PARADOXES OF PRIVATIZATION IN THE GLOBAL SOUTH

Much commentary in Iran, as in other low- and middle-income countries, tends to attribute the many distortions, failures, and unintended consequences of economic liberalization to the persistence of state intervention in the market. Yet a central paradox of economic liberalization in the late 20th century, especially when such reforms were perceived to have succeeded, was that the reduction or elimination of statist policies involved the intervention of the state.Footnote ⁹ The “myth of the market” is that economies operate free of state institutions. In reality, processes of commodification and marketization demand a robust state with high regulatory capacity, which Michael Mann identifies as “infrastructural power.”Footnote ¹⁰ Scholars such as Kiren Chaudhry forcefully argue that competitive markets are not simply created by “smashing” the state but rather that “the instruments of the state must be redeployed to perform the much more difficult task of indirect regulation and administration.”Footnote ¹¹ In other words, successful privatization of SOEs, often built up during years of import-substitution industrialization conducted in tandem with state formation itself, requires a state capable of initiating and carrying through such a major transformation. The paradox of privatization is that, as Haggard and Kaufman contend, “for governments to reduce their role in the economy and expand the play of market forces, the state itself must be strengthened.”Footnote ¹²

Successful privatization needs high state capacity. But perceptibly “strong” states do not always privatize, even if privatization is desired by policymakers, since elites can block policy change from within or without the government. Scholars of economic policy have identified the presence of “relatively autonomous” technocratic organizations within the state, or “insulated change teams,” as a key variable of success.Footnote ¹³ The concept of relative autonomy, though, has traveled a long theoretical distance. Originating in Marxian debates over whether states could be independent of capitalist elites, later usage of “autonomy” within development studies shifted toward a Weberian framework to analyze whether states could be sufficiently independent of social pressure to carry out structural transformations in the economy.Footnote ¹⁴ For example, SOE privatization usually requires state autonomy from public sector groups such as workers, often through dismantling or overcoming former corporatist linkages with labor.Footnote ¹⁵ The responses of domestic business elites to state efforts at liberalization can also depend on how state–business relations have been previously structured during eras of high tariffs, infant industries, and other protectionist policies.Footnote ¹⁶ In sum, to act autonomously in relation to powerful social actors, including state and business elites, that could lay claim to public assets, governments need to carve institutions out of the state apparatus that are unconstrained by such linkages. Explaining well-managed privatization via such autonomous state organizations therefore entails an examination of the social and political context in which opportunities to transfer public goods into private hands may emerge.Footnote ¹⁷

Moreover, the social function of SOEs can vary widely. As Chang and Grabel write, “Often SOEs are charged with serving too many objectives (e.g., social goals, industrialization, and the provision of basic services), and the relative importance of each goal is unclear.”Footnote ¹⁸ One might expect such overloaded SOEs particularly in states that depend heavily on natural resource commodity exports for government revenue, especially when trade-offs between capital accumulation and social distribution are not sharply demarcated. For instance, under the administration of President Hugo Chavez, Petroleos de Venezeula, S.A., the national oil company of Venezuela, renegotiated contracts with private domestic and international actors and expanded direct expenditures on new social services for the urban and rural poor. This was a shift away from the company's strategy in the 1990s to fashion itself a multinational corporation operating in global markets. Critics argued that the incorporation of expanded social objectives could harm the company's firm-level investment opportunities.Footnote ¹⁹ However, as Steffen Hertog has shown, Gulf states have produced profitable SOEs in lieu of substantial privatization. In the United Arab Emirates, Saudi Arabia, and Qatar, this was an outcome of “decades of nonpolitics”—an absence of social pressure from below, which allowed for extensive state autonomy in economic policy making. Populist measures, in these Gulf cases, were not required for successful state-building projects. SOEs were relieved both from pressures of bureaucratic predation and expectations of redistribution. Firms’ management could be directed and incentivized toward rationalized market calculations, forming small “islands of efficiency.”Footnote ²⁰ As a result of historically contingent political and social formations, such as a relatively small citizenry and a large migrant working class, such states developed “embedded autonomy” in relation to themselves. The “resource curse” of state capture and patrimonial linkage, often attributed to easy access to natural resources, is likely due more to politics than petroleum.Footnote ²¹

In Iran, politics also determined how, to whom, and over what networks economic resources flowed during the process of restructuring domestic firms and markets. State formation after 1979 was embedded within and constrained by an array of social actors. To understand why, we first need to place Iran's seemingly haphazard economic policies within the political drama of revolution, war, and postwar reconstruction. Throughout the entire postrevolutionary period, a factionalized and fractious state elite prevented the coalescing of a unified apparatus that could fully apply the technocratic blade to the public sector. The flux of competition among political entrepreneurs, electoral and otherwise, relied upon popular mobilizations of a variety of social bases and status groups. At times, intraelite conflict provided opportunities for market activity by domestic private sector actors, as in the banking industry in the early 2000s. In subsequent years, though, state transfer of public sector companies was mostly channeled toward organizations whose member constituencies had been produced alongside the state itself, whether large pension funds for the formal labor force, “justice share” cooperatives for “revolutionary” status groups, or the military's growing network of subcontractors that provided avenues for upward status mobility among war veterans. While states that construct autonomy from protected elites and other powerful social actors are best poised to carry out “real privatization,” Iran's postrevolutionary trajectory embedded the state deeply within the domestic social arena. The result has been the rise of the subcontractor state.

