Celebrating the first anniversary of his May 1997 upset election victory, Iran's President Mohammad Khatami proudly told a throng of his young supporters, "Today your Islamic Republic and your country, enjoy more prestige and respect at the international level than ever before...without extending its hands to anyone out of desperation, without negotiating away one iota of its honor and independence."1 He further noted that his "election was a victory for the rule of law, freedom of expression, and political liberties in Iranian society."2 His ardent followers, in tum, treated the occasion as the first annual celebration of Iran's "second revolution," their candidate's rise to power.
Mr. Khatami owed his presidency to a fortuitous combination of circumstances which were not altogether of his own making or his supporters' design. First, millions of voters who took part in the presidential elections were longing for a change - any change. There were (1) post-Revolution youth, who sought relief from unbearable sociopolitical restrictions on their life style, political freedom and creative expression; (2) women, who suffered from extensive gender discrimination in marriage, employment and mobility; (3) the urban poor, who witnessed a dwindling standard of living despite the revolution's promises of greater prosperity and welfare; and (4) secular intellectual and middle-class professionals, who found him a less objectionable choice than the other candidates. Mr. Khatami's second stroke of fortune was a mistake by the incumbent leadership, which, sure of its candidate's victory, allowed a fair and free election to take place and was unable to change ballot boxes as was widely expected. Third, when the modern right (Islamist moderates) and the old left (Islamist interventionists) could not come up with their own presidential nominee, Mr. Khatami was prevailed upon to become a compromise candidate to oppose the leading contender, who was disliked by both factions. And, finally, Mr. Khatami won the race on the strength of his attractive three-pronged ticket of restoring the rule of law at home, pursuing detente with the outside world, and strengthening the fragile domestic economy through structural reforms.
Challenged by his die-hard conservative opponents every step of the way toward promised reforms, Mr. Khatami's first year in office produced some successes but also many setbacks in all three areas of his campaign platform. The tug-of-war between his restless supporters and the entrenched right wingers resulted in a series of crises that were frequently accentuated by heightened social tensions and political showdowns and occasionally by ugly violence. While he deftly tried to tum each passing setback for his plans to his administration's ultimate advantage, the political struggle lost none of its fury, bitterness or variety. This paper reviews Mr. Khatami's first year performance in the three areas of his campaign platform.
DOMESTIC SOCIOPOLITICAL AGENDA
During the campaign and on numerous subsequent occasions, Mr. Khatami emphasized the country's need for national unity, respect for the law and civil rights, the creation of a vibrant civil society, and the eradication of poverty. Translated into action, his domestic plank meant: (a) reconciling the all-embracing concept of the velayat-e faqih (vice-regency of an Islamic theologian) with modern-day exigencies of popular democratic participation; (b) easing the stifling restrictions on political activity as well as social, cultural and artistic expression; (c) allowing the formation of political parties and non-governmental associations; and (d) putting an end to the extra-legal powers of certain rogue elements who took the law into their hands in the name of enforcing Islamic moral codes. As could be expected under the circumstances, the new president's audacious (and in part irreconcilable) domestic sociopolitical agenda had little chance of being fully realized within a short period.
At the outset, the new president had no difficulty in obtaining a vote of confidence from the conservative fifth Majlis for his technocratic and nondescript cabinet, despite the inclusion of two "liberal-minded" and controversial nominees for the crucial ministries of Interior (dealing with law and order, political parties and national elections) and Islamic Guidance (in charge of the press and publications). But, after a very short honeymoon, challenges to his reform campaign began to mount. Marking his first 100 days in office, the president tried to warn his opponents and comfort his supporters by noting again that establishing the rule of law remained his "utmost duty and his pact with God." To bolster his position, in December 1997 he appointed a five member body to ensure proper implementation of the Constitution and protection of the people's rights. Achieving this goal, however, required a right path to be found in an uncharted ideological minefield, between Iran's closed-circuit religious oligarchy and Western participatory democracy.
Mr. Khatami began this daunting task by first expressing his unwavering fealty to the concept of the velayat-e faqih as the main pillar and axis of the regime. Rebutting some Shia theologians who questioned such an interpretation of Islamic jurisprudence, he steadfastly maintained that this concept was no longer a mere religious thesis subject to debate and scrutiny: it was already embedded in Iran's Constitution and was part of the country's political infrastructure. His mantra was thus to guarantee personal freedoms, as he said, "within the rule of law in an Islamic framework compatible with the modern age." Different voices and free expression would be allowed as long as they remained "within the law and (were) directed toward strengthening the Islamic Republic." Many among the regime's secular opposition abroad and many more among his supporters at home found this tortured formulation of freedom somewhat hollow, if not indeed a negation of the essence of Western democracy.
Within this narrow confine, however, the new president pushed ahead vigorously. Some 200 new charters were approved by the Ministry of Culture and Islamic Guidance for newspapers and periodicals, raising daily circulation by one third. Permits for peaceful demonstrations were more frequently and more liberally granted by the Interior Ministry. Banned Hollywood and Iranian films were allowed to be shown in a handful of cinemas. More lively shows were featured in exclusive cafes. State television and radio stations reduced their religious sermons in favor of more attractive programs. Checkpoints for identifying married and unmarried couples were somewhat reduced. Some social restrictions on youth activities were slightly relaxed.
In the political field, the first "party" - Islamic Iran Solidarity - was given a permit in January 1998. Its organizers called themselves friends and admirers of the president, with the goal of political reforms leading toward freedom and a civil society. The party, however, remained mostly on paper. The Interior Ministry subsequently approved the application of other groups to establish a party. Of these, only Kargozaran-e Sazandegi (Agents of Nation-building), composed of Rafsanjani technocrats and headed by the embattled Mayor Karbaschi of Tehran, could claim to be a political party in a Western sense. The others (e.g., the Society of Urumieh Zoroastrians, the Association of Graduates of Japanese Universities, Borujen's Islamic Cultural Group, and Lawyers for Human Rights) were at best no more than provincial or professional clubs representing some new fledgling civil groups. Curiously enough, former Prime Minister Bazargan's old party, the Iran Liberation Movement, now headed by Ibrahim Yazdi, failed to receive approval despite many tries.
