There has been growing evidence that the decline in the productivity of the economy was associated with, if not directly caused by, the entry of Revolutionary Guard businesses and the development of Revolutionary Guard Business Oligarchies (RGBO). In this section we identify the main effects and where possible, specific examples of these effects are given.

The entry of the RG into business activities as a business entity was a new territory for the rank and file of the security and military apparatus. In early 1990, there was a duality of purpose and identity for RG businesses. On the one hand, there was the profound sense of the force seeing itself a natural ally of the poor and those marginalized in the pre-Revolution era, on the other hand there were emerging elements among some of the well-connected commanders who seemed to be aware of the immense opportunities for the RG to use their political and military power to generate income and accumulate wealth. This did not necessarily - at least at the earlier stages - imply personal wealth, though some appear to have benefitted at an individual level.

A number of problems were encountered in the process of establishing new businesses by the RG. Like any new business, access to capital was a problem. While the RG had many assets, most of these had limited use in business applications. In early 1990, the RG and the Basij, the paramilitary organization that was closely linked to the RG, set up two financial entities. These were immediately given state funding to start providing for the needs of future retirees of the two forces. In addition, both of these financial branches were quickly given licence to operate as banks.

One of the above entities that started, Mehr Financial Credit (MFC)^[4], became the main bidder in some of the key illicit transfer of state-owned enterprises to the RG and has acquired more than twelve billion dollars worth of government assets under the ‘Privatization’ programme four years ago. The RGBO later acquired more banks and investment businesses often at knock-down prices. The net outcome of these acquisitions has been a decline in the productivity of companies and firms whose management was forced to adjust to the objectives of the RGBO or leave. In November 2009, the head of Iran’s Privatization Organization, Mr Heydari-Kord Zanganeh, reported that since 2005, the new government has sold more than half of the state-owned firms worth 63 billion dollars. The disinvestment has cut the government's share in the gross domestic product (GDP) from 80 per cent to between 40 and 45 per cent. It was also reported that several state banks have offered a fraction of their stake as part of the program. Iran also plans to transfer its three large insurance companies — Dana, Alborz and Asia — to the private sector^[5]. It is interesting that, in all-important cases, the RGBO have been the buyers of the assets. The most notable example was also the largest in terms of value on the stock market. In one of the most controversial cases of managed-privatization, fifty one per cent of shares of the Telecommunication Company of Iran (TCI) were sold to an Iranian consortium for $8 billion. All companies in the consortium were RGBO-linked^[6].

The RGBO also needed to gain a competitive edge vis-à-vis their private sector competitors who had more experience in running businesses and managing trade links with other countries. Here, the solution was to establish private routes and infrastructures for importing goods without paying their import duties. In a brief period, the RGBO constructed more than 80 unloading docks and a number of private airports which were completely outside the reach of Iran’s Customs and Import Duties Office^[7] .

The effects of this state-approved smuggling were felt mostly by private sector firms, which have experienced a sharp fall in their profit margins and sales. There have also been reports that this trade network has been used by some elements inside the RG for trade in narcotics and alcohol. The most publicized case was the discovery of 29,000 kilograms of pure opium in Tehran Airport in February 2011. Jaam-e- Jam Newspaper, published inside Iran, reported that the financial arrangements for the import was organised through an Iranian bank. In a bold statement, Mr Hossein Abadi, the Head of Iran’s Anti Narcotic Agency, reported that such a discovery has been without precedent in Iran^[8] . The German media reported leaked information about the concerns of the United States and the Azerbaijani anti-narcotic agencies about the possible involvement of the RG in the smuggling and distribution of heroin in Europe and Central Caucasia^[9].

The foreign media’s coverage of these issues has gained new momentum since the discovery of the opium haul in Tehran. Nevertheless, instead of taking a strong stance in tracing the network behind the find and trying to establish the identity of those involved, the poor follow up has only fed the worst interpretations about the identity of those involved. However, it has tarnished the image of the RG which until a few years ago still received credit for the contribution made during the war with Iraq and investment made in reconstruction during in the post-war period despite constant questions about RG involvement in the persecution of the opposition groups.

