State should eradicate emergence of oligarchs

Although the apprehension of Babak Zanjani had a positive role in preventing the abuse of economic rent-seekers during the past eight years, the real question raised in this regard was about how to prevent the reemergence of oligarchs in Iran’s economy. Here is an interview with Farshad Momeni, a professor at the Faculty of Economy in Allameh Tabataba’i University. He believes that underlying actions should be taken to prevent the growth of such oligarchs instead of directly dealing with them.

Apparently, a very accurate economic system should be established to fight with the rentier economy, and it is impossible to deal with the economic rent easily in the short run. What do you think? This is an issue in rentier economies. The phenomenon of lengthy confrontation with corruption can be seen at the main levels of economic activities. It has been said that macroeconomic activities are correlated with the rentier economy. In other words, they are interwoven right at the core unless there is an independent decision-making institution which considers developmental orientations and tries to confront this phenomenon with an organized will. Even at this level, the emergence of an uncorrupted society is very unlikely. There is financial corruption even in the most transparent countries that benefit from a developmental structure.

In different eras and some administrations, there have been substantial increases in the amounts and quantities of economic rents. What is the reason? Clearly, we can say that the rent-seeking motivations increase significantly when the petroleum revenues boom. In this case, the costs of seeking rents will also decrease. According to the quantitative comparisons, this phenomenon has always been present in all eras the petroleum sales revenues increased. Iran experienced a petroleum price surge before the Islamic Revolution. At that time, there was a sudden social class gap resulting from the prevalence of petroleum rent-seeking, inasmuch as the Shah of Iran ordered General Fardoust (the vice president of SAVAK and the then head of the General Inspection Office) directly to fight with financial corruption. However, the Pahlavi Dynasty was finally toppled. In your opinion, why did General Fardoust fail to fight with the financial corruption of those years, despite using all security measures? According to the reports of the statistical yearbook, petroleum revenues increased before the Islamic Revolution around 1976. As a result, corruption grew. The Shah appointed General Fardoust as the official responsible for solving the problem of petroleum rent-seeking. The detailed accounts of cases taken care of by General Fardoust were

published in his memoir. Off the record, there is some evidence that he appointed the competent experts of that time to deal with the cases of corruption. After conducting thorough analyses, they concluded that they would have needed nearly 180 years, which was practically unimaginable, to eradicate the financial corruption emerging as a result of growing petroleum revenues at that time. Therefore, they decided to ignore the cases of corruption worth below 100 million tomans (in 1976). They came to the conclusion that they would still have needed five years to deal with corruption cases above 100 million tomans and to completely eradicate the financial corruption even if they had ignored cases below 100 million tomans (At that time, one could buy a house in an average-to-high region with nearly 100 thousand tomans). When the system adopts such a strategy to fight with corruption, it is evidently impossible to legitimize the fight with corruption because thousands of corruption cases are ignored to deal with one case. This policy can never have a deterring effect on corruption.

Finally, the Shah gave an unprecedented confession in an interview with Keyhan. Yes, Keyhan interviewed the Shah on October 25, 1976. In that interview, he confessed, “If we were to be given this chance again, we would not set fire to our money.” It is noteworthy that the head of the Pahlavi Dynasty said such things. Do you mean that the underlying conditions of corruption should be prevented instead of dealing with individuals? The governing principle of the rentier economy is that individuals are considered much more effective than the institutional structures paving the way for corrupt individuals. However, in practice, this strategy has been futile because it has not prevented the spread of corruption. Why is it fruitless to deal with corrupt individuals? Theoretically, there are two factors in confronting corrupt individuals. These two factors make fighting with corruption completely futile unless the institutional structure is reformed. First, fighting with individuals is considered a passive action. Due to the structure underlying this corruption and the public expectation, the supervisor organ has to start dealing with oligarchs. This policy is neither effective nor continual. Second, since solving large-scale cases would not include corruption cases, small-time rent-seekers feel secure. Therefore, the deterring effect of this fight will diminish, and the public will see it as futile.

