News

For people like Mahdi Fahandari, times have always been tough in Iran. The 33-year-old labourer has struggled to make ends meet on the $6 a day he earns. Lately, however, the situation has become dire.

"Inflation is bad and prices are always rising. It's getting hard even to buy food," he says amid the noisy gloom of the welding shop where he works — a job he fears may soon disappear. "A lot of my friends are out of work."

Located 850 kilometres east of Tehran near the Afghan and Turkmenian borders, Mashhad is Iran's second-largest city and home to the mammoth Imam Reza Shrine, which makes it a destination for millions of Shia visitors. The pilgrims and the cross-border trade usually keep the economy strong, but like the rest of the country, Mashhad is feeling the pinch.

Until recently, the local real-estate market, driven by Iran's post-revolutionary baby boom, was red hot. But now "private projects have nearly dried up," says Abbas Khakshur, vice-president of Marmarbeton, a big construction firm and a major source of business for shops such as Mr. Fahandari's.

He says public spending will soon follow suit. "There is no money in the government's budget any more. We are worried about our business."

Iran runs on oil, and the plunging price of crude — from a high of $147 (U.S.) a barrel last July to less than $36 this week — has devastated the economy to so much that many Iranians believe that mismanagement by presidential firebrand Mahmoud Ahmadinejad is partly to blame.

As a result, Mr. Ahmadinejad suddenly seems vulnerable as the country prepares to go to the polls in June — especially since his predecessor, liberal cleric Mohammad Khatami, announced this week that he wants his old job back.

"The Iranian nation's historical demand is to have freedom, independence and justice, and I will work for that," Mr. Khatami said.

Is he a serious contender? His rival may think so. A few days after the reformist Mr. Khatami joined the race, he was reportedly chased through the streets of Tehran during celebrations for the Islamic Revolution's 30th anniversary by a mob of stick-wielding Ahmadinejad supporters. The same day, their champion declared himself ready to meet U.S. President Barack Obama and discuss their differences: "It is clear the Iranian nation welcomes real changes."

Mr. Ahmadinejad has been weakened by criticism of his economic performance. When the global downturn began, he ruled out any impact on Iran: "Even if the price of oil hits zero, we can manage the country for about three years."

But as the situation worsened, signs that Iran, which relies on oil for more than 80 per cent of government revenue, was being hit badly were hard to ignore. When the government set this year's budget at $37.50-a-barrel oil, compared with the $70 needed to balance last year's budget, Mr. Ahmadinejad finally acknowledged that "we will have to leave a major part of our projects behind."

'HE DOESN'T LISTEN'

By then, frustration was mounting within Iran's academic community. "They were slow to realize the problem," says Mohammad Khatib of the Mashhad Chamber of Commerce, who was among a group of 50 economists that visited the President in July to complain. Unfortunately, "he doesn't listen to economists," Prof. Khatib says.

Adjusted for inflation, Iran's per-capita gross domestic product is lower today than it was before the revolution in 1979. The latest official rates for inflation and unemployment are 26.4 and 10.2 per cent, respectively — yet both are widely considered to be underestimated. Iran holds one-10th of the world's proven reserves but has the lowest growth rate among oil producers in the region.

Addiction to oil is considered a root cause of Iran's problems. "It is widely accepted among economists that we need to reduce our dependency on oil," says Hamid Shushtarian, editor of Iran's monthly Journal of Asian Economics.

The situation began in the post-revolutionary period when, spurred by its first "supreme leader" — Grand Ayatollah Ruhollah Khomeini — Iran tried to become self-sufficient. But since the presidency of Ayatollah Akbar Rafsanjani (1989-1997), which introduced limited free-market reforms, Iran's leaders have seen the need for liberalization. The country's official economic plans call for just that — Mr. Shushtarian says they "see Iran moving toward a free-market economy. Privatization is even in the constitution," which was amended in 2004 to call for the privatizing of state-run businesses.

Mr. Khatami succeeded Mr. Rafsanjani in 1997 and continued his policies, also with limited success. In the 2005 election campaign, however, Mr. Ahmadinejad pledged to distribute oil revenues to the average Iranian. He has been hostile to an overly "Western" approach to reform, and reluctant to alienate his base among the rural poor.

