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As the Bazaar Goes, So Goes Iran

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Pacific Money

As the Bazaar Goes, So Goes Iran

Will the election of Hassan Rouhani revive Iran’s struggling mercantile community?

The crowded corridors of Tehran’s Grand Bazaar course straight through the heart of Iran’s complex commercial and political discourse. Its bustling and frenetic aisles, packed with haggling patrons and coated in centuries of Persian brickwork house not only copper, tapestries and spices, but the intellectual conversations that drive Iran’s politics. Though a fractious political group and notoriously coy in protest, the Bazaari community has long been at the center of the debate over Iran’s economic future. Should the country move towards free-market policies, or attempt to achieve an equitable distribution of wealth?

After eight years of Mahmoud Ahmadinejad’s enthusiastic policies of redistribution, Iran’s economy is hemorrhaging growth and jobs. Inflation officially stands at an intolerable 32%—although many observers believe it is higher. Price volatility makes it nearly impossible for Bazaaris to conduct any sort of planning. Hassan Rouhani’s stunning victory in last month’s presidential election suggests that the country is once again ready to embrace the more laissez-faire attitudes championed by Akbar Hashemi Rafsanjani and the Center for Strategic Research (CSR).

When Rafsanjani first took power in 1989, he inherited a wounded country teetering on economic destitution after a decade of revolution and total warfare. The controversial President attempted to generate a sustained expansion in economic growth by privatizing the petroleum, steel, copper, and automotive industries. In 1993, facing mounting foreign debt and stubborn inflation, Rafsanjani embraced a controversial IMF structural adjustment package, which allowed Iran to stave off the creditors by decreasing the money supply and cutting spending in an effort to stabilize the rial and unify exchange rates.

For Bazaaris, doing business during the Rafsanjani days depended on successful networking. Vendors allied with the clergy received favorable exchange rates and import-export licenses for their loyalty; many without state patrons turned to the black market to bolster their earnings. As NYU’s Arang Keshavarizan argues in his book, The Bazaar and State in Iran, patronage has “fragmented the Bazaar by making ties in the value chain more unstable and escalating competition [among merchants].” The increasing presence of mosque cooperatives and private commercial enterprise in the economy made life increasingly difficult.

Though GDP and per capita income continued to expand, politics conspired against Rafsanjani’s free market agenda. President Clinton’s signing of executive orders prohibiting U.S. trade with Iran and 1996 legislation sanctioning investors in the petroleum industry stymied pro-growth initiatives and ensured unstable exchange rates. Wealth began to concentrate at the highest levels of Iranian society and Rafsanjani’s personal empire expanded to encompass Mahan airlines, Azad University, and most of the pistachio trade, creating resentment towards him and damaging his reputation. Feeling increasingly alienated from their President, Iranians referred to him derogatorily as “Akbar Shah.”

Mahmoud Ahmadinejad’s victory over Rafsanjani in the 2005 presidential election was therefore seen as a sweeping rejection of Rafsanjani’s free-market vision for Iran. Raised in an impoverished rural community, the populist Ahmadinejad berated Rafsanjani and for alleging exploiting privatization and deregulation efforts to enrich himself, his family and his allies in business. The populist newcomer also won the the praise of the downtrodden by promising to pursue economic policies that redistributed wealth.

But Ahmadinejad’s overzealousness allowed Rafsanjani to plot a come back. When the Planning and Budget Office (BPO) advised that injecting excess capital into the economy would cause inflation, he reduced its authority and placed it under his direct supervision. Utilizing subsidy reform, preferential loans, and privatization schemes,

Ahmadinejad rerouted billions of dollars in assets to empower his allies in underdeveloped areas, the Iranian Revolutionary Guard Council (IRGC) and the Basij militia. Though this allowed him to develop a Hugo Chavez-like cult following among fiercely loyal supporters, Ahmadinejad’s populism increasingly alienated him with Ayatollah Khamenei. Placating these groups also came at substantial economic cost, as decreased oil subsidies led to an increase in prices across the economy.

This proved decidedly bad for business. When oil prices slipped from record highs after the first four years of Ahmadinejad’s administration, redistribution could no longer sustain itself. The toughening of American sanctions against oil importers pushed inflation through the roof, wrecking untold havoc on Iran’s mercantile life. Ahmadinejad’s threat to raise and collect more taxes from the shops in October 2008, July 2010, and last fall finally forced the Bazaaris into political life, closing their storefronts and forcing the government to back down.

The entry of many Bazaaris into the political arena comes at a particularly tumultuous time. Merchants are now more vulnerable than ever before to the legal and smuggled imports coming from major ports and free trade zones. The black market activities of the politically connected IRGC and Basij members has also injected more and unfair competition.  This has made profits more precarious than ever, and many merchants have looked to diversify their holdings through other activities like real estate speculation.

Will Rouhani really be better for business? Bazaaris hope so, and have a good indication of what they’re getting in the new administration. Like Rafsanjani, who was barred from running in this most recent election by the Guardian Council, the President-elect will make controlling inflation and the exchange rate his first priority. Rouhani will also have to reverse the cycle of preferential loans to Ahmadinejad’s cronies and initiate major bond issuances to banks and private investors. This will involve new stakeholders, included a revived BPO and other advisory organizations discarded by Ahmadinejad such as the Supreme Economic Council.

The stock market has so far signaled its approval of this agenda, but political roadblocks to economic recovery remain. Though Rouhani appears to have the support of Ayatollah Khamenei, pushing inflation down past the interest rate will likely require action on the international front—in particular, reaching an agreement with the P5+1 over Iran’s nuclear program or otherwise finding new markets for Iranian oil.

The Bazaaris are a bellwether for Iranian society. Their political stands against Ahmadinejad were a clear signal that Iran was ready to move on from the populist approach he championed.

Yet at present, there is no guarantee that life will improve for them with Rouhani’s election. Patronage networks still dominate the increasingly competitive marketplace, and despite Iran’s isolation, globalization continues to increase domestic competition. When Rouhani takes office on August 3, the debate between the free market will only intensify.

Andrew Detsch is editorial assistant for The Diplomat.