by Djavad Salehi-Isfahani
For a “managed democracy,” Iran holds remarkably unpredictable presidential elections. And the upcoming election on May 19 is no exception, given that the incumbent, Hassan Rouhani, is facing a tough conservative challenger.
Rouhani’s opponent, Ebrahim Raisi, is a high-ranking cleric who is considered to be a possible successor to Iran’s Supreme Leader, Ayatollah Ali Khamenei. Raisi’s campaign has received a boost following the withdrawal of another hardliner, Mohammad Bagher Qalibaf, the mayor of Tehran, who garnered one-third as many votes as Rouhani in the 2013 election.
When Rouhani was elected in 2013, Iran was suffering from 35% inflation, the national currency had depreciated by two-thirds in the previous year, and international sanctions were crippling the economy. Oil exports and output of automobiles – Iran’s leading manufacturing industry – had each declined by two-thirds, and restless industrial workers were demanding back pay.
Rouhani had campaigned against former President Mahmoud Ahmadinejad’s populist policies, promising to put jobs and production before redistribution. He said that he would control inflation, negotiate a deal with the West to end the sanctions, and restore macroeconomic stability.
By any reasonable standard, he delivered: inflation is in the single digits for the first time in three decades; sanctions have been lifted in accordance with the 2015 nuclear deal; and the exchange rate has been stable for four years. But, unfortunately for Rouhani, many Iranians who had expected their living standards and employment prospects to improve as a result of these successes are now feeling disappointed.
To be sure, the economy has started to grow again, after contracting for two years. But there is disagreement about the current recovery’s breadth and durability. Because much of the recent growth has come from a doubling in oil production, it has not increased most household incomes, or created new employment opportunities. Thus, International Monetary Fund monitors who visit Iran twice a year have projected 6.6% growth for the 2016-2017 fiscal year, but only half that for the 2017-2018 fiscal year.
Survey data show that, outside of Tehran, average real (inflation-adjusted) household expenditures fell during the first two years of Rouhani’s term, while poverty rose. In the 2015-2016 fiscal year, there were almost one million more people below the poverty line than when Rouhani took office.
And yet these outcomes do not necessarily amount to broken promises. When voters rallied behind Rouhani’s call for lower inflation, they may not have realized that prices rising at a slower rate would also mean slower income growth. And the lay public was not alone: even one of Rouhani’s economic advisers initially boasted that people were 20% better off because the rate of inflation had declined by 20 percentage points.
Moreover, Rouhani has pursued a tight fiscal policy that deepened the recession and delayed the recovery. He has kept the government’s rate of fixed investment at around 5% of GDP, which is twice what it was under Ahmadinejad, but still too low. Government fixed investment is the traditional driver of economic growth in Iran, and has been as high as 20% of GDP in good times.