So what strategy should be adopted instead of confronting individuals? If we are to analyze this phenomenon scientifically, it is necessary to correct the structural system reform weight instead of eliminating individuals. In fact, individuals should be dealt in a way that an appropriate investment is made in the structure reform. After that, individuals should be confronted. Hence, this strategy will become an institutionalized method.

What are the outcomes of this strategy? This method first targets the centers of corruption and analyzes the domains of petroleum rent corruption accurately to prevent the emergence of systematic institutions of corruption. It can also significantly reduce the cases of corruption and helps deal with corruption firmly and properly. As a result, it will have a deterring effect because everybody feels that they will be held accountable if they break the law for any amount of money. This model will legitimize the fight with corruption, and the public gain trust in the system and will not think that these actions are taken in the dark. Therefore, the country will benefit from political stability and economic security.

The president ordered to confront the rent-seekers a while ago. What is your reflection of this order? I first became happy when I saw Mr. Rouhani reacted to the matter and ordered to take care of the problem. In fact, it was possible to break free from the inflation-based recession in the short run and to hope for the mid-term development when economic rent, corruption and usury were the mainly caused by the value-added tax. This was a matter of life or death. I was happy when I saw the matter was taken into consideration, but I was worried because the stance was passive like what had happened in the past when such measures had been taken (to deal with oligarchs) and resulted in reverse outcomes. In other words, the problem turned out in a way that confronting the corrupt individuals would seem to be the solution. Due to the institutionalization of corruption, the economic system emerging in the previous years would have the potential to reproduce such corrupt individuals. You may have noticed that the reproduction of such individuals can affect the quantity and quality of corruption in a worrying way.

So what is the solution? The fight with corruption should be reviewed fundamentally.

What do you think about the prevalent corruption in the previous administration? Due to its stance against corruption, the previous administration paved the way for the formation of systematic corruption in Iran. This eight-year experience should be analyzed more accurately at the right time.

Why did corruption emerge in the previous administration? The avoidance and negligence of scientific, legal, and planning actions in the allocation of petroleum revenues had a prominent role in the emergence of corruption.

However, I remember the time when a reputable foreign journal published the statistics about financial corruption in Iran and stated that Iran plunged by 80 steps, something which was denied by President Ahmadinejad claiming that it was doctored by the enemies of the state. Yes, when a president reacts to

scientific statistics like this, he is actually showing the greenlight to the economic rent-seekers to spread corruption. This kind of reaction also misleads the supervisory organs.

I think the dismissal of the Ministry of Health in the Tenth Administration can be a good example for the allocation of foreign currency incomes. Although she was discharged, Ms. Dastjerdi left an honorable legacy with that specific action. From March 20 to September 21, 2012, when she corresponded to officials with regard to the imports of petroleum-earned dollars, she was told that the country was in crisis and that there were no dollars which could be allocated to vital medicines. However, after September 21, 2012, when the IRICA issued reports on the imports within the first half of the year, she noticed that the dollars that should have been spent buying the vital medicines for patients in critical conditions were allocated to the import of luxurious cars. She then started to make complaints, as a result of which she was discharged.

However, the state is responsible for allocating foreign exchange earnings. Although a great tyranny was imposed on patients, it cannot be considered a violation of laws. This is a problem with the laws, something which causes many economic rents. When the state controls the allocation of petroleum-earned dollars, then it can spend the earnings in any ways it wishes. For example, the state can claim that it is necessary to import cosmetic products to the country and decides to allocate foreign currency to that purpose. As a result, some individuals can access special benefits out of the ordinary.

According to the September report issued by the Research Center of the Iranian Parliament, Ahmadinejad’s administration spent 500% more petroleum-earned dollars than Khatami’s administration to achieve each unit of economic growth. Given this report, is it logical to consider mismanagement effective in the spread of corruption? This can clarify how financial corruption and inefficiency can be interwoven, something which is a major threat to legitimacy, so the new administration should take this matter into consideration.