In the law-enforcement area, the president was credited with the replacement in early September 1997 of the Revolutionary Guards commander, Mohsen Rezai, who had been suspected of intervening in the Majlis elections of 1996 and of publicly siding with Mr. Khatami's presidential rival in May 1997. The Basij (local militia) power to enforce Islamic "duties" of "promoting good and enjoining evil" on ordinary citizens was also officially relegated to the regular police and law-enforcement agencies. As a gesture to women constituents, a woman was appointed vice president and the head of the Environmental Protection Agency, a cabinet-level rank. Several women lawyers were appointed as assistant judges and prosecutors, and one was even named as an assistant judge in the Supreme Court.
Thanks to the new political freedoms, the level of burgeoning political discourse on subjects never before believed to be possible grew vastly higher, compared not only with the rest of the Middle East, but also with Iran's own last 50 years. Various "Islamic" student groups dared to question the sanctity, infallibility and life-tenure of the supreme leader. They called for changes in the composition and qualifications of members of the Experts Assembly (who appoint and remove the rahbar, commander-in-chief). They asked for nullifying the Guardians Council's vetting power over legislation and election candidates, and rejected the Expediency Council's ad-hoc structure at the rahbar's pleasure. They called for the dissolution of the "puppet" Majlis (after it impeached the interior minister) and demanded the resignation of the judiciary chief (after the conviction of Tehran's mayor). Elsewhere in the mushrooming and censor-defying newspapers and periodicals, a host of editors, columnists, writers and ordinary citizens took advantage of newly found freedoms to speak out publicly on matters of concern to them: nepotism, corruption, injustice, unemployment, housing shortage, marriage hurdles, and stifling restrictions on recreation and entertainment.
Beyond these noteworthy developments, the new president's efforts toward a more fundamental restructuring of Iranian government and politics were either resisted or reversed. Under pressure from hard-liners who found the idea of civil society a Western (and, by implication, anti-Islamic) innovation, Mr. Khatami gradually changed his tune and began to talk about Islamic civil society.3 Right-wing clerics took advantage of the nuance and equated such a society with prophet Mohammad's seventh century realm (madinat-o-nabi) and thus in line with their own comprehensive Islamization drive.4 The law of unintended consequences could not have produced a more vivid application!
Furthermore, the supreme leader, while publicly praising and supporting Mr. Khatami's intentions and policies, declined to endorse him strongly in critical cases. The new president, for example, unlike ex president Rafsanjani (and other heads of the government's legislative and judicial branches), was not granted the customary title of Tehran's "substitute Friday imam" on behalf of the supreme leader (the principal, ex-officio imam). He was thus never given the customary forum for delivering weekly political/religious sermons. Likewise, Mr. Abdallah Noori, his first minister of interior, was denied the command authority over law enforcement agencies, a power which all his predecessors enjoyed and which was routinely signed over to the interior minister by the rahbar.
Clearly upset by the outpouring of passionate support for the president among most citizens and shaken by an ill concealed fear that the country was fast drifting away from revolutionary commitments and Islamic values, fundamentalist forces openly portrayed the course adopted by Mr. Khatami as a threat to Iran's national security.5 The new commander of the Revolutionary Corps (Pasdaran), appointed by the rahbar, and allegedly reflecting the supreme leader's views, was reported to have said in a closed meeting of his officers that "the revolution was threatened; some deviates in the clerical guise are becoming lawbreakers; liberals are dominating the universities; students dare condemn authorities. The Corps' duty is thus to uproot the counterrevolution by cutting the dissidents throats and removing their tongues."6 Encouraged by such an "antiliberal" offensive and in the prevailing fluid sociopolitical atmosphere, theocratic extremists and their religious goon squads lost no opportunity to physically attack Khatami supporters and undo their deeds. The president, in turn, appeared powerless or reluctant to act. Various militant hardliners, members of Ansare-e Hezbollah and other roguish elements rampaged through the Office of Sustaining Unity (the successor to student groups which occupied the U.S. embassy in 1979) injuring several members. Street gangs, protected by a senior member of the Guardians Council, disrupted lectures by Abdolkarim Soroush, a progressive Islamic academic who advocates the separation of mosque and state. Daily crackdowns on the youth for "moral offenses" such as violations of Islamic dress code and conduct resurfaced. Anti-vice squads of both police and vigilantes (the Basijis) proceeded as before to bring young offenders before cruising judges, who imposed on-the-spot sentences.
Secret trials and imprisonment of dissidents, including clerical elements opposed to the regime, were reported in local and foreign newspapers. The secretary general of the Islamic Human Rights Commission (a Tehran-based creation of the Islamic Republic) told a local daily that the police, the security agencies, the judiciary and the armed forces all have their own (illegal) special detention centers where complaints about torture, forced confessions and mistreatment of detainees are regularly reported to the Commission.7 Bahai officials in the United States report no change in the Islamic Republic's hostile attitude toward their 350,000 coreligionists residing in Iran, who since 1979 have been deprived of government employment, pensions, inheritance and university education. Unperturbed by all this, a government spokesman called the latest report on Iran's human rights conditions by U.N. rapporteur Maurice Copithorne "malicious." The president himself refused to receive the U.N. high commissioner on human rights in Tehran when she indicated her intention to discuss alleged violations of human rights in Iran.8
Other setbacks on the domestic scene included the impeachment and ouster by the Majlis of Interior Minister Abdollah Noori on charges of jeopardizing national security (e.g., allowing dissident student demonstrations); the arrest and conviction of the Tehran mayor on charges of corruption and misuse of public funds (e.g., contributions to Mr. Khatami's election); the denunciation and house arrest of Ayatollah Hossein Ali Montazeri, the one-time heir to Ayatollah Khomeini, on charges of insulting the leadership (e.g., questioning the qualifications and authority of the supreme leader); the arrest of Ibrahim Yazdi, the heir to Prime Minister Bazargan's Iran Liberation Movement, on charges of supporting Ayatollah Montazeri's right to speak out; and the Council of Guardians' veto of the candidacy of left-leaning candidates to fill two vacant seats in Majlis by-elections - reflecting hard-liners' renewed resolve to stop pro-Khatami, "pro-democracy" movements.9 Taking direct aim at the president's reform agenda and against the government's strong objections, the Majlis' conservative majority also passed a bill prohibiting the publication of photographs of unveiled women in papers and magazines. Another measure would require the segregation of hospitals and medical facilities by sex so that patients would be examined only by same-sex doctors and health aides.