NATIONALIZATION BY NECESSITY

Article 44 of the Iranian constitution, the legal basis for SOE privatization since its amendment in 2004, has a remarkable history. According to ʿIzzatullah Sahabi, a member of Khomeini's 1979 Revolutionary Council, it was placed into the second draft of the constitution by ayatollahs Bihishti and Alviri and Hujjat al-Islam Bahunar and approved by popular referendum in October of that year.Footnote ²² Originally, Article 44 stated:

The spirit of Article 44 was partly a move to bolster the left-leaning credentials of the Khomeini-led state and partly a recognition of the circumstantial nationalization that had already taken place amid revolutionary collapse. In 1979, year one of the revolution, a segment of Islamic liberals backing provisional government head Mihdi Bazargan was content with keeping a large private sector intact in order to ensure continued domestic investment. Bihishti, however, was more concerned with the success of Khomeinist forces. Secular leftist groups in the 1979 revolutionary coalition insistently called for nationalization of major industry as part of a socialist transformation of Iran and possessed a formidable social base that competed with Khomeini loyalists. As Khomeini's “lieutenant,” not to mention a political genius in the mold of Trotsky, Bihishti moved to outflank the leftist competition through the use of language such as that in Article 44. In reality, most of the antipathy toward the private sector by the revolutionaries remained directed at those elite families connected with the old regime or Western-linked capital. The new state, therefore, did not expropriate all factory owners and landholders but ended up in control of the economy mostly by exigency rather than plan.

After war with Iraq began in late 1980, state control over production and distribution was strengthened. Bazargan's original intentions for boosting the private sector were sidelined. This stemmed, however, more from need than ideology. By the fall of 1981, Khomeini loyalists had occupied the state's commanding heights, and a new five-year plan was drafted to commence in 1983. The plan stressed common Third Worldist pieties such as self-sufficiency in production and unshackling the Iranian economy from the “dependent development” of the shah's rule. In reality, the document was merely a codification of the war economy. Its lofty goals were never implemented due to the country's ad hoc governance.Footnote ²⁴ As the public sector expanded in the war economy, parastatal organizations that had initially formed as Khomeinist auxiliaries during the postrevolutionary struggle—the IRGC, the volunteer basīj militia, the rural development agency Construction Jihad, and the welfare organization Imam Khomeini Relief Committee—became crucial to operations both on and off the front lines. These included not only military logistics, supply transport, and recruitment efforts but also employment and welfare provision. As Kaveh Ehsani notes, “Public sector employment more than doubled after the revolution, from 1.7 million in 1976 to 3.5 million in 1986. According to one estimate, within three years of the revolution, one in six Iranians above the age of fifteen belonged to one state and revolutionary body or another.”Footnote ²⁵

Even during the war, however, the private sector employed the majority of the labor force in agriculture, services, and small-scale manufacturing. Such private sector activities often competed in the economy with newly formed state-sponsored cooperatives and revolutionary organizations.Footnote ²⁶ After a recession induced by the oil slump in 1986, the government gradually shifted some activities in trade and commerce, especially nonoil exports, to private hands, effectively utilizing the robust black market in order to meet consumption needs during the crisis years of the war. Capitalists outside of such preferential networks invested in the most available and inflation-protected assets: real estate and construction. Again, however, this process was facilitated by the state, which freed up urban land for use and made housing loans with low fixed interest rates easily procurable. As the economist Kamal Athari has noted, the housing sector has always been the backbone of private sector development in Iran. From 1980 to 1986, even as war and political uncertainty upended other economic sectors, there was a housing boom in urban areas.Footnote ²⁷

Meanwhile, latent ideological differences were emerging within the new political elite. A self-described “radical” faction, with members such as Prime Minister Mir Husayn Musavi, Bihzad Nabavi, and Ayatullah Muhammad Musavi Khuʾiniha, pushed for more statist intervention: taxes on commerce and income, labor regulation, land redistribution, import substitution, and increased scrutiny of private property.Footnote ²⁸ In reality, the postrevolutionary economic debate between prominent elites in the 1980s never questioned the sanctity of private property per se but rather concerned the suitable balance of state and market. The radicals’ measures, passed in the parliament, were doggedly rejected by a conservative faction based in the Guardian Council, a de facto House of (clerical) Lords enshrined in the 1979 constitution with veto power. Khomeini frequently sided with the populist radicals until his death in 1989, though little coherent economic policy emerged from the intraelite strife during his tenure as leader and supreme jurist.

THE LIMITS OF LIBERALIZATION

After the war ended in 1988, a “third way” faction coalesced under President Akbar Hashemi-Rafsanjani (r. 1989–97) whose members self-identified as pragmatists or “constructionists.” This faction was the first to broach the issue of SOE privatization in the public sphere. Politically, Rafsanjani saw himself as an updated version of the modernizing 19th-century Qajar bureaucrat Amir Kabir, whose biography he had written as a young cleric in the 1960s. The technocrats Rafsanjani brought into his government publicly ridiculed the visible lack of scientific knowledge and economic expertise during the war years. Masʾud Nili, an economist at the Planning and Budget Organization during the late 1980s and a main author of Rafsanjani's first Five-Year Plan (1989/90–1993/94), boasted that during this period, Islamic leftists and radicals believed in a dirigiste economy, and Islamic conservatives believed in a “traditional” market economy (commerce and trade through mercantile networks with a night-watchman state), while a new self-described “expert” faction under Rafsanjani recognized that a “modern” and competitive market economy was the correct path for the country.Footnote ²⁹ Technocratic expertise was to supplant revolutionary fervor.