As it has been the case in other countries, illicit trade has brought with it money laundering, bribery and other rent-seeking activities. International metrics measuring corruption, financial transparency and business efficiency depict a worrying picture of the economy and the business community in Iran. In October 2011, at the IMF’s meeting in Turkey, the U.S. Treasury Secretary expressed his concerns about the extent to which Iran is involved in laundering illegally-obtained money. At the same time, the German media reported that Iran was the second most attractive country for money-laundering activities^[10]. In fact, the extent of the money-laundering activities of Iran have been so widespread and far-reaching that, in the last four years, a number of blue chip international banks have been caught accommodating Iranian money-laundering activities, almost all of which were linked to the RGBO^[11]. Credit Suisse, Lloyds TSB and Barclays volunteered fines in excess of one billion dollars to the U.S. authorities for their involvement in the money-laundering activities of Iran in its foreign trade. Globalisation means that corruption in one country does not stay within the borders of that country and the contagion of the phenomenon spreads quickly in today’s integrated world system.

A close study of the changes in the ranking of Iran in terms of transparency, corruption and banking fraud reveals the extent to which Iran’s economy has been pushed toward illegal and counter-productive methods of business. These have taken the place of productive activities and wealth generation with dire consequences for employment, investment and income.

This Table demonstrates those countries which have had a significant deterioration in their transparency positions. It is believed that corrupt economies gravitate toward each other. In order to seek bribes, a culture of bribery needs to exist on the opposite side to complete the transaction. Indeed, the data for 2008 shows that the countries in which businesses were most willing to pay bribes were Russia, China, Mexico, India and Italy. Iran’s trade with all these countries has been on the rise, with China enjoying the biggest increase. It also follows that corruption needs secrecy. It is easier to avoid transparency and publicity in countries where democratic institutions, especially a free press, are non-existent or under pressure. The relative positions of Iran’s main trade partners in 2010 are provided below.

It should be noted that half of the UAE exports to Iran are re-routed trade from Chinese sources. This raises the share of imports from China to more than 25%. This proportion of imports has been reported to be part of the RG-approved smuggled imports.

A number of observations can be made concerning the rise in corruption in Iran and the change in direction of trade with other countries which themselves have poor scores on the corruption index. First, when the share of trade of China, Russia, Venezuela and India with Iran have been added together, these countries constitute more than 50% of Iran’s foreign trade. It is revealing that the countries which have seen the biggest rise in their trade with Iran, China, Venezuela, Russia and India all have a discouraging index of corruption perception.

Compared with its Arab neighbours in the region, Iran stands out as the most corrupt economy. In 2006, UAE was 31st, Qatar 32nd, Bahrain 36, Oman 39, Kuwait 46, and Egypt and Saudi Arabia 70th in the ranking based on the Corruption Perception Index. This perhaps is most discouraging since it suggests that Iran has become institutionally and culturally immersed in corruption. Businesses there function and survive on that basis. It follows further that in such an environment, the economy gravitates toward quick return / high profit activities, typically illegal, where the windfalls leave the country and seek a safe haven abroad. This dynamic has been common to almost all governments in which business oligarchs have benefited from their connections with the ruling elite.

The alarming growth of corruption in Iran provoked some members of the parliament to draft a bill that eventually passed in early 2007. Drawing on two clauses in the constitution, the bill required the Command of the RG, cabinet ministers, members of the Council of Expediency, the Guardian Council and those connected to the Supreme Leader, as well as the Supreme Leader himself and his family to provide information about their assets and sources of their wealth. Interestingly in 2007, in an abrupt move, the Guardian Council issued a ruling that declared any investigation into the assets and financial connections of all senior members of the regime and their families to be against the religious decree as well as contradicting the spirit of the constitution^[12].

The impact of the official rejection of the investigation into the finances of government officials has been an unprecedented rush into new foreign trade contracts, the development of energy fields, the construction of dams, tunnels and other large projects. This is being undertaken by the RGBO, at times on behalf of the government. The few cases which have leaked into the public domain show that the RGBO have had no intention of doing the work themselves, but after agreeing a pay back, have transferred the contract to third parties. Equally worrying, as well as damaging to private sector, has been the decision of the present government to award contracts to the RGBO without public competitive bidding.