In sum, Mr. Khatami's first campaign promise - to establish the rule of law - was only partially fulfilled. Guaranteed individual rights, even in the context of the regime's own flawed Constitution, were hardly honored any better than before. After some social and cultural openings, a crackdown on the independent media was resumed by the hardline judiciary under the banner of protecting Islam and the revolution. Censorship and closure of the press and publications were reinforced. Arbitrary arrest, detention and sentencing of writers and editors under an anachronistic seventh century judicial system (where the duties of the prosecutor, judge and jury are all vested in one man) were routinely followed. Cruel and unusual punishments (stoning to death, lashing and torture) were meted out. The watchdog commission to endorse the Constitution showed no sign of life. No new legislation to safeguard personal liberties was enacted.
A visible sign of progress was the number of new voices daring to express controversial views, albeit still without any guarantee of repeating the performance or escaping severe penalties. The only hope for the future, however, was that the genie had escaped from the bottle and could not easily be pushed back in.
RELATIONS WITH THE OUTSIDE WORLD
In his campaign speeches, Mr. Khatami alluded to the necessity of defusing tension with the rest of the world through a "dialogue between civilizations," and his own resolve to maintain normal relations with all countries on the basis of "dignity, rationality and national interests." He started his presidency in an external political environment clouded by a negative international image, stiffened U.S. sanctions, wobbly relations with the European Union (EU), lingering suspicion within the Arab world about Tehran's intentions, no peace agreement with Iraq, occasional rifts with both Turkey and Pakistan, and bad blood with Afghanistan's Taliban.
The successful hosting of the eighth summit of the Organization of the Islamic Conference in December 1997, where friends and foes enthusiastically participated at the highest levels and elected Mr. Khatami the leader of the OIC for the next three years, was the new president's first lucky break. The Arab world's frustration with the stalled Middle East peace process and the Clinton administration's erratic position vis-a-vis the intransigent Likud government in Israel played into Mr. Khatami's hands and his conciliatory attitude toward Iran's Muslim neighbors.
A tangible success was achieved in the rapprochement with the Saudi kingdom after years of open hostility. Frayed relations moved toward normalcy following Mr. Khatami's election, but especially following the extremely friendly visit to Tehran by Crown Prince Abdullah at the OIC summit and a subsequent visit to Mecca in March 1998 by ex-president Rafsanjani and his family. In addition to closer collaboration within OPEC, the two countries in late May 1998 signed a wide ranging agreement for improved trade, technological cooperation, exchange of scholars and sports competition. Regular flights between Tehran and Jeddah were resumed after nearly two decades. Later in the year the Saudis formally absolved Tehran of any involvement in the 1996 bomb attack on Al-Khobar Towers, in which Iran was speculatively implicated in the American and Israeli press.10 And in contrast to the antagonistic confrontations of previous years with Saudi authorities, the 1998 pilgrimage to Mecca by the Iranian faithful passed without any serious incidents.
Relations with other Arab countries around the Persian Gulf also underwent concrete changes for the better. In early August 1997 the secretary-general of the Gulf Cooperation Council told a London newspaper that Iran did not pose any threat to its Arab neighbors and that its improved relationship with the rest of the world was a plus for regional stability. With Saudi blessing, Bahrain and Iran announced in November 1997 their intention to exchange ambassadors after 17 months of tension. Close links with Oman, Qatar and Syria were attentively maintained. Following a path-breaking visit to the UAE by Foreign Minister Kamal Kharrazi in May 1998, the two sides agreed to peacefully negotiate their differences over the three Persian Gulf islands, although the issue remained unresolved. Even with Iran's archenemy Iraq, a move got underway to resolve festering issues. Mr. Khatami sent a congratulatory message to Iraqi president Saddam Hussein late in December 1997, marking the Muslim holy month of Ramadan, the first such message in 17 years. In early April 1998 the two governments agreed to begin a peaceful process of repatriating all remaining POWs. Later in August 1998 Iraq opened its borders to Iranian pilgrims intending to visit the Shiite holy cities of Najaf and Karbala.
Relations with Turkey, which significantly flourished during Necmettin Erbakan's "Islamic" administration cooled a bit after the latter's ouster. Diplomatic contacts seesawed on both specific bi lateral issues and on Ankara's friendly relations with Israel. Expedient approaches were made toward Armenia and Greece, ostensibly to counter an Azerbaijan-Turkey-Israel coalition. Mutual security and economic interests, however, kept the relationship intact, and several bilateral trade and border agreements were successfully concluded. Ties with Pakistan followed a tortuous course. While Rawilpindi continued to carry the official diplomatic responsibility of protecting Iranian interests in the United States, coop rated with Iran in its fight against drug traffickers, and showed interest in buying Iranian gas, the two countries had recurring differences over the fate of the Afghan government and their rival interests in the region. Relations with Egypt, hostile and cold since Anwar Sadat's warm reception given to the shah in 1979, also underwent a dramatic change, at least in tone. Trade delegations from both countries visited each other's capital and some joint ventures were initiated. The one dark spot in the Middle East area was the badly deteriorating relationship with the Taliban's Afghanistan, where Tehran allegedly supported the old Kabul government against the insurrectionists through military and strategic assistance.