Rafsanjani's first Five-Year Plan aimed to reduce state control in the economy, marketize the distribution of consumer goods, borrow capital on international financial markets, and reform the country's multi-tiered currency exchange rates. It was bitterly attacked by the radicals—solidly entrenched in parliament in the late 1980s with Mihdi Karubi as speaker—in print media such as Salam and Bayan. They accused the government of capitulating to Western capitalism, favoring industry over agriculture, and relying on foreign debt. Stung by his critics, Rafsanjani repudiated the claims, asserting that his plan was for a “mixed, Islamic economy.”Footnote ³⁰ Yet Rafsanjani and his aides then strategically allied with conservatives in the Guardian Council to disqualify members of the radical faction from running in the 1992 parliamentary elections. The Khomeinist “left” was effectively purged from the political field, and Rafsanjani was compared to Gorbachev and de Klerk in the international media. Iran's “perestroika,” however, was short lived; a balance of payments crisis ensued due to an oil price collapse in 1993 and 1994, unemployment and inflation reached untenable levels, and protests broke out in several major Iranian cities. Rafsanjani reluctantly backed off from his reforms.

The political infighting of the early 1990s affected the SOE privatization process. Out of 770 public companies, the government identified 391 that could be privatized according to the constitutional language of Article 44. In practice, SOE sales became protracted and mostly occurred through direct negotiations with interested buyers instead of through public auctions. As privatization proceeded, critics from both the left and right claimed it was riddled with corruption and that it effectively handed over the state to a new and undeserving āqāzādih—the “sons of the elite.” In interviews with business actors who possessed decades of private sector experience during 2009 and 2010, I inquired about this early privatization effort in the Islamic Republic. Several respondents provided anecdotal evidence that many companies were known to be loss making. Skittish private capital was not convinced of the government's promise of secure and profitable investment outlets. Indeed, in 1994, parliament, now controlled by conservatives, prohibited government sale of SOEs through negotiated transfers. Instead, transaction houses were created to preferentially sell companies’ shares to large endowed foundations (bunyādhā) whose beneficiaries included war veterans, families of martyrs, basīj members, and other “devotees” of the revolution.Footnote ³¹ The parliament's move blocked the transfer of SOEs to private entities and established an early precedent of “pseudo-privatization” into the hands of these and other parastatal entities.Footnote ³² By one calculation, of the 331 companies that were fully or partially transferred under the name of privatization between 1989 and 1994, half of the shares went to parastatal organizations.Footnote ³³ The remaining SOEs were told to become self-sufficient in their operation costs, but hard budgets were rarely enforced by the state due to these companies’ social function as large employers and their easy access to preferential foreign exchange rates.

As the Rafsanjani administration grappled with the conservative-majority fourth parliament (1992–96), radicals such as Khuʾiniha and Karubi slowly moderated their views and eventually declared themselves as “reformist” politicians. The transformation of most of the Khomeinist left to political liberalism has received much scholarly attention, but their gradual acceptance of economic liberalism is less noticed. One reason is that Muhammad Khatami, Iran's minister of culture from 1982 to 1992, did not offer much of an economic plan during his 1997 presidential campaign. Once elected, he proposed an economic reorganization plan in 1998 and then the third Five-Year Development Plan (2000–2005). While also emphasizing the goal of a universal social welfare system, the plans continued earlier efforts at economic liberalization—which was not surprising since most of Khatami's economic team was retained from the Rafsanjani administration.Footnote ³⁴ By no means did the reformists entirely recant their earlier stances on economic policy, since many of them continued to lambast Rafsanjani's approach well after the election of Khatami. Nevertheless, the ideological shift was underway. Leftists gingerly moved toward economic liberalism, while economic liberals appealed for political reforms. As Nili recalled in 2002, “The [plan] managers that had statist economic orientations are today implementing plans oriented towards a modern competitive economy and support of the private sector.”Footnote ³⁵

This was a practical marriage of political convenience, however, not a necessary outcome of Iran's postrevolutionary development. Reformist elites publicly rethought their precepts of the revolution but mostly in the realm of politics, not economics. Stressing concepts of civil society and a deideologization of the public sphere, the movement found a popular champion in Khatami, who seemed to promise an Islamic Republic with a human face. The reformists who did accept Rafsanjani's project of economic modernization attempted to reverse his top-down approach, arguing that it could only come to pass once political modernization had begun. The most significant economic successes achieved in Khatami's administration, after years of foot-dragging from the conservative-controlled Guardian Council, were the 2002 unification of tiered exchange rates and a floating peg of the Iranian rial to the dollar. Yet economists close to Rafsanjani had first suggested this reform in the late 1980s, signaling how slowly the state machinery of the Islamic Republic has operated when it comes to economic liberalization.

