Iraq News Now

The IMF’s April 2019 Regional Economic Outlook for the

Middle East and Central Asia offered some positive news for the Saudi economy,

revising its 2019 growth estimate for the economy upward from 1.8 percent due

to improvements in the non-oil sector. In contrast, the Iranian economy was set

to contract by six percent, accompanied by inflation of nearly 40 percent,

following a contraction of 3.9 percent in 2018.

While the IMF report emphasizes US sanctions as the

proximate cause of the difficulties faced by the Iranian economy compared to

the relative success of the Saudi economy, there are in fact deeper structural

factors at play. The role of the military in the Iranian economy is one of the

most important forces that has prevented it from realizing its potential.

Iran’s Revolutionary Guard Corps (IRGC) – the military

branch in charge of protecting the country’s Islamist system – controls

arguably as much as 20 percent of the gross domestic product. It is involved in

a wide range of industries, including construction, infrastructure,

telecommunications, and petrochemicals. The last 40 years have shown that the

IRGC is good at military activity, but not very good at serving consumers. It

undermines competition via extortion and has become a serious obstacle to

foreigners doing business in Iran.

One of the most famous illustrations of this is the

government’s decision to award the license for operating the main terminal of

Tehran’s airport to a Swiss-Turkish consortium, only to have to renege once the

IRGC closed the airport in protest. The IRGC – whose own bid was initially

defeated in the tender – classified the decision as a threat to national

security, and had a series of economic and political interests in securing the

deal. The Basij, which is a subsidiary of the IRGC, has been able to purchase

stock in state-owned enterprises at artificially low prices, distorting the

functioning of capital markets. It also provides preferential employment

opportunities for its wide array of members, distorting labor markets.

The IRGC’s propensity to take actions that serve its own

interests rather than those of the general public are arguably reflected in its

financial support for foreign militias, such as those in Lebanon and Syria.

Thus, in addition to exposing Iranians to bad quality services, military

involvement in the economy also diverts scarce resources (on the order of

hundreds of millions of dollars) to foreign ventures with questionable economic

returns.

Most recently, the IRGC’s involvement in the economy has

been a contributor to the deployment of wide-ranging economic sanctions against

Iran, and is a reason why the Iranian economy has been forced to be

inward-looking, despite the fact that it would benefit immensely from foreign

investment and trade. In fact, in the brief aftermath of the Joint

Comprehensive Plan of Action, the economy grew at 12.3 percent as Iran

re-engaged the global economy, compared to contractions in three out of the

four years prior, including a decline of almost eight percent in 2012.

In the case of the Gulf economies, including Saudi Arabia,

military engagement in the economy has been virtually nil, beyond its role as a

standard purchaser of goods and services in the market. This has been an

important contributor to the attractiveness of the Gulf economies to foreign

investors, and in turn to the countries’ high living standards.

This is because military involvement in the economy makes

engaging with the global economy much more complex. Prospective foreign

economic partners become much more wary of the political consequences of trade

and investment, as they inevitably empower the military.

Moreover, the military has access to special resources which

can completely undermine the competitive process, such as the de jure power to

designate competitors as security concerns and the de facto power to extort

competitors via its armed personnel. This can lead to market concentration –

and even monopolization – with consumers suffering from higher prices,

decreased choice, and low levels of innovation.

When a company such as Italian oil giant Eni wants to

explore for oil in Saudi Arabia, it doesn’t have to worry about its personnel

being physically threatened by a Saudi military contractor who is competing for

control of the oil, nor does it have to buy off generals who might otherwise

designate it as a security threat and remove its access to any oil it

discovers.

Respect for property rights – especially those of foreign

investors – and openness of markets has been critical to the rapid advancements

in human development in the Gulf. Moreover, despite the geopolitical challenges

that the Saudi government has been facing, it has continued to be able to

secure critical foreign investment, because the economy and the government are

relatively independent from the perspective of foreign diplomatic relations.

In light of the uniformly negative consequences of military

involvement in the economy, why would a country even permit it? The military

itself will support such an expansion as it allows it to diminish its financial

dependence on the state, and frees it from civilian oversight. Moreover, it

will support any broader political aspirations of the military. From the

perspective of the government, it may allow such expansion as a defensive

tactic if it feels threatened by other groups in the economy, such as civilians

or other military branches, or it may simply be powerless to prevent the

military’s gradual encroachment.

But military personnel are trained for combat, not for

managing production and satisfying consumer needs. Putting the army in charge

of the economy is in principle the same as putting a regional supermarket

manager in charge of air defense, which would naturally lead you to worry about

the integrity of your country’s airspace. Naturally, there are some shared

managerial skills, but for the most part, when it comes to performance, there

is no substitute for dedicating oneself to one’s craft for 30 years.

While economists disagree on the best growth model for

development economies, one area of consensus is that the military should stay

away from the economy. The Gulf countries have been able to harness their oil

wealth in a much better way than their regional neighbors for a variety of

reasons, with one of them being keeping the military away from the organization

of commercial activity. Until countries such as Iran heed this lesson, they

will continue to perform significantly below their potential.