COUNTRY COMPARISONS 

 


Traversing the Economic Spectrum between
The United States and Iran


by Kamrouz Ghadimi
 

 

Traversing the economic spectrum between the United States and Iran is a difficult task in the sense that there is a fine line between their economies and the political tension that has unfolded between the respective governments of each country within that past few decades.   Differentiating between what is relevant and what is political in origin presented a difficult task in ascertaining the material for this paper.  Irrespective of that, an empirical comparison was adequately assessed between the two countries.

 The United States is located in the North American continent.  While the country has experienced an economic recession aggravated by the September 11, 2001 events, it maintains the highest output of GDP worldwide.  Maintaining a government based on the constitution of 1787, the US is a federal republic with a bicameral federal legislature known more intimately as the United States Congress. The two establishments include the House of Representatives and the Senate.  While the president of the United States is elected every four years to the position of “Head of State,” the president is responsible for appointing members of his administration in order to advise him on the matters pertaining to the overall well-being of the country (e.g. Secretary of Defense, Donald Rumsfeld, with regards to National Security or the Chairman of the Fed, Alan Greenspan, with regards to economic welfare, etc.).  The president of the United States in currently George W. Bush, and his current term in office ends January 2005.

 Conversely, Iran is located on the opposite side of the world, in the heart of the Middle East, spanning a fraction of the US land area.  Iran came to light for the American public following a popular uprising that overthrew the monarchy under the Shah Reza Palavi in 1979, and set up the present day Islamic Republic of Iran.  Where the US has a variety of products contributing to its GDP, Iran’s oil earnings account for 80% of its export revenue.  This number, however, has been dropping in past years and according to the Economist, the oil sector’s share of GDP has declined from 30-40 % in the 1970s to 10-20% in 2001.  This drop is mainly due to OPEC output ceilings, spearheaded by Saudi Arabia, as well as damage done to Iranian facilities during the Iran-Iraq war of the 1980s.  The government is based on the constitution adopted in 1979, which provides executive, legislative and judicial branches (much like the United States).  The legislature consists of 290 members and all candidates for the National Assembly (or Majlis) must be approved by an Islamic screening committee (2).  Where the US only has one individual who is both the leader and head of state, Iran has two separate individuals occupying each office.  The current Supreme Leader is Ayatollah Seyyed Ali Khamenei and the current president is Mohammed Khatami.  While the President is elected every four years by popular vote under a universal adult suffrage electoral system, the Supreme Leader is a title bequeathed from predecessor to predecessor and has no set term.   In essence, there exists a government within a government in Iran.  Where the Majlis and the President mirror the US in the legislative and executive branches, the discrepancy between the two governments arises with the overpowering Council of Guardians (six members selected by the Majlis and six members selected by the Supreme Leader) that exist to ensure all legislation processed by the Majlis is in accordance with Islamic Law. 

 

In due course, where most countries of the world contain a small number of variations of the same cultural group of individuals, the United States has attracted various ethnicities from all over the world and currently holds a population of approximately 285 million people (3).  Known as the “Land of Opportunity”, many immigrants have traveled and continue to travel to the US to start a new life, far from the turmoil that exists in their homeland, whether the trouble is economical or political.  The diverse groups of people that compose the melting pot of the United States have contributed to the popular culture ideal – people come in all shapes and sizes and must be judged according to the content of their character only.  This ideology, however, was not always as widespread as it is today.  As is the case when individuals of foreign dissent enter a country with established citizens of several generations passed, a sense of supremacy arises by the established citizens and prejudice, as well as cultural scrutiny, evolves.  The US has had a long history of issues concerning racial, religious, as well as cultural tension amongst individuals of varying backgrounds.  The issue is far from settled and absolute harmony does not yet exist amongst the multifaceted society that makes up the land of the free.   Progress, however, shows promising results that may end in the definitive adoption of the initial ideal mentioned earlier.  In essence, the United States of America has a little bit of every country, culture, and religion in the world.  This multivariate equation has in part contributed to the dynamic efficiency of the private and public sector as well as the overall economic prosperity of the nation. 

