Oct 5, 2012


Scholarly debates on the relation between economy and political regimes have lead to uncertain conclusions. There are many questions to ask regarding this topic. What is the effect of long- and short-term economic performance on the kind of political regime that exists in a society? Does a particular kind of political regime perform economically better than other? How to determine the effect of internal economic policy decisions versus the trends marked by international economic cycles? How to weigh the relative importance of macro and microeconomic variables when talking about economy and politics? Are short-term crises favorable to the construction of a democracy or just to the breakdown of a non democratic regime?

The discussion comes about because of the Iranian rial devaluation that turned into high inflation and street protests this week. The Washington Post mentions that this is the moment that “some US officials have been advocating for years: a kind of widespread economic distress that they hope will lead to changes in Iranian behavior, if not a change in the leadership itself.”

How bad is the crisis? There are two versions because of the, so to say, two-rate system, similar to what happens in Cuba: an official exchange rate juxtaposed with a black market rate. According to the Iranian government, things are OK. The exchange rates section of their Central Bank website shows an interesting graph for the reference rate between the US dollar and the Iranian rial. The lowest point is found in October 15, 2011, when 1 US dollar bought 10,531 Iranian rials. Afterwards, there is a constant increase in the rate, with some small episodes of stabilization, marked increase or marked decrease. By late January 2012 the rate was above 1 dollar for 11,260 rials. And overnight it went to 1 dollar to 12,260 rials, rate that officially has been kept until today. The press has reported differently: various sources coincide in estimating the real exchange rate, that of the black market, in 1 dollar for 35,000 rials, and that inflation rose up to 69.6%. With people on the streets because the money in their pockets suddenly was not enough to buy basic products, it is not difficult to assess which rate is more relevant to the household economy.

In any case, the problem is not new. On September 12, Reuters described a “radical reform” in Iran expected to stabilize the rial, which that week was at 25,000 to the dollar. The strategy consisted of a “managed float”, where the exchange rate would not be fixed, but would buy and sell currency to control rate volatility. Moreover, only “certified” buyers and sellers could participate in these transactions. However, the proposal was quickly attacked by business groups who feared that to give to the government such control over the currency would open windows of opportunity for corruption, suggesting it would constitute a third currency market, next to the official and black market ones. This opposition combined with the technical challenges of its implementation have prevented the Iranian government from introducing currency exchange reforms. And the fears of the Iranian Central Bank materialized: the rial sunk even deeper in the following weeks.

Is the lack of a decision from the Iranian government to stop the devaluation the long awaited prelude to some substantial change in the regime, be it in its policies (particularly the refusal to comply with international agreements, what boosted US sanctions on Iranian oil) or in its leadership? There are some grounds to suspect it. In Egypt, high bread prices and shortages were a key element to the protests against the government. Nonetheless, it was the military who stepped in, announced that Mubarak was out of office and put themselves in charge, making the rode to democracy sinuous if not tortuous. In any case, it was change.

What is the scope for change in Iran? There is a large consensus among scholars that the regime and all it entails (the figure of the religious Supreme Leader, the conjunction of the State and the Mosque, etc.) are not questioned, not even by the Green Movement, the organization that fought against alleged fraud in the 2009 Presidential elections where the incumbent Mahmoud Ahmadinejad won. Some moderation in the religious aspect of the government and its policies, fair competition among candidates or, for the US, desisting in the nuclear program seem to be realistic elements of change in Iran, at least in this very particular context. All these aspects might have some effect on alleviating the pressure over the rial. But economic problems are most successfully attended with economic measures, not so much with just political agreements regardless of the nature of the regime. It is too soon to say that Iran is lost or that the regime will keep the house in order. As what usually happens in these cases, Virtù and Fortuna will tell us if on this occasion Iran is a good example to study the relation between economy and democracy.


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Founded in 2004, Democracy and Society is a biannual print journal published by the Center for Democracy and Civil Society at Georgetown University. The D&S Blog provides web-only content, including special reports and investigative series, on issues relating to democracy and development.

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