Deepening Poverty Threatens the Social Contract in Iran

22 Oct 2020

Deepening Poverty Threatens the Social Contract in Iran

“Public welfare” and “social justice” have been key slogans of the Islamic Republic’s political narrative. However, sanctions, corruption, and inadequate government policies have accelerated the rate of poverty in Iran.

By Sara Bazoobandi

The Arab Gulf States Institute in Washington (AGSIW)

October 22, 2020

Iran’s Islamic Revolution put protection of “mostazafeen” (oppressed and underprivileged people) at the heart of its political narrative. Fighting poverty was incorporated into the Islamic Republic’s constitution and various policies that have been formed over the past four decades. Article 29 of the constitution requires the government to provide adequate financial support and social services for all Iranian citizens in need, including those who are retired, unemployed, disabled, or have been affected by accidents or natural disasters.

One of the core elements of the Islamic Revolution’s ideology has been the principle of “no to the East, no to the West” in which the regime has equally rejected liberalism and Marxism. During the early years of the revolution, however, economic policies were dominated by populist anti-capitalist sentiments that were in many respects in line with Marxism. In that period, the regime used a narrative that was based on the concept of justice and equality in Islam. The revolution’s leader, Grand Ayatollah Ruhollah Khomeini, promised to create a system in which wealth is equally distributed across society and “the oil wealth is brought to people’s tables.” To achieve that, the revolutionary institutions (e.g. Imam Khomeini Relief Organization, Mostazafan Foundation), through nationalization programs, took over private assets of wealthy Iranians, mostly those who were close to the previous government. Therefore, the social contract between the revolutionary leaders and the citizens was formed on the promise of creating a new socioeconomic structure in which accumulation of wealth by a small portion of the population was not allowed, and the ultimate aim was to empower the poor and underprivileged.

However, various political groups in power have applied policies that conflict with the initial promises of the revolution. The economic structure in Iran has shifted from nationalization of private assets after the revolution to privatization of government assets.

“Public welfare” and “social justice” have been key slogans of the Islamic Republic’s political narrative. In practice however, income inequality, inflation, and unemployment have been pushing more people into poverty each year. Over the past decades, multiple episodes of national currency devaluation have affected the welfare of Iranian citizens, particularly those with lower income. According to the Islamic Parliament Research Center, by 1995, about 20% of Iranians lived in poverty. By 2010, over 15% of Iranians in urban areas and 27.3% of those in rural areas were living in absolute poverty. In 2015, the Ministry of Culture and Guidance conducted a poll to assess “the values and concerns of Iranians.” Of the 15,000 Iranians polled (over the age of 15 from urban and rural areas), 76% believed that the gap between the rich and poor had widened over the five years prior to the study (2010-15). Year-on-year poverty ($1.90 per day in terms of purchasing power parity) increased about 30% between 2018 and 2019. By the end of 2019, 33% of Iran’s population lived in absolute poverty and 6% were not able to afford sufficient food (a minimum of 2,100 calories per day). Falling purchasing power of the currency, high inflation, and the decline of per capita income in recent years caused by a combination of sanctions, corruption, and inadequate monetary and fiscal policies have accelerated the rate of poverty in Iran.

During the Iran-Iraq War from 1980-88, the state’s resources were directed to cover the costs of military operations. Rationing and subsidies became integral to the government’s economic policies. Nevertheless, by the end of the war, nearly half of Iranians were living in absolute poverty.

A decade after the war, then-President Ali Akbar Hashemi Rafsanjani, introduced pro-market policies to accelerate economic growth. Former President Mohammad Khatami continued those market-oriented policies and tried to reconnect Iran to the global economy by opening the market to foreign investors. During the presidency of Mahmoud Ahmadinejad, the government instituted populist policies that aimed to eradicate income inequality and liberal market reforms along with the implementation of subsidy reforms and privatization.

In 2011, in an effort to forestall public unrest over the lifting of subsidies, mainly on energy and bread, Ahmadinejad introduced a nationwide cash payment system. In the initial phases, the program was designed to benefit low-income households and amounted to nearly 29% of median household income at the time.

The cash payment system temporarily improved income inequality in Iran. According to the World Bank, Iran’s poverty headcount ratio (percentage of the population living below the poverty line of $1.90 per day) was reduced from 1.1% of the total population in 2009 to 0.1% in 2013. However, the combination of higher energy prices, increased money supply by the government (to meet the obligations of the cash handouts), and sanctions nearly doubled inflation between 2010 and 2013. In 2012, each monthly payment per person was about $45 (around 450,000 riyals). After the currency devaluation in 2018, it declined to less than $13 and to less than $3 in 2020. Therefore, less than a decade after the beginning of the program, the rise of inflation eliminated the poverty reduction impacts of the cash handouts by reducing the purchasing power of the recipients.

The Islamic Republic also established two organizations to fight poverty and inequality: the Imam Khomeini Relief Committee and Mostazafan Foundation.

The Imam Khomeini Relief Committee was founded in 1979 to contribute to poverty alleviation through development projects, education and culture programs, health care, and allocation of direct financial aid (e.g. loans). The organization operates under the direct orders of the supreme leader and receives allocations of public funds from the government budget each year along with contributions from other sources, such as religious and charitable donations and investment returns.