Iran has had a cold and closefisted reputation for over 20 years, following the establishment of the Islamic Republic of Iran in 1979.  The original supreme leader, Ayatollah Ruhollah Khomeini once said “there is no fun in Islam” (4).  Khomeini was exiled in 1963 from Iran for speaking against the Shah’s rule.  During his time in Paris, Khomeini produced many cassette recordings of his teachings and ideologies and had them distributed within Iran by his followers.  Simultaneously, the Shah was losing popularity amongst his people due to his many violations of human rights and privacy.  Moreover, his attempts to Westernize Iran were met with strong opposition from the respected members of the clergy, many of whom were colleagues of Khomeini (4).  As the tension within Iran progressed, Khomeini was flown back to Iran from his exiled location in Neuphle-le-Chateau, near Paris.   Once in Iran, Khomeini spearheaded the revolution in hopes to create an Islamic superpower.   Inasmuch as Iran was the only Islamic country of the Shiite sect (where as all the others were Sunni, with the exception of Southern Lebanon), Khomeini was determined to eliminate all Sunnis and convert everyone to the Shiite sect (The Sunni sect of Islam believes that the when the prophet Mohammed died, his predecessor should have been decided upon by a committee of elders where as the Shiite sect affirms that Mohammed decreed that his first cousin and son-in-law,Ali, should be the next spiritual and political leader of Islam prior to Mohammed’s death).  Individuals who fought for the cause would be martyrs and in Islam, martyrs are highly revered and are said to hold a ticket to salvation upon the time of death.  According to Sciolino, with the Koran in one hand and the Sword in the other, Khomeini waged war on Iraq first.  Unfortunately, most of the members of the Iranian armed forces were either executed or had fled the country, consequently debilitating Iran’s military backbone.  In lieu of grown men, Khomeini sent boys as young as 13 to fight the stronger Iraqi army.  The Iran-Iraq war lasted for 8 years and ended in a stalemate.  Shortly thereafter, Khomeini passed away and was succeeded by the current supreme leader.

 

With the advent of the current president, Mohammad Khatami, and the increasing strength of the democratic aspect of the government, Iranians are enjoying the same activities that Americans enjoy on a daily basis.  The only difference is, however, that Iranians must be clandestine about their activities for the consequences of breaking the Islamic law in reprimanded by heavy fines and jail time.  In 1999, the youth of Iran that have had no first hand recollection of the Shah and have only seen bloodshed under the rule of the Islamic Republic, staged a protest in the University in Tehran (3).  Though the protest was put down, many speculate that the growing power of the president and the democratic support by the youth may indeed one day create a shift from a theocracy to a full-fledged democracy.   Progress, however, has been slow and at times, stagnant.  Nevertheless, Iran’s foreign policy has aggrandized its position both economically and politically, mending bridges with past enemies so as to benefit from trade between countries (e.g. President Khatami visited Syria, Qatar and Saudi Arabia in 1999 in an attempt to improve Iranian relations with the Arab World (4)).  

As previously mentioned, the United States produces the largest GDP in the world, valued at $9.87 trillion in the year 2000 (1).  The Iranian GDP came out to be a fraction of the US GDP, and equivalent of $72 billion in the year 2000. Moreover, the US’s GDP growth rate is 0.6 % larger than Iran’s (4.1 % vs. 3.5 %, as averaged over the years of 1996 – 2000).  Furthermore, to account for unequal populations amongst countries, a GDP per capita has been assessed for these countries. According to the World Bank, the GDP per capita for the US and Iran respectively was  $35,032 and $1,130 during 2001 (2). 

As far as the strengths of each countries currency, the current exchange rate is 1.0 US Dollars for 1741.25 Iranian Rials.  The value of dollars to rials has dwindled enormously following the revolution and particularly during the war torn years of the early to mid 1980s.   The value of the rial has been further reduced due to the 19.6% inflationary rate in the Iranian economy.  In order to put things in perspective, the US dollar has experienced a 2.5% inflationary rate between the years of 1996 and 2000 (1), considerably miniscule to the whopping 19.6% for the Iranian rial.  