PRIVATE SECTOR GROWTH WITHOUT PRIVATIZATION

In the late 1990s, a curious process began that economist and former MP Ahmad Maydari called “private sector growth without privatization.”Footnote ³⁶ As mentioned, private capital never fully disappeared in postrevolutionary Iran. Some Pahlavi-era industrialists and merchants, looking for new opportunities, reinvested their capital in the country. Others, such as mid-level bureaucrats and provincial figures, amassed small fortunes during the 1980s via land grabs in an unsettled legal environment.Footnote ³⁷Bāzārīs who lacked political clout to obtain coveted import licenses or foreign currency allotments turned to speculation in black and grey markets.Footnote ³⁸ Beginning in the early 1990s, Tehran mayor Ghulamhusayn Karbaschi (r. 1989–98) encouraged speculative capital to further move into housing and commercial construction projects, extracting “fees and taxes from merchants and developers in exchange for exemption from zoning laws and protection from political pressure.” Private investment in the city's construction sector from 1987 to 1997 increased by a factor of fifteen, funding Tehran's “growth machine” as the capital's high-rise skyline and ringed highways took the shape recognized today.Footnote ³⁹

Private capital soon found another outlet. Facing a staunchly conservative Guardian Council that eagerly vetoed down any reform too far reaching, Khatami's administration was well aware of the political limitations on privatization, Rafsanjani-style. As an alternative, the government began to grant licenses for establishing private companies in sectors where these were justifiable under Article 44's language. In 2009, one Tehran-based small-business owner told me that the best year for “entrepreneurs” over the past two decades in Iran was “definitely the second year of the Khatami government [1998–99].” First occurring in banking and insurance, licenses were later extended to the subsidiary oil, power plant, construction, airlines, telecommunications, and postal sectors. As a result, new enterprises emerged and flourished in sectors formerly dominated by quasi-monopolies. For example, in the 1990s, only a few SOEs produced all industrial dairy products in Iran. By the late 2000s, over twenty private companies were active in the field along with the original SOEs. Instead of transferring public monopolies to private hands, Khatami's government allowed the private sector to compete with public and parastatal firms for market share. In fields such as banking, this competition generated consumer-friendly innovations such as electronic accounts, internet banking, and ATMs, all of which state banks eventually adopted.

Banking exemplified Iran's rising private sector during this period.Footnote ⁴⁰ In 1999, three of Tehran's housing construction magnates formed the Housing Credit Institution, which was allowed to provide housing and auto loans only. To attract middle-class household savings, it paid higher interest than state banks, advertising with the slogan “two percent more.” Also in 1999, a former Tehran stock market manager, a Central Bank official, and several Pahlavi-era textile and plastics industrialists founded Saman Credit Institution with a start-up capital of 1.1 billion tomans. In 2001, it became Saman Bank with a capital stock of twenty billion tomans. By the late 2000s, Saman was valued at 300 billion tomans (about $300 million USD), with large public pension funds in the steel and copper sectors as major shareholders. One of Saman's founders stated that two changes had made its growth possible: consumer credit for goods such as autos, appliances, and computers; and innovations in electronic banking services. A former industrialist with good relations to the Ministry of Industry founded Karafarin Bank, whose other investors included top members of SOE conglomerates. Parsiyan Bank, whose advert campaigns lavishly recalled ancient Persepolitan friezes, grew out of the investment arm of automobile SOE Iran Khudraw. Parsiyan soon became the country's third largest bank and the largest listed on the Tehran stock exchange.Footnote ⁴¹ As a final example, the major shareholders of Iqtisad-i Nuvin Bank, which advertised itself as “Iran's first private bank,” had been active in light industry and construction.

By 2009, with only 4.7 percent of Iran's branches, private banks held 34 percent of the country's total long-term deposits and 25 percent of its short-term deposits.Footnote ⁴² As the stories of these banks illustrate, private sector growth without privatization during the Khatami era did not arise from a vacuum. Instead, a particular form of capitalist development, in which private entities coexisted with public ones, emerged out of organizational networks linked to previous state-building efforts in the industrial sector as well as networks of diaspora and domestic capital. This would not have been possible if the private sector had been completely wiped out after the revolution. Furthermore, just as nationalization during the war years was a mostly ad hoc response to political exigencies and elite factional competition, this new growth in the private sector emerged out of a makeshift solution to constraints imposed by intraelite political strife during the 1990s.

Khatami's administration did attempt to push ahead on SOE privatization without breaching Article 44. The Third Development Plan (2000–2005) stipulated that public ownership would be broken up except where “the state has a natural monopoly.” A government commission indicated that only 128 out of 724 firms needed to remain state owned; in addition, it recommended that more than 1,000 parastatal companies be privatized, including those controlled by large foundations and related institutions.Footnote ⁴³ But the Guardian Council loudly attacked Khatami's plan as antithetical to Article 44's nationalist spirit, partly echoing (without crediting) the former radicals’ earlier critique of Rafsanjani's liberalization agenda. In 2004, however, the Rafsanjani-chaired Expediency Council released a long-awaited and binding interpretation of Article 44 that clearly supported the Khatami administration.Footnote ⁴⁴ The ruling disallowed further protest by the Guardian Council, amending Article 44 to oblige the government to divest from majority control in heavy industry, downstream oil and gas refineries, mining, power generation, banking, aviation, shipping, insurance, infrastructure, and telecommunications sectors. By then, however, Khatami's second term was nearing its end, and conservative intransigence in other state branches limited implementation of his administration's privatization goals.

