Business Week

Stanley Reed in London
January 13, 2003

Iran: Will Economic Reforms Keep the Mullahs on Top?

Is Iran's Islamic Republic unraveling? That's how it has looked of late. December witnessed the largest student demonstrations against the mullah-controlled regime since 1999.

Reform-minded President Mohammed Khatami, who has tried and failed to break the grip of the fundamentalist clerics, has been threatening to resign. His departure, some say, could discredit the mullahs and finally trigger the popular upheaval thatwould end in their downfall.

But another view is emerging. In this scenario, the mullahs don't lose, they capitalize on public frustration. The result could yet be a pragmatic regime--even one willing to deal with the U.S.

For starters, the clerics still have room to maneuver. The student groups demonstrating are badly fragmented, and, more important, their protests so far show little sign of spreading to the general population, which is weary of being pulled in conflicting directions by political strife. "People are tired of being sacrificial lambs.

They are more looking out for their own interests," says Siamak Namazi, a Tehran political analyst. Even the students aresick of Khatami, who once enjoyed rock-star status on Iran's campuses.

What's of more concern to many Iranians is poor quality of life. They blame Khatami for wasting seven years on a quest to liberalize politics while failing to improve publicservices in Tehran, where traffic jams and pollution dominate. Iranians fault the government for not creating enough jobs to cut unemployment, now officially at 16% but probably higher.

This shift in public priorities is giving the initiative to a group of moderate conservatives led by ex-President Ali Akbar Hashemi Rafsanjani, the pistachio grower considered Iran's most adroit politician. Rafsanjani, who as President made big strides in liberalizing the economy, suffered a humiliating loss at the hands of Khatami's reformers in the 2000 parliamentary elections. But he has kept great influence as head of the Expediency Council, which rules on disputes between Parliament and the hard-line Guardian Council. Rafsanjani has suddenly become more visible, speaking on everything from U.S. policy to unemployment.

Rafsanjani argues that the regime should focus on improving the economy and set aside Khatami's pursuit of broader political freedoms. Using an economic reform platform, he is laying the groundwork for his faction's victory in parliamentary elections in 2004 and presidential elections in 2005. While he is unlikely to run for President, he may back a candidate such as former Culture Minister Ataollah Mohajerani, a pro-business centrist whom he can manage.

Could a government of moderate conservatives bring more change? The Rafsanjani crowd is certainly more liberal on economics than Khatami's camp, which includes socialists who have resisted market reforms. A Parliament and President that agree on the agenda may be able to liberalize faster than Khatami's administration--though a new government would still face the entrenched interests. Rafsanjani also represents a substantial group of right-of-center intellectuals who favor breaking the logjam on relations with the U.S. Since it would enjoy the religious Establishment's support, a Rafsanjani-influenced government would have better credentials to deal with that hot issue.

Rafsanjani may even play a key role in any upheaval triggered in Iran by a U.S. war on Saddam Hussein. Analysts say the ex-President will work to prevent hard-liners from any crackdown, such as declaring a state of emergency, that would aggravate the situation or tempt a U.S. intervention. It's realpolitik, Iranian-style--and it's how Rafsanjani and his camp aim to keep the Islamic regime alive.

© 2003 All Rights Reserved. Atieh Bahar Consulting.