The financial operations of the Imam Khomeini Relief Committee have been relatively opaque and there have been a number of corruption cases (i.e. employees siphoning the organization’s funds) and other misconduct, such as sexual harassment of female loan applicants. The organization is exempt from paying taxes to the government and exempt from official monitoring and regulation.

The Mostazafan Foundation was formed upon Khomeini’s order to abolish social inequalities mainly by nationalizing the private wealth of close allies of the former monarch and creating redistribution mechanisms that benefit low-income citizens. The foundation operates as a nongovernmental organization and is directly supervised by the supreme leader. There is no exact estimate of the size of the foundation’s assets due to a lack of transparency in its financial operations. Some reports claim that, by 2018, the foundation was in control of about 3% of Iran’s gross domestic product. It owns 24,542 registered properties and 185 companies in various sectors such as banking, insurance, construction, transportation, tourism, energy, and agriculture. These companies form 11 holdings from which 28 companies have been listed on the Tehran Stock Exchange. In all the publicly listed companies, the foundation has remained the major shareholder. It is reportedly Iran’s second-most powerful economic entity, after the National Oil Company.

The foundation is required to allocate 50% of its profits, generated from its economic activities, to assist poor and underprivileged Iranians (e.g. through low-interest loans or monthly payments) while reinvesting the rest. However, news reports and open sources indicate that there has been a decline in the foundation’s financial assistance to low-income citizens. Moreover, several cases of institutional corruption and misuse of assets in the organization have been reported.

Both the Imam Khomeini Relief Committee and Mostazafan Foundation were founded immediately after the revolution with the intention of empowering poor and underprivileged Iranians. Despite the establishment of such financially powerful institutions and their clear mandate to fight poverty, there has been a rise in poverty in Iran over the past four decades.

As inflation continues to rise, along with the devaluation of the riyal and the rapid rise of food prices and unemployment, poverty in Iran is set to increase. The International Monetary Fund predicts a 6% decline in Iran’s GDP in 2020, which is expected to boost inflation to 34.2%. The coronavirus pandemic has worsened economic conditions. A weekslong lockdown slowed economic activities in Iran and left more than 200,000 Iranians out of a job. Since most of these jobs are in the service sector, the Islamic Parliament Research Center indicated that, as the pandemic continues, these job losses will likely become permanent.

The evolution of the Islamic Republic’s economic policies has gradually redefined the social contract. Although, the initial narrative was focused on justice and equality, over the past four decades, many people have been excluded from economic activities that are tightly controlled by the government. Pro-market policies have created a quasi-government sector that is controlled by pro-government interest groups in Iran. Moreover, distribution of oil rent (in the form of government investments, allocation of government revenue to certain sectors or organizations, and access to profitable economic activities through nepotism and corrupt networks) is concentrated on the core support groups of the regime, excluding a large share of the population. Sanctions, economic mismanagement, and the pandemic have increased uncertainties about the future of the economy. Vulnerable workers in low-income or temporary jobs are mostly affected by such uncertainties as they are least able to renegotiate their wages, access social benefits, and find alternative employment. Senior government officials have begun to adopt a narrative in which poverty reduction is not only the government’s responsibility, but the Iranian people themselves are called on to support the poor and underprivileged. In addition, the government’s recent plans for generating tax revenue to offset the loss of hydrocarbon revenue caused by the sanctions aims to share the government’s economic hardship with the people. This has sparked rising frustration among the public, and members of parliament have attacked the administration of President Hassan Rouhani over the declining economic conditions.

The public mistrust for the government’s policies has increased over the past few years. This is reflected in frequent social uprisings that have led to the killing and imprisonment of many Iranian citizens by the authorities. The ongoing crisis will likely deepen the rift between the state and the citizens, possibly leading to more protests in the coming months. The loss of confidence in the government is visible in public discussions, social and broadcast media debates, and government polls. In 2015, 54% of those surveyed in a Ministry of Culture and Guidance poll believed that “injustice in the government’s policies” was the main cause for poverty in Iran and 57% believed that the government had failed to eradicate poverty. Such a decline of confidence in the government is expected to lead to low turnout in the 2021 presidential election.

Barring a Democratic victory in the November presidential election, the U.S. government is unlikely to reverse its “maximum pressure” policy. That will make the economic pressure of the pandemic more difficult for Iran to deal with. While international aid and financial cooperation, especially from Europe and China, are likely to continue during this period, they are not aimed at resolving any of the long-term challenges in Iran, particularly the rise of poverty.

Ongoing economic sanctions, inefficiency of government policies, and inadequacy of the key institutions in charge of poverty reduction in Iran indicate that the government is unable to offer any tangible solutions to address the economic challenges facing the country. The rise of social dissatisfaction caused by widespread poverty threatens to deepen the existing rift between the citizens and the government and disintegrate the social fabric, potentially leading to more popular uprisings and boosting state-sponsored coercion and surveillance mechanisms to quash them. However, these tactics will not be sufficient in the long term to overcome the implications of the rapid loss of value of the national currency and, more broadly, confidence in the government.