In short, while discussed far less than the debate over democratic pluralism in the Islamic Republic, much of Iran's political elite has undergone an ideological transformation on economic matters. Yet this shift in thought is not unique. In Iran, as in other middle-income countries in the 1980s and 1990s, privatizing the assets of an ossified, semi-authoritarian state was perceived as a radical position. It was not surprising then that many of the left-leaning Khomeinist elites found themselves, twenty years after the 1979 revolution, extolling the state-tempering properties of market discipline. Only one faction remained outside the consensus on privatization: the conservatives. While during the 1980s, they took a relatively laissez-faire position on private ownership, conservatives had never presented private sector growth as the main pathway for developmental success. Furthermore, conservatives stood to lose if SOE privatization reordered the elite and brought in newcomers as potential challengers. They were unwilling to cede the commanding heights of the Iranian economy in an uncertain political climate where new and unknown owners were feared. As Muhammad-Riza Bahunar, a high ranking conservative MP, bluntly stated, “Article 44 of the constitution was the place for the disputes between left and right groups within the country's political system that had begun during the government of the Sacred Defense [Iran–Iraq War] and continued for twenty years.”Footnote ⁴⁵ After the election of Mahmoud Ahmadinejad, however, the conservatives’ stance on the issue shifted significantly.

PARASTATAL SECTOR GROWTH THROUGH PSEUDO-PRIVATIZATION

As neither a septuagenarian nor a member of the ʿulamaʾ, Ahmadinejad was not Iran's average conservative. Running on a platform of pious competence, his image as an educated, technocratic engineer was strategically cultivated to resonate with Iranians tired of a seemingly useless state apparatus. To his advantage was an apathetic Brezhnevian air surrounding the reformist movement, which had descended into infighting once conservative obstruction stalled Khatami's sociopolitical agenda. Ahmadinejad's allies deftly took advantage of the stalemate between reformists and the old conservative faction, calling themselves, at first, “developers” and then also “principlists.” The latter term originated during the 1990s as an emblematic counterpoint to reformists, who conservatives argued had diluted revolutionary principles. Campaign slogans cleverly injected symbols of Iranian nationalism into the visage of a proletarian-cum-statesman. Ahmadinejad and his circle countered the reformists’ faded discourse of civil society and political pluralism with a rehashed critique of the perceived corruption of Rafsanjani—who was running for president yet again—and a vague promise of income redistribution. Old-guard conservatives looked on warily. Yet they also envied Ahmadinejad's plebiscitary success and so hitched their wagon to his rising political clout.

After his 2005 second-round electoral victory against Rafsanjani, Ahmadinejad did what most good politicians do: he stole his opponents’ ideas. SOE privatization was to move forward, he announced, but with the benefits distributed to the people via a program entitled “Justice Shares.” This plan sounded oddly similar to the 2005 presidential campaign manifesto of Rafsanjani, which proposed that every Iranian family would receive stock shares of divested companies. Private sector boosters—including the Iranian Chamber of Commerce, Industry, and Mines and the Tehran Stock Exchange—had imagined that “popular” share divestment would dilute and diversify stock ownership, thereby increasing the demand for further privatization.Footnote ⁴⁶ Supreme Jurist ʿAli Khamenei's intervention and public support for privatization, in a May 2005 announcement and a July 2006 executive order, provided a legitimating push against conservative holdouts. With the Leader's blessing, no one could claim privatization belonged solely to a reformist agenda. Ahmadinejad, however, put his own spin on the plan. Article 44's revision under the previous president's watch mandated that the state sell or transfer majority ownership to all nongovernmental sectors, defined as “private, cooperative, and non-government public sectors.” The last category is the legal definition of most of the parastatal sector and includes public pension funds, military contractors, and endowed foundations not under the purview of the national budget.

Ahmadinejad followed the article's new language to the letter. The Justice Share program created a system of provincial committees that oversaw the formation and administration of investment cooperatives for these shares. By using cooperatives, another institutional layer was added between the private and public sectors. Originally, it was announced that the lowest two income deciles of the population—about thirteen million people—would be given justice shares, at half the share's face value, payable over ten years. The third to sixth income deciles would be permitted to purchase justice shares at full price, also payable over ten years. Justice Share dividend payments would allow individuals to eventually pay back share ownership costs. Investment cooperatives could exercise their new power as minority shareholders in divested companies, but government bodies were barred from appointing new company and cooperative managers.Footnote ⁴⁷ During implementation of the program, however, various status groups in addition to income clusters received shares: low-income villagers and nomads (seventeen million shares), public sector retirees (thirteen million), beneficiaries of the Imam Khomeini Relief Committee and other welfare organizations (8.5 million), families with martyr status (1.3 million), seminary students and clergy (178,000), and, curiously, over 15,000 journalists. Other groups announced to be eligible soon were carpet weavers, Qurʾanic scholars, young addicts in treatment, construction workers without labor contracts, and bus and taxi drivers.Footnote ⁴⁸

These status groups were not chosen randomly. They represent already existing categories of beneficiaries within the fragmented yet broad Iranian welfare system that developed after the 1979 revolution. By 2009, the government stated that forty-one million people—over half of the population—had applied for and received justice shares. The Central Board of Justice Share Distribution includes the president and several key ministers as well as the head of the Martyrs and Veterans Affairs Foundation, the commander of basīj forces, and the head of the Imam Khomeini Relief Committee. The private sector was kept out of the loop.