Iranian-Russian relations followed a relatively smooth course despite strong U.S. opposition, Tehran's closer relations with CIS members trying to shed the Russian yoke, and the festering dispute between Azerbaijan and Armenia in which Tehran and Moscow pursued separate agendas. Both countries sought a coordinated stand regarding the legal status of the Caspian Sea, as well as continued economic and technical cooperation on matters pertaining to regional security. Russia's giant monopoly Gazprom showed increasing interest in Iran's vast offshore gas reserves in the Persian Gulf. In a rebuff to Washington, Russia's Ministry of Atomic Energy announced in March 1998 that it planned to sell several new nuclear reactors to Iran, after the United States had obtained a pledge from Ukraine not to sell turbines for the 1000-megawatt power plant in Bushehr.
Moscow also reaffirmed its intention to speed up construction of a nuclear reactor in Bushehr and to increase its investment in the offshore South Pars gas field.11 Relations with China continued friendly, and Chinese companies cooperated with Iran in various projects including Tehran's subway system, cement plants, hydroelectric power stations, metal fabrication and joint scientific and technical research. Just before President Jiang Zemin went to Washington, China reportedly told the United States that its nuclear cooperation arrangement with Iran had been halted and cruise missile sales would be stopped. But Western doubts about this pledge continued.
Diplomatic ties with the EU began to warm up. U.K. Foreign Secretary Robin Cook, assuming the group's presidency, suggested that attempts to isolate Iran would be "counterproductive"12 now that Iran has a new and moderate government. A communique issued by the Group of Eight foreign ministers on May 9, 1998, welcomed "encouraging political developments in Iran," citing Iran's ratification of the Chemical Weapons Convention and its stated commitment to domestic liberalization. After lengthy negotiations, a compromise was reached under which all EU ambassadors returned to Tehran six months after they were recalled following a German court ruling that implicated senior Iranian leaders in the 1992 assassination of Kurdish dissidents in Berlin. The agreement was hailed as a diplomatic victory for Tehran. In February 1998 the EU lifted its year long ban on ministerial contacts with Tehran and called for a new "constructive" dialogue, replacing the old "critical" one. The removal of this obstacle opened the way for visits to Tehran by the Italian prime minister, a former French president, and a host of other dignitaries from Italy, France, Belgium, Holland, Austria and Great Britain - most of them for the first time since the revolution. Restoring normal relations with London at the ambassadorial level, long hampered by the Salman Rushdie affair, was assiduously pursued (and later achieved).
The Khatami administration's visibly friendlier links with the rest of the world were, however, somewhat overshadowed by scant tangible improvements in relations with Washington, despite the White House's apparent intention to move in that direction. By the time Mr. Khatami took the helm, there were palpably significant interests within policy-making circles in both Tehran and Washington in moving forward toward better relations. In the course of the Islamic Conference meeting, President Khatami (reportedly responding to Washington's earlier behind-the-scenes overtures) departed from the dominant 18-year official line by calling for "thoughtful dialogue" with "the great people and nation of America" and a "detente in diplomatic policy."13 The call for a dialogue was immediately welcomed by the United States.14 Shortly after the Islamic Conference, in a 45- minute CNN interview broadcast on January 8, 1998, President Khatami referred to America as "a great civilization." While he saw no "need" for a formal government-to-government dialogue or political ties at the time, he called for people-to-people exchanges between professors, writers, scholars, artists, journalists and tourists as a way to "crack the bulky wall of mistrust" between the two governments.
Washington chose the State Department spokesman to deliver the administration's immediate public reaction to Mr. Khatami's bold initiative. He said President Clinton "appreciated the spirit" of the interview and agreed with President Khatami that "relations between nations must be based on mutual respect and dignity." However, he added that the administration still believed the best way to address the estranged governments' differences would be to engage in a direct government-togovernment dialogue. The spokesman further reiterated that in a formal discussion Washington would raise the issues of Iranian support for terrorism, Tehran's opposition to the Middle East peace process, and its pursuit of weapons of mass destruction.15
Not surprisingly, Iran's supreme leader, Ayatollah Khamenei, who had initially endorsed Mr. Khatami's discourse as "good, comprehensive and to the point," threw cold water on the prospect of friendlier relations with Washington, calling the United States "the enemy of the Islamic Republic" and describing any negotiations and dialogue with America as harmful to Iran's interests. While the Iranian president had expressed regret over the 1979 hostage crisis, Mr. Khamenei called the seizure of the American embassy in Tehran "a way to punish America." Mr. Khamenei further disregarded customary diplomatic courtesies when, congratulating Iran's soccer team after its victory in the U.S. Iran match in the World Cup, he noted that "the arrogant enemy once again suffered the bitter taste of defeat."16
Reactions by other high Iranian officials to Washington's backhanded response were also guarded, if not plainly negative. Mr. Rafsanjani, who followed a low-key and moderate stand toward Washington while president, took a strident position, accusing the Clinton administration of "lack of sincerity." Majlis Speaker Nateq Noori said the lesson we all learned from the past is that "the United States is not trustworthy" and that Washington's grudge against the Islamic Republic is reflected in its use of "psychological warfare to sow discord in our society." "America," he said, "is our enemy and will not retreat even one step from its stance unless we abandon our positions."17
Evidently pressured by European allies and a growing domestic lobby in favor of a more positive response to President Khatami's offer of people-to people exchange, Washington gradually adopted a more conciliatory tone. In Senate testimony on May 14, 1998, Assistant Secretary of State for Near Eastern Affairs Martin Indyk, the architect of the "dual containment" policy, cited a number of actions taken by the Khatami administration that justified a review of the U.S. position toward Tehran. Later on, speaking before the Asia Society in New York on June 17, 1998, Secretary Albright urged Washington and Tehran to draw up a "road map" leading to normal relations. She said Washington was "ready to explore further ways to build mutual confidence" and urged Tehran to "consider parallel steps." However, she demanded progress on human rights, a turning away from terrorism, and abandonment of the search for weapons of mass destruction. The following day, President Clinton declared: "We want a genuine reconciliation with Iran based on mutuality and reciprocity." He then immediately cited the decade-old conditions: Iran would have to move away from supporting terrorism, distributing dangerous weapons, and opposing the Middle East peace process.18
After an eerie silence of some weeks, Iran's supreme leader responded to Washington's latest demarche by calling it a "political gimmick" and a "hypocritical play."19 Foreign Minister Kharrazi echoed his sentiment, stating that "America's tone has improved, but its policies must change to show sincerity." Removal of U.S. sanctions, he said, is a prerequisite for improved relations. As might be expected, Iran's state-run radio also dismissed Washington's goodwill proposal as inadequate and demanded that the United States "renounce violence against Iran" by ending its support of the Iraq based opposition guerrilla group (the Mojahedeen-e Khalq), freeing frozen Iranian assets, and "apologizing" to the Iranian nation for its wrong policies over the past 50 years.