Recently, in response to the looming budget deficit, he proposed slashing Iran's gasoline and electricity subsidies — and handing the cash directly to the poor, a move that exasperates economists. "When you have a limited supply and you increase purchasing power," Prof. Khatib says, "then prices just go up."

Inflation and unemployment are higher today than when Mr. Ahmadinejad came to power, sparking a widespread sentiment that not only has he failed to deliver on his promises, his profligate spending has wasted the chance at reform oil money once offered.

As a result, Mr. Ahmadinejad has seen his support weaken considerably, even among conservatives. In recent months, conservative "pragmatists" who oppose his re-election have gathered around Mr. Rafsanjani, now an influential member of the Assembly of Experts, the secretive body that appoints the supreme leader. He can't stand for the presidency again because of his age (he turns 75 tomorrow), but Mr. Rafsanjani still leads traditional conservatives supported by the wealthy elite. They dislike Mr. Ahmadinejad's economic policies and his erratic, confrontational behaviour on the world stage.

Until this week, they were seen as the President's most significant opposition, with Tehran Mayor Mohammad Ghalibaf and former interior minister Mostafa Pour-Mohammadi touted as their leading candidates. The reformists, who seek greater democracy, social liberty and foreign engagement, have performed poorly of late because their base — the educated middle class — is disillusioned with the system and failed to vote in great numbers.

But the return of Mr. Khatami may change all that.

"There is no one with equal power to ignite the modern section of society," says Sayed Hosseini, professor of sociology at the Azad University of Mashhad and himself a former reformist politician. On the other hand, he says, the rise of Mr. Khatami may unite conservatives around Mr. Ahmadinejad. "They will vote for him holding their noses."

And although Mr. Khatami was elected in 1997 on a groundswell of popular support, especially among women and students, the optimism dimmed while he was in office because the establishment stymied many of his reforms. "I have my doubts about the Khatami of 2009," says Nader Entessar, chair of political science at the University of Southern Alabama and an expert on Iranian politics. "Eight years was enough for people to get to know him, and you can't pinpoint one instance where he stood his ground when he was challenged by the conservatives. Most of his achievements were rhetorical."

With the economy, however, Mr. Khatami stands on firmer ground. "The leadership never opposed his economic reforms," Mr. Shushtarian says. "The review of his economic management is positive. ... I think he would be successful again because he is a man who refers to specialists."

MILITARY BROADSIDE

Hard-liners are concerned enough to take potshots. In a recent speech endorsing Mr. Ahmadinejad, military commander Hassan Firouzabadi said the presidency "requires a lot of energy and competence," and is not "for old, retired people" — a clear dig at Mr. Khatami, 13 years older than the 52-year-old President.

It was the first time, Prof. Entessar says, "that any senior military officer has made a public endorsement like this." Even more significant: the silence of supreme leader Grand Ayatollah Ali Khamenei. "During Khomeini's time, he made it very clear the military had no place in politics. Not so with Khamenei."

What role the Grand Ayatollah, who holds the final political authority, will play in the election is much pondered (but not openly). Mr. Khamenei will decide how much pressure will be applied on the election process by the security and judicial systems.

"When Khatami first ran in 1997," Prof. Entessar says, "nobody gave him much of a chance, and they saw no need to micromanage the election." But after he had served two terms, "it was a different story. The security organizations were heavily involved."

The supreme leader backed Mr. Ahmadinejad, and has done so since, but there have been signs that he is growing tired of the President's histrionic style and poor economic management. When Israeli troops moved into Gaza, Mr. Khamenei quashed a bid backed by the President to recruit volunteers for "martyrdom operations." But even so, "if Khatami starts getting traction," Prof. Entessar says, "you could see a counter-reaction."

Then again, the election's first round is bound to feature an array of candidates from across the political spectrum. Conservatives will face off with reformists, and there is even speculation that Mir-Hossein Mousavi, prime minister during the war against Iraq, also will attempt a comeback, after 21 years, as a reform candidate.

It may seem a long shot, but neither Mr. Khatami nor Mr. Ahmadinejad was a serious contender when he started out. "One thing about the past two or three elections in Iran is that a candidate who wasn't even known at the time came out on top," Prof. Entessar says. "So it's possible that we might see surprises again."

Matthieu Aikins is a Canadian journalist based in South Asia.