Ahmadinejad's push for privatization from 2006 onward allowed his government to brand its efforts as “performance execution” of the sort earlier administrations failed to enact. Privatization was hardly a secret; rather, it formed a strategic component of the president's public relations campaign against his critics. While reformist elites had been effectively sidelined from most state institutions after 2005, preventing the exercise of countervailing force against such policies, left-liberal opposition was also defanged because there was no effective ideological argument remaining in their arsenal. In late 2009, Iranian Privatization Organization (IPO) head Ghulamriza Haydari Kurd-Zanganih announced that the government had divested 800,000 billion rials (around eighty billion USD) and more than 370 companies. This huge divestment, far larger (in real terms) than the amounts divested during both the Rafsanjani and Khatami administrations combined, took three main forms. First, SOEs were sold through the Tehran Stock Market, public auction, or negotiation. Private-sector firms, including private banks and investment companies, as well as the “nongovernmental” parastatal sector have been active in this type of SOE privatization. Second, SOE shares were transferred out of the public sector under the category of Justice Shares, which placed those assets in the cooperative sector. Third, due to the 2006 changes in Article 44, government debt owed to parastatal pension funds and other nongovernmental organizations could be settled, in lieu of cash payments, via direct cash-to-equity divestment of SOE ownership. In Table 1, using the IPO's own data, I compare these three forms of SOE divestment and their relative size from 1991 to 2011. This table shows that the Ahmadinejad government has divested far more SOE assets than its predecessors. Including justice shares, the scale of transfer is over eight times higher than all earlier efforts combined, even though the current president's second term is still incomplete. According to IPO data, the largest amount of divestment occurred in the oil, chemicals, metals, electricity, and telecommunications sectors.

TABLE 1.

Value, Recipients, and Methods of State-Owned Enterprise Transfers in Iran 1991–2011 (Constant Billions of Rials with Base Year 2011)

Note: Persian calendar years begin on March 20. Figures adjusted for inflation using the Consumer Price Index of the Central Bank of Iran to base year 1390; 10,000 billion rials ≈ U.S. $1 billion. NGO, nongovernmental organization.

^aStock market, auctions, and negotiated transfers.

^bJustice shares.

^cTransfers in lieu of debts owed by government.

^dFull or partial divestment of shares.

^eThe number of divested companies before 1381 is not available in IPO data, although figures for Rafsanjani-era transfers are given in the text of this article.

^fBecause there is a break in Iranian Privatization Organization (IPO) data after 1380, this table uses two separate IPO data files to compare amounts over the entire time period.

^gRefer to both terms of Khatami's presidency.

^hAdditional justice shares have not been distributed after the first two rounds.

ⁱRefer to Ahmadinejad's presidency through 2011.

Source: Iranian Privatization Organization (www.ipo.ir).

During previous administrations, SOE divestment had generated its share of notorious scandals. In the late 1990s, for instance, an upstream management company named Petropars was created to act as the main supervisor for subcontractors in Iran's natural gas sector. Registered in England, Petropars was majority owned by the National Iranian Oil Company's pension fund. Conservatives in the parliament accused President Khatami's oil minister, Bizhan Namdar Zanganih, of favoritism and covert deals, especially with Bihzad Nabavi, by then an outspoken reformist MP who also held a position in Petropars. Nabavi eventually resigned the post amid factional wrangling, but technocrats defended the overall privatization process. Longtime Rafsanjani supporter and former deputy oil minister ʿAli Hashimi stated, “If there is corruption, it lies in the subcontracting.”Footnote ⁴⁹

In 2009, amid post-election street demonstrations and international media attention, far larger divestment scandals made the front pages. Tehran's spacious International Exposition Center, where the popular Annual Book Fair is held, was transferred in July to the Armed Forces Social Security Organization as payment for government debt. In September, 51 percent of the Telecommunications Company of Iran (TCI) was sold to a conglomerate linked to the IRGC Cooperative Foundation, a large investment company and service contractor. The conglomerate, Itimad-i Mubin, denied that the IRGC's military command would have any role in managing the newly privatized TCI. Yet the opaque auction of over eight billion USD in shares had been limited to two bidders, with the other reportedly linked to a basīj investment cooperative.Footnote ⁵⁰ In essence, two military parastatals were competing for a major share in the lucrative domestic telecom market. Of course, all of these transfers, whether debt cancellations or block share sales, are included in the IPO's definition of privatization. When criticized by MPs who were IRGC veterans themselves, IPO head Kurd-Zanganih and others pointed out that pension funds invest in similar types of holdings in countries around the world and are legally allowed to do so in Iran under Article 44.Footnote ⁵¹

In July 2009, one of these MPs, Hamid Riza Fuladgar, head of a special commission on privatization, candidly spoke to Iʾtimad newspaper. When asked about the possibility of SOEs crowding out private sector investment, he stated:

Fuladgar is no reformist. The Isfahan MP and former Construction Jihad member is allied with political elites such as Tehran mayor Muhammad-Baqir Qalibaf and parliament speaker ʿAli Larijani, both former IRGC members. Alif, a news website published by conservative MP and former labor minister Ahmad Tavakuli, protested in similar terms:

In other words, rather than quietly fostering centralization of economic activities under IRGC control, important members of the conservative political elite who shared the IRGC's worldview were vociferously attacking the pseudo-privatization process in which IRGC-spawned contractors and public sector pension funds were participating. Full divestment, not centralization, was their demand.