Judged by the totality of these developments, Mr. Khatami's second campaign promise was largely carried out in a realistic and pragmatic fashion. Relations with the Arab states around the Persian Gulf have warmed up considerably. Reconciliation with the EU was methodically and successfully pursued. New understandings with Russia, China and the CJS were reached, although not always without a hitch.
With regard to the United States, the policy had a mixed outcome. The U.S. State Department, in October 1997, declared the Baghdad-based Mojahedeen e Khalq guerrilla group "a terrorist organization," a decision which was generally interpreted as a gesture of goodwill to Tehran. The waiver of sanctions against European companies investing in Iran's energy sector, the exchange of athletes and academics between the two countries, and reduced restrictions on travel by Iranian officials in the United States were all symbolic of less enmity and more realism. President Clinton's several friendly messages to Iran also served as encouraging signs.
The setbacks were equally noteworthy. In the U.S. State Department's annual report on international terrorism, released in April 1998, Iran still remained "the most active state sponsor of terrorism" - an action which was interpreted in Iran as stabbing Khatami "with a smile." The U.S. Congress in May 1998 overwhelmingly passed a bill imposing new sanctions on Russian companies that export missile technology and equipment to Iran. Washington reportedly obtained a pledge from China in early 1998 to halt assistance to Iran's nuclear programs, prompting Tehran to shift efforts elsewhere, principally to Moscow. Under strong American pressure and the promise of financial aid to Russia's strapped space program, the Russians took a number of steps, including a new directive by President Yeltsin, to tighten controls on the export of nuclear and missile technology to Iran. On July 15, 1998, the Clinton administration announced the imposition of trade sanctions on nine Russian companies that allegedly had helped Iran with its missile program.20
The net result was probably still positive. Yet opposition by powerful groups in both Washington and Tehran to a serious rapprochement may delay warmer ties between the two countries for some time.
DEALING WITH THE ECONOMY
When the new president took office in August 1997, Iran's economy was in fair shape. It enjoyed a rather healthy surplus in external balance and had more than $10 billion in foreign-exchange reserves. His planners projected a real GDP growth rate of 5 percent and an inflation rate in the lower teens, down from 28 percent the previous year. The budget was officially balanced. Unemployment was claimed to have declined to the lowest level since the cease-fire with Iraq in 1989. The outlines of the on-going Five-Year Plan (1995- 2000), which he was bound by law to follow, called for liberalizing trade, privatizing money-losing state enterprises, unifying the multiple exchange rates, expanding non-oil exports, and reforming the bloated and inefficient bureaucracy.
The president, caught between reformist technocrats pushing for rapid growth and Khamenei populists championing continued welfare subsidies, promised to fuse development with social justice in order to satisfy both groups. The fiscal platform later announced by his finance minister promised to balance the budget through the reduction or containment of public expenditure (e.g., pruning of current outlays, privatization of state entities, and strict supervision of new project investments) and enhancement of government income (e.g., imposition of new taxes, reduction of state subsidies, and more effective collection of taxes and debts owed to the treasury). On monetary and exchange policy, the new administration promised better control of the money supply, reduction in the public sector's share of aggregate credit, restructuring of banking activities toward greater independence and initiative, and a determination of the exchange rate consistent with targeted economic growth and increased hard-currency reserves.
Promising to "combine fast growth with social justice without imposing hardship on the working population," the president appeared to believe that all economic problems could be solved by good intentions and a bully pulpit. Furthermore, he seemed unaware of the handicaps he faced in this intricate game. The first hurdle involved substantial confusion in his own inner circle regarding the right strategy. He was advised by his main political aides that without prior political reforms no significant economic restructuring could be achieved, and that successful liberalization of the political regime would by itself ensure economic recovery. In their view, there was initially a need to mobilize public support and encourage popular participation before any serious attempt could be made to jump-start the economy. He was also caught in a battle outside the government between his close left-wing supporters who considered political reforms superior to economic preoccupation, and the right wing opponents, who found the reverse sequence the right path. Mehdi Karrubi, the left-leaning ex-speaker of the Majlis, forcefully claimed that the revolutionary slogans of "independence, freedom and Islamic Republic," clearly placed political issues ahead of all others. His archrival, Ayatollah Yazdi, the chief justice and a fundamentalist cleric, on the other hand, argued that, given Iran's dire economic circumstances, political freedom and freedom of expression should receive no more than fourth or fifth priority.21
His second handicap was certain inbred ideological differences among his top economic aides regarding the right prescriptions for the country's economic malady. Control freaks recruited from former Prime Minister Mussavi's wartime cabinet saw the economy's salvation in more state intervention, regulation and management. The IMF-World Bank disciples inherited from President Rafsanjani's team argued for trade liberalization, price deregulation and further market reforms. The result was a near-total policy paralysis that lasted for almost the entire year.