In the previous administration, Dr. Rafiepour published a valuable book called Social Cancer of Corruption. What is your reflection of this book? In my opinion, that book is a substantial piece of evidence that should be taken seriously by the officials in the new administration so that they can understand the outcomes of individual-based confrontation with corruption. It should be used as an eye-opener to change the viewpoint on corruption. Although we have witnessed economic rents in different years, no comprehensive studies have even been conducted. This book managed to reveal some important dimensions of the matter.

What is your viewpoint regarding the approach that Rouhani’s administration has adopted towards the phenomenon of systematic corruption? Compared with the previous administration, the incumbent one has an advantage which is to show sensitivity and allergy to the importance of transparency at least by opinion and motto. I should emphasize that the first step in fighting with the systematic financial corruption is to make the processes of decision-making and resource allocation systems transparent.

In your opinion, what factors should the new administration take into consideration with regard to the phenomenon of economic corruption? According to the bulk of studies on the spread of corruption, five factors should be considered and highlighted whether a state depends on petroleum or not. In the Wealth of Nations, Adam Smith listed these factors as incorrect economic policies, lack of civil freedoms, lack of expertise, excessive supervision, and poor legal frameworks.

An incorrect economic policy that allows some individuals to take advantage can be the shock therapy, right? It is a good example. In fact, the shock therapy policy can also lead to corruption. The state should know that although this policy may provide the country with many short-term benefits, financial corruption will growingly spread as past experiences suggest.

Do you think the new administration is less interested in the shock therapy policy? In the new administration, there are still many people who believe in the shock therapy. If they learn a lesson from Ahmadinejad’s administration and consider the sufficient cost of an opportunity to return to the shock therapy policy even on lower dimensions, they can prevent this policy even it is needed for the short run to please the public.

Can you also explain a little about the legal freedoms? If an economic system intends to fight with corruption transparently, a necessary measure is to have free press. In other words, it should allow for the formation and growth of civil institutions. If civil freedoms grow in this framework, corruption will considerably decline in society.

Excessive supervision attempts are apparently tangible in Iran. Currently, there are more than 24 supervisory organizations. Due to the absence of a thoughtful organization, there are now parallel efforts. Even if a productive force intends to do something efficient, there will be confusion and cancelation of efforts in the end due to the presence of countless supervisory organs.

Can you explain a little about the lack of laws introduced as the final factor by Adam Smith? Unfortunately, short-term and long-term orientations are at the same level in Iran. For instance, an administration may hire skilled experts and develop a 20-year outlook document, which might be ignored in the budget by the next administration due to the lack of fundamental laws. This setback will prevent us from having a transparent image of economic status in the country for the next few years; therefore, rent-seekers will gain the opportunity to take advantage of the situation. If there is a long-term plan approved by the principles of the government in a way that the president, the head of the parliament, and the head of the justice department are required to abide under any conditions, the new administrations will not be given any chances of violation or corruption.

How can this important plan be institutionalized? An efficient system that cares about the future should have comprehensive knowledge about the functions that can cause corruption and should know what can exacerbate the spread of corruption. Taking supervisory measures and reforming the laws, it should be able to prevent the emergence of corruption and avoid spreading corruption with incorrect economic policies.

Have any studies been conducted to help the new administration develop a comprehensive plan to put confrontation with rent-seeking on agenda? Yes, the key to success is that the state should have a strong will and develop an organized research plan to make resource allocation processes transparent and act accordingly. According to previous studies, the first step should be to accurately supervise how the petroleum earnings are allocated. The second important factor is the method of distributing banking credits. The final factor is how to formulate policies on imports and exports. The previous administration ignored the thorough monitoring of customs, by which it is possible to prevent many rent-seeking attempts.

Governmental tenders are among the other cases abused in the previous administration. Even in the case of Mahafarid Khosravi, many references were made to the illegal delegations. An important factor that should be taken into account is to further monitor governmental tenders. Unfortunately, there are no accurate statistics regarding the amounts of governmental tenders in the past 20 years. However, they are estimated to amount to 15% of the annual GDP in Iran, which is an unbelievable figure. In the previous parliament, some attempts were made to analyze these tenders accurately but were unfortunately futile. Transparency of these tenders are among the important actions that can prevent economic rent-seeking.

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