Criticisms from within the political elite mounted. In November 2009, the Parliament Research Center, headed by Tavakuli, issued the report “Transition from the State to the Pseudo-State Economy.” The document calculated that 264 SOEs valued at fifty-four billion USD had been divested between 2004 and 2009. Of this total, 68.5 percent went to justice shares, 12.5 percent went to debt cancellations, and only 19 percent was sold or negotiated through the stock market. Yet even SOEs sold on the stock market did not all go to the private sector. Within these sales from 2007 to 2009, eighty-two firms’ shares were given to the nongovernmental public sector, worth 3.7 billion USD. Two such entities, the Social Security Investment Company (SHASTA) and Iranian Mihr Iqtisad (a basīj-linked cooperative turned bank), obtained 46 percent of these shares. Other major parastatals that acquired SOE assets were IRI Shipping Lines and several public industrial joint-stock companies.Footnote ⁵⁴

In late 2010, Fuladgar's special parliamentary commission released four reports on privatization outcomes. These stated that 70 billion USD in over 300 companies had been transferred since Ahmadinejad's first term, including shares in automakers Iran Khudraw and Saipa, Sadirat, and Tijarat Banks, Asia Insurance, and the aforementioned TCI. After deducting justice shares, debt cancellations, and transfers to parastatals and cooperatives, only 13.5 percent was transferred to the private sector.Footnote ⁵⁵ Critics argued that SOEs underwent “a kind of relocation” but not to the private sector.Footnote ⁵⁶ A 2012 report by the Judiciary's Inspection Organization contended that the transfer process had sacrificed “quality for quantity.”Footnote ⁵⁷ In sum, conservative elites who had long stymied earlier administrations’ attempts at SOE privatization were forcefully attacking the Ahmadinejad government for not privatizing far enough.

This intraelite struggle over the structure of the economy is difficult to understand if we assume a priori that the elite operates as a military junta or centralized praetorian ruling apparatus. Instead, postrevolutionary dynamics of elite conflict need to be embedded in broader processes of state formation that reshaped the elites themselves. Iran's political field narrowed considerably between 2003 and 2009, as reformist politicians in parliamentary and presidential elections were disqualified, harassed, and sidelined. Concurrently, state ministries underwent a major bureaucratic reshuffling, as older government staff retired and new loyal cadres rose up the ranks. As Mehrzad Boroujerdi has shown, these new individuals were predominantly not clerics. Instead, they were educated in technical fields that emerged within Iranian higher education organizations founded to populate revolutionary institutions with trustworthy staff. Most of them hold engineering degrees and thus possess forms of cultural capital different from those gained in seminary training. As with the first generation of post-1979 cadres, who used new revolutionary credentials to upend hardened networks of local elites from the Pahlavi era, this second-generation “new class” came from Iran's provincial peripheries, not the seat of power in Tehran. They are indebted to the state for social prestige garnered through participation in both the Iran–Iraq War as well as the postwar administration of provincial rule.Footnote ⁵⁸ Akin to the “red engineers” of postrevolutionary Russia or China, these individuals ascended through the bureaucracies of the Islamic Republic.Footnote ⁵⁹

Ahmadinejad himself governed a northern province before he became Tehran's mayor. He and his close aides emerged from peripheral circumstances and were able to transform bureaucratic loyalty into a usable set of credentials. Reformists, older conservatives, and Iranian urbanites may lampoon these credentials—educational as well as cultural—as sub-par, but they are not useless. Men with provincial biographies, stationed outside Tehran for years, now populate the IRGC's top ranks. This experience enables the many subcontracting companies that today are staffed with IRGC retirees in the private sector, for example, to adeptly navigate the provincial waters teeming with homegrown urban elites, each with a localized “economy of favors.”Footnote ⁶⁰ Older conservatives fear ceding any more political ground to members of this “new class,” who can convert their local knowledge and stored accumulation of favors into economic capital. Mimicking the reformists, these now self-described “moderate” conservatives had hoped that “real” SOE privatization would empower countervailing forces outside of the state's rising cadres.

Ahmadinejad loyalists, however, do not dominate the IRGC, basīj, and other high-prestige bureaucratic organizations. Instead, this “new class” has mostly internalized and reproduced the self-dividing tendencies of the first postrevolutionary generation, albeit with a key difference. In the first decades of the Islamic Republic, prestige and status could best be garnered by maneuvering within the government. Once the entire political elite fell behind an ideological consensus of shrinking the state through privatization, a host of new opportunities opened within the multiplying and cross-cutting networks of the subcontractor state.

So far, this article has focused on the elite level. Significant nonelite actors within Iranian society have also shaped the contours of pseudo-privatization: pensioners, the “deserving” poor, military cadres and retirees, civil service workers and bureaucrats, villagers, and occupational categories. These overlooked status groups all laid claim to a complex and entrenched postrevolutionary social compact, one that the state could not easily jettison. Pseudo-privatization was not simply a top-down elite-driven project but also structured by claims from below. These demands and expectations were borne out of the country's postrevolutionary formation of a new and broader welfare system. In the Islamic Republic, intraelite conflict prevented the state from extracting itself from social linkages that state organizations had fostered and relied upon during the postrevolutionary decades in order to generate basic capacities for governance. As the state subcontracted out a wider range of its social welfare and economic functions, pseudo-privatization became the method of least resistance.

A HUNDRED PARASTATALS BLOSSOM

Rather than a discrete entity, Iran's parastatal sector contains numerous organizations that do not make up a single distributional coalition. Tension and opposition of interests is the norm because the postrevolutionary state has been embedded in a diverse set of nonelite status groups and social actors at different historical junctures. This occurred not only because of intraelite conflict that forced political factions to cultivate strong social bases but also due to revolutionary mobilization and recurring contention from below, institutions of war mobilization and their organizational legacies, and nationalist projects of economic development amidst geopolitical isolation. In this section, I discuss how pseudo-privatization responded to and enlarged particular constituencies via three different pathways: the Social Security Organization's (SSO) investment company SHASTA, the Justice Share Program, and the IRGC's economic contracting activities.