 

The Real GDP, GDP per capita and inflationary rates for the US have more or less been representative of a leading world power over the past several decades.   These values, however, for Iran have undergone dramatic adjustments following the 1979 revolution.  As was mentioned earlier, when the Shah Reza Palavi ruled, his economic policies leaned heavily towards Westernization through Industrialization and Trade.   He invited foreign companies to invest in Iran and contribute to the GDP, in turn raising the exchange rate of rial to foreign currency -- at the time of the Shah, the exchange rate was 70 rials to 1 dollar (4).  When Khomeini came on the job, conversely, he wanted to nationalize all utilities and resources and free the country from its dependence on oil revenues and to preserve Iran’s oil reserves for future generations.  Foreign investors left Iran, the government gained control of all large-scale industries and mines, banking and insurance enterprises, power, utilities, radio and television, as well as mail and telephone services (2).  This nationalization consequently rendered an inefficiently run economy headed by government officials who were mostly interested in saving money and investing scantily.  Moreover, their decision making at times has been illogical and dangerous.  For example, at one point when three of Tehran’s main hospitals failed to pay their electric bill, the Ministry of Energy turned off the electricity to the hospital for several hours.  In today’s age of modern technology and reliance on computerized systems for health care, particularly in hospitals, the lack of electricity resulted in several deaths and postponement of vital surgeries. 

The government of Iran, on the other hand, has taken certain creative steps to raise money for its subsidies on gasoline, bread, power, water and transportation.  For example, it sells the right to move to the top of the list of the individuals who would like to pilgrimage to Mecca, inasmuch as Saudi Arabia has a strict quota for the number of individuals it allows into the country for this purpose every year.  Moreover, young men are mandated to serve two years with the Iranian military, but this draft can be bought for a price.  In addition, the government issues Treasury bonds and offers a 20% increase on maturity to cover the current inflation rate. 

 

All in all, Iran’s economy is torn between actions that will benefit the State and actions that are loyal to the Mosque.  Since there is no separation between the two, capitalistic growth, as observed in the United States, has not been optimal in Iran. Ironically enough, many of Iran’s leaders insist that the United States is to blame for its economic problems.  In 1995, the Clinton administration issued a unilateral embargo, having long discouraged its allies from trading with Iran and having blocked loans through sources such as the World Bank (2).  Moreover, in 1996, Clinton signed anti-terrorism legislation that imposed sanctions on foreign firms that invested more than $20 million in Iran’s oil and gas sector.  With all this in mind, the constituents of Iran are coming more and more to the realization that the problem is internally propagated. The reformist newspaper Sobh-e-Norouz wrote in May of 1998 that “The economic crisis can no longer be blamed on the enemy plots or the collapse in world oil prices.  Rather, the problem is the country’s mismanagement.”

In due course, both countries have leading exports that generate a large fraction of their revenue.  The United States, however, has an exceptionally diverse economy, whose leading industries include steel, motor vehicles, aerospace, telecommunications, chemicals, electronics and computers (1).   Focusing on the automobile industry, General Motors, Chrysler, and Ford comprise the “Big 3” of automobile manufacturing in the United States (6).  GM and Ford in particular have benefited from years of production, increasing efficiency and reducing costs.  In turn, they have experienced economies of scale and scope in their production line.  The government has, however, provided the Big 3 with subsidies to their production, particularly issuing large amounts for Chrysler during the times in which the company was earning negative profits.  It must be emphasized that the capturing of scale and scope economies is a result of this large market share.  This is, in part, why the smaller market shareholders, within the US market, of Toyota, Nissan and Honda find it more profitable to produce in other countries where their market share is larger.  The US manufacturers have experienced import penetration from Japan, particularly in the mid 1970s.  However, through subsidies from the government to gauge GM and Ford’s economic inefficiencies (e.g. management and X-inefficiencies), the manufacturers were able to rebound from their lost market share, between 1980 and 1990.  The Big 3 underwent a period of price cutting in the mid 1980s in unison with the adoption of a “copycat” policy as their response conduct to Japanese motor vehicle production.  This closed the gap between cost advantages the Japanese had over the United States.  In essence, by copying the Japanese manufacturers in methods of cost reduction (e.g. improving technology, resolving labor disputes, correcting management inefficiencies), the US displayed a Schompeterian School example (6), where other producers within that same industry adopted an innovation and the process of creative destruction was observed. 