Third, a number of exogenous forces helped undermine his ability to follow even the half-way course that he and his economic team had charted. First, a precipitous fall in crude-oil prices, as in the mid-1980s, played havoc with the domestic economy. The projected average oil price for the coming fiscal year budget (based on previous year's realized amount) had to be reduced twice, from $17.5 a barrel to $16, and then to $12. The actual price received by the treasury during the year was at times even lower, reportedly even below $10. The short-fall in oil revenue for the year was estimated to be at least 40 percent, or $6 billion. Non-oil exports were also hurt by economic recession as well as the EU's untimely decision in September 1997 to impose a three-month ban on Iran's pistachio exports on health grounds. Turmoil in Southeast Asia and elsewhere contributed to a decline in non-oil exports and foreign-exchange earnings.
Hamstrung by these internal and external forces, Mr. Khatami's sole major economic bill to the Majlis during his first eight months in office was the 1998- 99 budget. In the bill presented to the Majlis in November 1997, the transparency promised by the chief executive was still missing. Revenues were, as always, overestimated; sources of some income still unclear; and tax exemptions, if anything, more numerous. Continued interference with the central bank's operations was also more onerous. Expenditures were, as usual, underestimated; subsidies remained mostly intact or were raised. The long expected safety net for the less well-off was nowhere in sight. The underlying budget shortfall was to be made up by unspecified further "cost cutting."
By the spring of 1998, economic troubles reached a critical mass. In a televised statement on March 15, 1998, the president called Iran's economy "sick, in production, distribution and regulation."22 Economic ills were attributed to the "poor structure," which was in tum blamed on a bloated state sector and undue dependence on oil revenues. Problems associated with this structure were said to be "high inflation, high unemployment, low productivity, declining living standards, and the gap between the rich and the poor." While he promised to present a new economic game plan soon, it took another four months to have a 14-page blueprint approved by the rah bar and announced to the public a day before the start of his second year.23
A review of the president's first-year economic report card shows a mixed picture. On the plus side, Iran's net external obligations were regularly and faithfully fulfilled. State and private short-term export credits were again offered to Iranian banks by Switzerland, Italy, Australia, New Zealand, Canada, France, the UK, Germany and Belgium, as well as Islamic and Persian Gulf development banks. The most noteworthy event was Washington's decision to allow European companies to invest in Iran's oil and gas sector without fear of U.S. retaliation. After a year of hesitation and the expiration of two unofficial deadlines, the Clinton administration, on May 18, 1998, issued the so-called "9-c" waiver, exempting Total of France, Gazprom of Russia, and Petronas of Malaysia from all sanctions under the 1996 Iran-Libya Sanctions Act, and agreed to automatically issue the same waivers for future investments by European firms in Iran as long as Europe exercises an expanded system of controls on the transfer of sensitive technology to Iran. In the legislative area, the Majlis approved in November 1997 legislation permitting foreign companies to open local branch offices in Iran, which had been banned after the 1979 revolution. Foreign banks were allowed, as of March 1998, to open branches in the free-trade zones with up to 49 percent share in joint ventures with the government.
In the energy sector, a three-way agreement with Turkmenistan and Turkey to build a 3,200 km pipeline to carry 30 billion cubic meters of natural gas a year via Iran was given to the Dutch/Shell group for a feasibility study. A bilateral deal to import 4 billion cubic meters of Turkmen gas for domestic consumption via a 200-km pipeline became effective on December 29, 1998. Oil swap deals with Azerbaijan and Kazakhstan were carried out, albeit with recurrent interruptions. And renewed interest was shown by French, Russian, Italian, British and Norwegian oil companies in developing Iran's oil and gas reserves. A string of some 43 exploration and development energy projects, both offshore and onshore, and in both the Persian Gulf and the Caspian Sea, was offered on a buy-back basis to foreign investors in August 1998. The ambitious $8 billion offer by the National Iranian Oil Company was the largest such initiative since 1979.
On the minus side, overall economic conditions deteriorated during the year, and none of the economic reforms promised by the administration was initiated or seriously entertained. Real GDP growth declined to about 2 percent (against a planned target of 5 percent). Consumer-price inflation officially exceeded 20 percent (against a 12-percent planned goal) with private estimates at least a third more. Unemployment, officially put at 9 percent by the Plan Organization, was publicly questioned by the minister of labor and the House of Labor (workers' league) as unrealistic and grossly underestimated. The current account balance was down to $1.8 billion from $5.2 billion a year earlier. Oil production had to be cut by some 300,000 barrels a day to comply with OPEC's decision. Merchandise imports were further compressed due to the dearth of foreign exchange, reducing output in many industries dependent on foreign inputs. Non-oil exports reached the lowest level in four years. Private-sector investments declined, particularly in heavy construction. The value of the Iranian rial in the free market fell to as low as 6,300 rials per one U.S. dollar, the lowest for the year,24 and nearly a record low since 1979. Flight of capital for investment to Dubai and elsewhere continued. By allowing non-oil exporters to sell their exchange earnings through the Tehran Stock Exchange at a much more depreciated rate, the official "export rate" of IR 3,000 = $1 was virtually abandoned, and the currency was de facto devalued.25 The quality and reliability of official statistical data declined as conflicting and contradictory figures on the same subject were quoted by different state agencies, and crucial information was withheld on many basic indicators.
Finally, along with rising inflation and unemployment, and the declining value of the Iranian rial, social problems intensified. According to one official report, for example, the number of drug addicts in Iranian high schools doubled during the year to 100,000, and the total for the country reached 1.2 million.26
By the end of the first year, the economy still enjoyed some resilience (particularly through drawdowns on foreign-exchange reserves, some $2 billion of prepaid oil sales, and newly obtained foreign export credits) to withstand the impact of oil-revenue shortfalls. But the poor prospects for an oil-price recovery plus factional political differences during the year effectively preempted any serious efforts toward economic and administrative reforms. In the fiscal area, public expenditures were reduced, but only at the expense of development projects, of which several thousand still remained unfinished.