In July 2011, the Managing Director of Iran’s National Oil Company confirmed that the value of contracts awarded directly to the RGBO had reached 25 billion dollars^[13]. It should not surprise us that the biggest growth in corrupt behaviour seems to have occurred in the period 2006-2010. In April 2010, the true extent of the financial corruption associated with the entry of the RGBO into banking caused shockwaves in the banking system with a number of banks facing an alarming shortage of capital. This was the result of the fact that Oligarchs had been given billions of dollars in loans and credits but were refusing to repay their debt. Mr Torabi, a member of the investigation panel examining the troubled Bank-e-Saderat, confirmed that some of the Boards of so-called private banks have government-appointed directors who have authorised billions of dollars in loans for themselves without any collateral. These funds have now been transferred abroad, leaving the banks cash-poor and seriously exposed to bankruptcy^[14].

The resources taken out of the economy in such a fraudulent manner have deprived Iranians of credit they could have used to set up new businesses, and of investment that existing private sector firms could have used to expand their activities and catch up with their foreign competitors thus creating new jobs in the economy. The business environment has become most difficult for private firms which are not connected to the corruption network. The table below shows a host of international indices measuring the quality of governance in the economy.

A quick glance at the data in Table Four sheds light on the special features of economic governance in Iran. First, when compared with all the countries in the Table, Iran has the most difficult system for doing business. As for access to credit for businesses, in spite of a boom in oil and gas revenues, it is easier and cheaper to get credit in India, China and Turkey. As for protecting investors in terms of property rights, information transparency about companies and disputes, Iranian investor receive the lowest level of support. Lastly, for ease of paying business tax and participating in foreign trade, Iran is the second worst.

The growing rent-seeking activities in the economy have had profound implications for the economy in general and for the youths of the country in particular. In the last twenty five years, the economy has shown a disturbing underperformance associated with the displacement of competitive private sector firms and fairly competent state-owned enterprises with foundation-owned companies which in one form or another have had links with the Revolutionary Guards and other security entities. These firms have tended to be more interested and involved in distributive activities and import of foreign goods than investing in production and manufacturing where the level of expertise needed for successful growth is much higher. At macroeconomic level this has resulted in underinvestment in productive activities where growth and expansion lead to the creation of new jobs.  It is in fact the expansion and growth phase of production that provides the greatest employment opportunity for the young people out of school or university education. This is because the firm’s management is already in place and the technical know-how has acquired the necessary experience to run the production line.  The new jobs created result from the organic growth of the firm and often if not almost in all cases are the most suited for young employees when on-job training and induction can be provided during the productive activities of the firm. This type of employment tends to be more stable than those in the distributive and import sectors where hiring and firing is easier for the firms. Also since the level of skills, acquired prior or post hiring is much lower in quality, wages paid to young people tend to be lower and their progress more restricted.

In almost all rent-seeking activities, transparency is also very poor and those who progress in the hierarchy of the firm tend to be individuals with better political connections. Again these conditions created an insider-outsider situation under which those without connections have little hope of finding jobs.

The worrying disappearance of manufacturing jobs as well as very low creation of new jobs for which the youths have to compete with the experienced unemployed draws truly a bleak picture of what the future holds for the talented and often educated youths of the country. At this point, the youth of Iran should be laying the foundation for the future of the economy by being employed in those sectors of the economy which can sustain long term growth once the oil production declines to such a level that export earning become negligible or certainly insufficient to pay for the huge import bill the economy has become dependent on for the last forty years or so.

Without creating economically viable jobs that can develop and use the productive capacity of the human capital of the country, Iranian economy is bound to fall further behind compared with both oil-rich economies of OPEC and those like Turkey and South Korea who thirty years ago had similar economic performance and income to those of Iran. This decline in the performance of the economy can further exacerbate the growing unemployment among the under 35 years old and the rapid decline in their share of the national income. This is both socially unfair and economically unsustainable.