Iran’s score has decreased from last year, driven by lower scores in freedom from corruption, trade freedom, and labor freedom.
Heavy state interference in many aspects of private economic activity has resulted in economic stagnation in Iran’s non-oil sector and a serious lack of overall economic dynamism. A restrictive business and investment environment continues to hamper private-sector development. More than 500 companies remain state-owned, and privatization has been negligible in the past year.
Business licensing and closure are regulated heavily by an intrusive and inefficient bureaucracy. High tariff rates and non-tariff barriers undermine overall economic efficiency. Corruption is rampant, and fair adjudication of property rights cannot be guaranteed. The judicial system is vulnerable to political influence and lacks transparency.
Selected Countries and Ranking
|Free||Mostly Free||Moderately Free|
|1- Hong Kong||9- United States||39- El Salvador|
|2- Singapore||10- Bahrain||43- Israel|
|3- Australia||16- United Kingdom||48- Mexico|
|6- Canada||20- Japan||67- Turkey|
|29- Georgia||89- Lebanon|
|92- Azerbaijan||163- Uzbekistan|
|96- Egypt||171- Iran|
|113- Brazil||177- Cuba|
|123- Pakistan||179- North Korea|
Iran’s economy, once one of the most advanced in the Middle East, has been crippled by the 1979 Islamic revolution, the Iran–Iraq war, economic mismanagement, and corruption. International concern about Iran’s nuclear development and support for terrorism remains high.
Mahmoud Ahmadinejad, reinstalled as president after a June 2009 election that sparked widespread political protests, has led a violent crackdown against opposition forces. His regime, which has greatly expanded government spending, now plans to reduce government subsidies, particularly for food and energy, and replace them with cash payments to low-income Iranians. A gradual decline in oil production combined with lower world oil prices has reduced oil export revenues, which provide about 85 percent of government finance.
Iran’s economy remains burdened by rising inflation, corruption, costly subsidies, and an increasingly bloated and inefficient public sector. Unemployment remains high.
Business formation remains time-consuming, and licensing requirements are burdensome. Private investment and production continue to be hampered by a restrictive and outmoded regulatory environment.
Iran’s weighted average tariff rate was 20.1 percent in 2008. Import bans and restrictions, high tariffs, export licensing requirements, restrictive sanitary and phytosanitary regulations, burdensome customs procedures, state trading, arbitrary changes in tariff and tax schedules, and weak enforcement of intellectual property rights add to the cost of trade. Fifteen points were deducted from Iran’s trade freedom score to account for non-tariff barriers.
Iran has a relatively high income tax rate and a moderate corporate tax rate. The top income tax rate is 35 percent, and the flat corporate tax rate is 25 percent. All property transfers are subject to a standard tax. A value-added tax (VAT), collected intermittently since 2005, was officially re-implemented in 2008. In the most recent year, overall tax revenue as a percentage of GDP was 6.1 percent.
In the most recent year, total government expenditures, including consumption and transfer payments, rose slightly to 28.3 percent of GDP. The fiscal deficit measures 0.7 percent of GDP. Energy is highly subsidized.
Inflation is very high, averaging 14.7 percent between 2007 and 2009. Although the inflation rate decelerated in 2009, it had picked up by the second half of 2010. The government controls the prices of petroleum products, electricity, water, and wheat; provides economic subsidies; and influences prices through regulation of Iran’s many state-owned enterprises. Fifteen points were deducted from Iran’s monetary freedom score to account for measures that distort domestic prices.
Foreign investment is restricted or banned in many industries, including banking, telecommunications, transport, oil, and gas. Foreign investments require approval, and the process is not straightforward.
The method of calculating the maximum share that foreign-owned entities are allowed can be non-transparent. The parliament can veto projects in which foreign investors have a majority stake. Political unrest and uncertainty over international sanctions further deter investment. Most payments, transfers, credit operations, and capital transactions are subject to restrictions or approval requirements.
Only legal permanent residents of Iran may purchase land. Foreign companies may own property only if they are registered both in Iran and in their respective countries and make the purchase using their Iranian business identity.
The government controls Iran’s financial sector. Only six private banks have come into operation since nationalization of all banks following the 1979 revolution, and they operate under strict restrictions regarding de facto interest rates and capital requirements.
Stringent government controls limit access to financing for businesses. State-owned commercial banks and specialized financial institutions account for a majority of banking-sector assets. There have been efforts to privatize some state-owned banks in recent years, but progress has been slow.
The government directs credit allocation, though credit is often supplied by traditional money lenders in the bazaar in support of small cash-based businesses. The non-banking financial sector remains dominated by state-owned companies. Capital markets are not fully developed.
The constitution allows the government to confiscate property acquired either illicitly or in a manner not in conformance with Islamic law. Resorting to the courts is often counterproductive; finding an influential local business partner with substantial political patronage is a more effective way to protect contracts.
Few laws protect intellectual property; computer software piracy is extensive; and infringement of industrial designs, trademarks, and copyrights is widespread.
Freedom From Corruption
Corruption is perceived as pervasive. Iran ranks 168th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009, a steep decline from 2008.
The law provides criminal penalties for official corruption, but it is not implemented effectively, and official corruption is found in all three branches of government. Graft is extensive, and the anti-corruption agency has fewer than 1,000 inspectors to monitor the 2.3 million full-time civil servants and numerous government contractors who control most of Iran’s economy.
Labor regulations are restrictive, and the labor market remains stagnant. The non-salary cost of employing a worker is high, and firing a worker requires approval of the Islamic Labor Council or the Labor Discretionary Board.
Source: The Heritage Foundation