Anybody familiar with the Iranian economy - whether before or after the recent US and EU sanctions were stepped up - will be sceptical of simplistic judgments.

Despite record oil revenues, Iran's economy has continued to be plagued by high unemployment and double-digit inflation. According to the latest official estimate, inflation is at 20 per cent and is likely to rise after the recent sharp depreciation of the rial. Unemployment was officially 14.6 per cent in 2010, with women and young people disproportionately affected. Twenty three per cent of those aged between 15 and 24 were unemployed during 2006-09.

With its administration criticised by friends and foes alike for lack of transparency, official Iranian data are received with suspicion. For instance, after a three-year gap, Iran's Central Bank has only just released standard macroeconomic indicators. Data released selectively and in stop-start bursts inevitably meet with incredulity, and the latest growth estimate of 5.8 per cent for 2010 (6.1 per cent for non-oil GDP) is no exception. Analysis of Iran's economic policy is further complicated by intense factional politics and an intricate labyrinth of decision-making, ratification and oversight. At the same time, a veneer of official probity and populist jargon sits oddly with widespread patronage, a spate of banking scandals, record non-performing loans and highly skewed concentration of wealth.

Such weaknesses give comfort to proponents of sanctions. For them, Iran appears to be a textbook case for success: it can only be a matter of time before the economy is on its knees. Partial evidence for this comes from the foreign exchange markets where the Iranian currency fell by more than 50 per cent in a few months after new sanctions against the Central Bank were introduced. Optimistic claims periodically appear in the press and US official statements. As early as January 2011, Hillary Clinton, US Secretary of State, claimed to a student audience in the UAE that "the sanctions are working," judging by "a slowdown in Iran's nuclear progress." The political corollary of this is that since sanctions are "clearly hurting," they present the best hope of averting a military confrontation.

It is hard to predict the dynamics of the negotiations. But there are many reasons why sanctions are unlikely to deliver the blow that could force Iran to abandon or compromise on its nuclear ambitions.

First, although the sanctions are harsh and increasing in severity, other economies have managed to defy even harsher economic pressures in the past. Gary Hufbauer, the veteran sanctions analyst at the Peterson Institute for International Economics in Washington, believes that Iran can still "scrape by" as long as it can find buyers for its oil, despite the payment difficulties. Those who expect imminent collapse overlook the resilience of Iran's economy. Iran has a relatively diversified and self-reliant economy and a history of dealing with sanctions dating back to the 1980s. Moreover, a decade of high oil prices has helped build up its foreign reserves. According to the Chairman of the Tehran Chamber of Commerce, Yahya Ale-Eshagh, early this year these reached $120 billion, with another 907 tons of gold stashed in the Central Bank.

Second, if sanctions were judged by the harm they could cause to the population at large, their success would be a foregone conclusion. An array of restrictions on banking, shipping, insurance, ports, trade, commodities and energy transactions and ventures have already severed or complicated many of Iran's commercial ties to the rest of the world. With the noose tightening, there are already reports of shortages in essentials such as medicine and incidences of panic buying. Similar sanctions against Iraq under Saddam Hussein pushed millions below the poverty line, increased infant mortality and stepped up the brain drain.

Third, the case for sanctions often rests on an implicit assumption of a clear relationship between the economic and political cycles: economic sanctions cause hardship and this in turn is the catalyst for political change. However, this flies in the face of evidence: both the Arab Spring and Iran's 1979 Revolution followed periods of relative prosperity. There is no shortage of countries under sanctions whose target administrations survive - North Korea, Zimbabwe and Cuba, to name a few.

And here lies the ultimate flaw in sanctions: applied as a form of collective punishment, they penalise the victims of the target regimes as much as their perpetrators, who become adept at deflecting the worst impacts and use the spectre of external threat to suppress internal dissent. As Gary Sick, an astute Iran analyst, has remarked: "Sanctions do not persuade dictatorial regimes to abandon projects that they think are central to their security and survival or even their self-image."

Sanctions may allow President Obama a chance to avert war for now, but by hurting the Iranian people, they also highlight the contradictions of a policy which was until recently couched in terms of friendship and amity with ordinary folk in Iran.

(Hassan Hakimian is director of the London Middle East Institute and a reader in Economics at SOAS, University of London.)

 

 

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