oil prices, or that it really hoped to be able to change the country’s tax policy overnight, it would still be difficult to explain the administration’s response to recent protests at the bazaar.
In clearer terms, the announcement of a controversial new tax of three percent imposed on the bazaar, a measure which would not even have compensated for a considerable portion of the government’s fall in revenues, and the subsequent quick retreat by the administration in face of bazaari protests, strengthens the presumption that the main reason behind the announcement of new tax policies was political, not economic.
In this connection, divisions among the ninth administration and other factions in the conservative camp, particularly the faction known as the traditional right (which is composed of the bazaar, clergy, and political parties such as the Islamic Coalition Society) is a significant factor that could be analyzed in light of recent events. It is important to note that recent disagreements among the right are coming up to the fore ahead of the upcoming presidential election. Indeed, one of main topics of disagreement is the traditional right wing’s criticism of the ninth administration’s economic policies. Some right wing analysts have gone as far as to correctly identify the economy as the ninth administration’s “Achilles’ heels”.
Now, the Ahmadi Nezhad administration, which despite unprecedented oil revenues, has failed to resolve the livelihood issues of voters and has been unlucky enough to be deprived of high oil revenues eight months ahead of the election, is facing significant challenges in realizing its economic promises (such as payment of cash subsides) or even to contain the present situation and prevent it from further deterioration. The ninth administration is aware of the fact that it is unable to receive the votes of the educated and middle class given the economic and social damages it has inflicted on these classes, and is forced to invest on lower classes of society by emphasizing populist policies. However, it is not clear whether the administration has enough oil revenues to attract these groups (through mechanisms such as direct cash payments).
As a result, the ninth administration, in response to the untimely economic crisis that it is facing, has clearly stepped up its efforts to shift “blame” onto others for derailing economic reform and being responsible for unfavorable economic conditions.
In such an atmosphere, it seems as if Ahmadi Nezhad has two particular political goals in mind in announcing and then retreating from his tax policy: first, the act involves an implicit warning to the traditional right wing that the administration is capable of producing crises for this faction and its allies of this faction continues to criticize the ninth administration. More importantly, however, the new policies were meant to convey to society the message that the ninth administration is using its best efforts to solve economic problems and bring about fair distribution of wealth, but its critics – including the bazaar and its political allies – are preventing the administration from resolving the public’s economic problems by undermining its policies.
One can predict that, more than anything else, the present administration would rely on the “sabotage” of others to reforms advanced by Mr. Ahmadi Nezhad and his supporters as explaining the reasons behind the government’s failed economic policies. And one can also predict that at that time, one of the most important pieces of evidence to be used by the administration in proving the above claims would be that of bazaar’s resistance to paying taxes. This is an act that its political repercussions would certainly affect that bazaar’s political allies – including the clergy and traditional right parties. TVA KIAN 291008.