 

Iran, conversely, enjoys a majority of its export earnings solely from the oil and gas sector (4).  Within this sector, potential for foreign investment is huge.  Iran continues to discover new oil fields and foreign companies are bidding for contracts to set up oilrigs, a step into the right direction as far as competition and efficiency is concerned.  These efforts, however, have been reduced in potency due to the conservative opposition against foreign investment.  For example, in 1999, Royal Dutch/ Shell signed a contract to invest $800 million in Iran’s Oil Industry, but the ultra-conservative newspaper Jomhouri-e Islami complained that the contract with the Anglo-Dutch firm will “once again allow Britain to secure a foothold in Iran” (4).  This type of publicity puts downward pressure on Iran’s foreign policy with regards to the allotment of foreign investment on Iranian soil.  Nevertheless, the legislature continues to approve contracts by foreign investors from South Africa, France, Italy, Britain, Japan, Greece, Spain, and India (3) (The US is not amongst these countries due to the D’Amato Act passed through Congress that banned US investment in Iran).  Iran held conferences in Tehran on two particular occasions in 1998, opening the grounds for foreign investment into their 5.7 billion-dollar oil and gas project. The representatives of 100 oil companies, including British Petroleum, Shell, and Eni of Italy (a few US companies prohibited by US law attended as well).  The French company, Total, expanded its Iranian market in 1998 when it launched its oil production in several offshore oil fields within the Persian Gulf.  Other countries such as Australia have joined in a project to create an Iranian gas pipeline from Eastern Iran through Karachi, Pakistan to India.  This project will cost $3 billion and will result in an export of 560 million cubic meters of gas annually from Iran (5).

The lucrative involvement of the aforementioned companies and countries has caused many US policy makers to think twice about opening up economic relations with Iran on a grander scale and rescinding the D’Amato act, which many economists feel is obsolete and counterproductive.  The Chairman of Mobil Kazakhstan, Carl Burnett, stated that “Mobil has been outspoken against sanctions in places like Iran, where we believe do more harm than good.” Many other large US oil companies share this feeling of economic futility.  It must be noted, however, that on March 17, 2000 Secretary of State Madeline Albright announced the easing of non-oil exports from Iran (4), confirming progress in the direction by which total economic welfare will be increased. 

The United States, despite the many setbacks of war and destruction within the past century, continues to dominate the world in production and wealth.  Though it has recently suffered an economic downtrend as a direct result of the September 11th attacks on America, many economists speculate that the economy was already in the midst of a recession and the return to an expansionary period will merely be postponed but not eliminated.   Iran, on the other hand, has to overcome many discrepancies with the bounds of political, economic and social sectors.  Though it has come a long way from the initial stagnating economy of the 1980s, the government must necessitate a foreign policy that not only advocates increased investment but also ensures long term relationships with other nations filled with mutual prosperity and profitability.  Ultimately, the political issues between both countries must be squelched so that economic welfare can continue to progress for both countries well into the 3rd millennium. 

 

Works Cited Page

  (1) www.economist.com/countries/Iran

(2)   www.economist.com/countries/United_States

(3)   Zabih, Sepehr. Iran Since the Revolution. The Johns Hopkins University Press.  Baltimore, Md : 1992.

(4)   Peimain, Hooman. Iran and the United States. London Press: 1999.

(5)   Armajani,Yahya. Iran. Berkeley, CA: 1986.

(6)   Viscusi, Kip, Vernon, John M.,  Harrington, Joseph E. economics of Regulation and Antitrust. Pp.700-740. MIT Press, Cambridge, MA: 2001

                

 

 

 

 

 

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