Privatization was carried out in only a token fashion, totally dwarfed by the government's new public investments. Supervision of public enterprises, promised by the finance minister, became in fact so lax that some of them, while still receiving subsidies from the budget for their own domestic capital needs, took money out of Iran and invested in other countries without the control authorities' knowledge of the nature and magnitude of these outlays. Of the more than 1,200 state enterprises, no more than one-fourth bothered to submit their annual financial reports to the Accountancy Court. In the financial area, no major reform of the banking system was proposed to make it more transparent, commercially competitive and efficient. The rate of increase in total liquidity was slowed down, but the public sector's share still loomed large. On trade and exchange matters, instead of liberalization, duties on many "non-essential" imports were doubled in order to protect the domestic industry and enhance government revenues. Many new items were added to the list of prohibited exports. The three-tier exchange-rate regime, instead of being reduced toward eventual unification, acquired a fourth one. And, despite continued real appreciation of the rial due to internal double-digit inflation, the country's official exchange rate is to remain unchanged for another 18 months.
The bureaucracy that was to undergo a major overhaul was hardly touched. The state remained the largest employer of the workforce, with lowest productivity among all sectors. The government controlled directly or indirectly around 80 percent of the economy through the production of some 5,000 goods and services; it handled approximately 74 percent of total imports. Not only did the president fail to make a dent in the activities and power of independent and monopolistic bonyads (mafia-type religious conglomerates), the Majlis stripped him of the authority to propose the termination of some, and made the rahbar the sole official responsible for their operations. Ministries duplicating each other's tasks continued to exist side by side. The three ministries of Agriculture, Sazandegi and Cooperatives were competing in rural areas. The two ministries of Oil and Energy, and the Atomic Energy Agency all dealt with various forms of power. The Ministry of Industries operated separately from the Ministry of Mines. And, finally, the three ministries of Education, Higher Education, and Islamic Guidance continued to have similar responsibilities.
By far the most disappointing outcome of President Khatami's third campaign pledge was the thin content of his long-awaited economic blueprint. The new "economic rehabilitation" plan rightly identified the country's major economic problems as protracted unemployment, chronic inflation, inadequate aggregate investment, heavy dependence on oil export revenues, harmful public and parastatal monopolies, excessive bureaucratic regulation, low productivity and widespread poverty. The diagnosis was accurate, but hardly new. It was only in the segment dealing with remedies that one could see how badly the planners mistook symptoms for the disease and how naively they thought their prescribed placebos would work. Unemployment was to be tackled by "more effective use of existing productive capacity" and the creation of a "suitable environment" for entrepreneurship. Inflation was to be checked through "price controls" over essential commodities and "state supervision" over other prices.
Investment was to be increased by attracting private domestic and foreign funds and "directing" them toward priority projects. Non-oil exports were to be increased by "proper incentives and administrative facilities." Economic monopolies were to be eliminated "except where the Constitution so prescribed." Poverty was to be reduced through price subsidies and direct payments to the poor.
Well-endowed with eye-catching generalities, but meager in details, the new scheme failed to acknowledge or even recognize the underlying causes of Iran's economic malaise, namely: (1) the uncertain and violable status of private property and business profit; (2) a backward, arbitrary and unreliable judicial system incapable of enforcing business contracts or settling disputes; (3) unfair competitive advantages enjoyed by bonyads, with easy access to lucrative exchange rates and cheap bank credits, and immunity from taxation and public scrutiny; (4) a stifling, anti-employer labor code that unduly raises the wage bill; (5) a management system based on revolutionary credentials and clerical connections instead of technical expertise and entrepreneurial talent; (6) institutionalized corruption in every process of doing business, from obtaining a production permit to the price of goods sold in the market. While the announced blueprint made repeated and high sounding references to the necessity of removing monopolies, cutting the bureaucratic red tape and raising the private sector's share in the economy, it was tone deaf when it came to pinpointing means of removing regime-specific impediments. With the fingerprints of his leftist aides visible everywhere, the plan clearly reflected president Khatami's final surrender to economic interventionists loyal to the rahbar. Ignoring his own earlier dictum that economic growth should not be slowed down "under the pretext of social justice,"27 he ultimately co-opted the left-wingers creed by unequivocally conceding now that if there were a conflict between achieving "rapid growth" and ensuring "social justice," priority should go to the latter.
In sum, Mr. Khatami's least noteworthy accomplishment during his first year in office related to his handling of the economy. To be sure, the economic-reform agenda proposed by the president was complex and controversial in both its priorities and its proposed measures. Yet internal conflicts among his aides resulting in indecision, inaction and ineptitude had a crucial role to play in that outcome. The oil revenue shortfall played a critical part. Continued U.S. sanctions and the dispute with the EU over the Rushdie affair also had a marginal part.
CHALLENGES FOR YEAR TWO
President Khatami has certainly been a much kinder and gentler leader than anyone Iran has had since 1979. But Khatami's Iran is not yet much kinder or gentler to its long-suffering people. Nor can one see what the ongoing political war games between opposing "moderate" and "conservative" factions, and the precarious state of the economy, will have in store for the president's future credibility, if not indeed survival.
Mr. Khatami's own personal popularity and nationwide appeal remain high. Even his staunchest conservative critics have so far carefully and cautiously refrained from any direct attack on him, choosing instead to criticize his colleagues and supporters. His personal attributes as an honest, well-intentioned and friendly leader without evangelical zeal still appeal to his so-called "20 million" constituents. His willful optimism in the face of harsh realities is a laudable trait with which the cynical electorate wished to identify, and which has so far made this philosopher/politician difficult to dislike. Nevertheless, the beleaguered president has been unable either to move the voters or change the country's political dynamics to his liking. And for this he has been blamed, even by some of his own followers, to an understandable extent.