Pension Funds

SHASTA is one of the largest pension fund investment companies in the country and a major recipient of divested SOE shares. Iran's main social insurance funds cover health insurance as well as pensions, varying from occupational funds where employees contribute a share of monthly premiums to funds for low-income households and special-status or occupational categories where the state fully pays enrollment and coverage costs. In Table 2, these main funds and their estimated coverage levels are compiled.Footnote ⁶¹ This table's coverage levels are undoubtedly misleading, since households can be enrolled in multiple funds. Other households remain inadequately covered due to the incomplete implementation of universal insurance. Estimates of the uninsured in Iran range between 5 and 9 percent of the population.Footnote ⁶² Nevertheless, as the table shows, two organizations are responsible for the vast majority of health insurance coverage. The Medical Service Insurance Organization operates under the supervision of the Ministry of Health and Medical Education, while the SSO is under the Ministry of Cooperatives, Labor, and Social Welfare. The SSO's beneficiaries are mostly located in the formal labor force—that is, middle- and working-class occupations in the public and private sectors with formalized wage and benefit contracts. The nongovernmental SHASTA, as the SSO's investment arm, is mandated with growing and maintaining the asset pools that pay the health and pension costs of these beneficiaries.

TABLE 2.

Main Health Insurance Funds and Coverage in Iran (2008)

^aOversees funds for civil servants, rural households, and smaller funds for particular occupational/status categories such as university and seminary students.

^bGovernment-linked foundation that covers eligible low-income households and other status groups defined as vulnerable.

^cSpecialized public insurance funds for banking, oil, petrochemical, electricity, municipal, airlines, TV and radio, auto, rail, and steel sectors.

Source: Ibrahimipour et al., “A Qualitative Study of the Difficulties in Reaching Sustainable Universal Health Insurance Coverage in Iran,” Health Policy and Planning (2011): 486.

As with pension funds worldwide over recent decades, SHASTA has shifted its activities into what Robin Blackburn has labeled “grey capitalism.”Footnote ⁶³ Pension fund assets, accumulated to support workers as they “grey” into retirement, are being increasingly invested in riskier, more volatile, and insecure “grey” financial assets that promise higher returns but conversely can be wiped out by economic crises. Before the revolution, the SSO held workers’ pension contributions mostly in fixed long-term deposits. In 1989, nearly 80 percent of SSO's investment portfolio was still in these low-risk deposits. By 2000, this share had decreased to 10 percent, while 70 percent of its total portfolio was composed of direct and indirect investments in the Iranian economy. In that year, SSO-held companies produced 43 percent of pharmaceutical and hygienic products, 36 percent of cement, 35 percent of televisions, 25 percent of fireproof products, 31 percent of refrigerators and freezers, and 35 percent of rubber in Iran.Footnote ⁶⁴ In 2012, after a further decade of expansion, SSO's investments in the economy amounted to over 15 billion USD (about 3.5% of GDP) in over 150 companies.Footnote ⁶⁵

In 2003, the World Bank criticized Iran's pension benefits, in comparison to those of European and other Middle Eastern countries, as overly generous. Fiscal pressure pushed the SSO to become more active in the acquisition of SOEs, both on the Tehran Stock Market and in negotiations over government debts to the fund. In 2001, for example, the government transferred assets worth 400 million USD to the SSO to cover constitutionally mandated obligations to pensioners. The SSO also purchased government bond issuances and financed public infrastructure projects.Footnote ⁶⁶ In January 2010, SSO head ʿAli Zabihi stated that over 27.5 million Iranians lived in SSO-enrolled households and warned that, even with high returns on these investments, future commitments to pensioners would surpass incoming revenues.Footnote ⁶⁷ These fiscal pressures have been exacerbated. In 2011, SSO officials claimed the fund was owed nearly 24 billion USD by the government.Footnote ⁶⁸

Iran's pension fund financialization shares characteristics with global trends. In the Chilean model of privatized pension fund associations, the pension system for formal sector workers is also utilized as a method of SOE privatization. In South Korea's national pension scheme, public pensions invest in both public sector bonds and financial sector assets.Footnote ⁶⁹ The Turkish army's pension fund invests in over sixty Turkish firms, and Saudi Arabia's general social insurance fund holds stakes in the country's growing industrial sector.Footnote ⁷⁰ The United States contains the largest low-risk bond-holding pension fund in the world as well as California's public employees’ retirement system, which invests two-thirds of its assets in global equities. As Blackburn writes, “Those who dislike and distrust pension-fund capitalism must reckon with the fact that it is already hugely important and likely to become more so.” Descrambling the private–public mix of retirement funds, if even possible, would “scarcely be supported by those who hold funded pension entitlements.”Footnote ⁷¹

Given these types of institutional investors in wealthier countries, SSO officials defend the presence of pension funds in the market. Due to starkly reduced birth rates, Iran's current “baby boom” generation of working adults will not likely be replaced in full. Pensioners would hardly accept a selloff of SHASTA's investment portfolio to the private sector without major guarantees of future entitlements by the state. Pension financialization in the Islamic Republic has therefore created a sizable interest group for pseudo-privatization—the Iranian middle class and formal labor force. Funneling public sector companies to the SSO and other pension funds is one method of subcontracting the state's direct welfare obligations to the parastatal sector. As with “grey capitalism” more generally, however, this strategy precariously rests on contradictory pressures of generating high profits against maintaining employment and wages in these same companies.