Success in implementing his ambitious campaign platform was something which he, as a seasoned and finger-burnt politician, knew only too well to be difficult if not impossible. But the frustrated and repressed majority who voted for him neither understood nor accepted his limited power or his opponents' clout in terms of position, money and guns. In their impatience for reforms, the youthful electorate appreciated the president's solemn pledges and symbolic gestures (e.g., riding public transportation, eating in staff cafeteria or taking phoned-in questions from the people on state radio and television). But they found these atmospherics wholly inadequate; they wanted to confront the opposition head-on at any price. The president's demeanor, however, called for the avoidance of such clashes at all cost.
Mr. Khatami's primary and paramount strategy during the first year was to preserve a facade of amity and like-mindedness with both the rahbar and Mr. Rafsanjani as the other two pillars of Iran's leadership troika. He also did his utmost to maintain a precarious and fragile peace with the Majlis conservatives to the point of meekly calling the impeachment of his favorite interior minister the legislature's legitimate constitutional right. He avoided any public criticism of the retrogressive judiciary by calmly accepting the conviction of his favorite, the mayor of Tehran, and hoping that he would be eventually exonerated through appeals. In line with this safe posture, he kept a comfortable distance from controversial figures such as Ayatollah Montazeri and Abdolkarim Soroush, although both valiantly championed his cause. And, he stayed astonishingly silent for a long time over violent acts by the clergy-backed street thugs who attacked his supporters or the influential scofflaws in and out of the government who ignored him. On most significant national concerns, he thus remained a reactive rather than a proactive leader. Ironically, despite his nearly universal reputation as a liberal reformer, he is increasingly seen by his disillusioned followers as a "closet conservative."
As a result, despite his earnest wish to unite the country behind his own brand of Islamic democracy, Iran in August 1998 was more politically polarized, socially fractured, and economically troubled than at any time since the early years of the revolution. At no time since Ayatollah Khomeini's death was the clerical establishment so publicly and openly divided. And, it is difficult to predict how this precarious state of affairs bodes for his year two and beyond. The president has so far shown an uncanny (and somewhat surprising) skill in avoiding personal or ideological tangles with his political rivals while successfully presenting himself as the Islamic Republic's last hope for survival.
This cautious, evolutionary and gradualist approach has served him well up to now. He has plausibly (albeit not quite accurately) blamed most of his economic woes on falling oil prices. Harsh measures recently advocated (and taken) by his opponents against the liberal press and dissident intellectuals have also been seen as a sign of the hardliners' desperation rather than strength.
Yet the road ahead is still bumpier and more hazardous than ever. And current political turmoil is bound to intensify. On the subject of internal law and order, there is still a compelling need for clarifying the "rules of engagement" for journalists, artists and writers, and to delineate the "red line" not to be crossed. Only in this way could a calmer and more secure atmosphere of sociopolitical freedom be established and maintained, and recent arrests, and imprisonment of dissidents be avoided. In foreign relations, festering disputes with neighboring countries and Washington - accentuated by Iran's recently revealed advanced missile program - need to be cleverly handled. Drastic and realistic reforms free from popular slogans need to be initiated to get the economy off dead center. In a word, Mr. Khatami must show that he is not merely a symbol of change in the Islamic Republic, but also an effective agent for the regime's meaningful transformation. Whether or not he will succeed in this endeavor, it is still too early to tell. But the overhanging clouds may yet be hiding silver linings.
1 Iran Times (Washington) May 29, 1998.
2 Kayhan Havai (Tehran) June 3, 1998.
3 The president's campaign speeches never clearly defined what he meant by civil society in the Iranian and Islamic context. A careful reading of his speeches (and those of his chosen aides) gave the impression that they were really talking about a civilized society (i.e., a peaceful, just and viable society) rather than civic and community associations and committees offering public services and checking governmental excesses.
4 See, "From Our Civil Society to Theirs," Kayhan Havai, May 20, 1998.
5 Iran Times, June 12, 1998.
6 The New York Times, May 24, 1998.
7 Hamshahri (Tehran), July 20, 1998.
8 Iran Focus, March 1998.
9 Messers Nouri and Karbaschi were regarded as Mr. Khatami's "right and left arms," and their removal as the greatest setbacks for the president since his inauguration.
10 Allegations in the Western media suggested that Iran agreed to end supporting Saudi dissidents in exchange for Riyadh's acquitting the Islamic Republic of any hand in the 1996 Khobar Towers bombing that killed 19 Americans. See Iran Times, June 5, 1998.
11 There are indications that Belarus has agreed to serve as a Russian proxy in selling weapons and technology to Iran, which Moscow itself might not be able to provide for various reasons.
12 The Economist Intelligence Unit, Iran (London, first quarter 1998), p. 13.
13 The Washington Post, December 31, 1997.
14 MEED, December 19, 1997.
15 The Washington Post, January 9, 1998, and The Wall Street Journal, January 8, 1998.
16 The Washington Post, January 17, 1998; and The New fork Times, January 17, 1998.
17 Iran Times, July 3, 1998.
18 The New York. Times, June 18, 1998.
19 Iran Times, July 17, 1998.
20 Washington's continued objection to Central Asia's oil and gas pipelines through Iran as well as the intended establishment of the Radio Free Iran and reduced funding for the International Atomic Energy Agency because of its technical assistance to Iran's nuclear energy program should also be considered among new setbacks on bilateral relations.
21 Iran Times, July 17, 1998.
22 Iran Focus (London), April 1998.
23 For the full text, see Jomhoori Eslami (Tehran), August 4, 1998.
24 Toos (Tehran), September 1, 1998.
25 Kayhan Havai, May 27, 1998; Iran Times, July 6, 1998; and Toos, September 1, 1998.
26 Iran (Tehran) September 1, 1998; and Reuters, September 2, 1998.
27 See Jahangir Amuzegar, "Iran Under a New Management," SAIS Review, Winter/Spring 1998, p. 81.