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The effect of Ahmadinejad's Foreign policy on Good Governance in Iran after 2005



Keywords: Good governance, Iran, Foreign policy, World Bank, Worldwide Governance Indicators (WGI)


  1. Introduction:

At the Millennium Summit General Assembly of the United Nations in September 2000, world leaders committed to the Millennium Declaration of the United Nations that set key objectives for the 21st century. The Declaration embodies an unprecedented consensus, outlining a common vision of peace and security, development and poverty eradication, securing human rights, and … DEMOCRACY AND GOOD GOVERNANCE. (Fukuda-Parr Sakiko, 2002).

This shows that good governance became one of the major focuses in contemporary political literature in the world and Good governance as a concept has increasingly deep-rooted itself in the political and development discourse. It has leaked into all areas and become part of the common shared values and qualities of different countries in the world.

Therefore, Good governance has gained significant attention in the world especially in the last decade.From 1990s, the idea of "good governance" as an instrument for sustained development and poverty alleviation has gained widespread acknowledgment, especially among international organizations. (Chaudhry, Malik, Khan, & Rasool, 2009, p. 338)

 In recent years, good governance has attracted the attention of economists, political scientists, lawyers, politicians, national institutions, and institutions of World Bank and IMF. Since some empirical and theoretical controversies have been found on the concept and importance of good governance but it can be considered as a prerequisite for economic growth and development (Kaufmann, Kraay, & Mstruzzi, 2003, p. 2).

Currently the issue of good governance is broadly observed as one of the key factor for poverty decrease and sustainable development. It can be reached in an enabling economic environment responsive to the basic needs of the people. It requires sound economic management and the sustainable use of resources as well as the promotion of economic and social rights.

  1. Conceptual Framework of Good Governance(Review on literature)

Governance now occupies a central stage in the development discourse but it is also considered as the crucial element to be incorporated in the development strategy. However, apart from the universal acceptance of its importance, differences prevail in respect of theoretical formulations, policy instruction and conceptualization of the subject itself. Governance as a theoretical construct, separate from the theory of state, is not only in a developing stage, but its formulation also differs among researchers depending on their ideological convictions.

UN defined governance as the the process of decision-making and the process by which decisions are implemented (or not implemented). Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance. (Sheng, 2002)

Good governance generates a good atmosphere for investment, including investment in people, and leads to higher income, reduces poverty, and provides better social indicators. According to UNDP, governance can be worked out as economic, political and administrative authorities to manage a country's affairs at all levels. It joints the systems, processes and institutions, through which residents and groups articulate their interests, put into affect their legal rights, meet their obligations and mediate their differences. (Chaudhry, Malik, Khan, & Rasool, 2009, p. 338)

Since governance is the process of decision-making and the process by which decisions are implemented, an analysis of governance focuses on the formal and informal actors involved in decision-making and implementing the decisions made and the formal and informal structures that have been set in place to arrive at and implement the decision. According to the World Bank, governance is "the manner in which power is exercised in the management of a country’s economic and social resources for development”. (Holzer & Byong-Joon, 2006, p. 3)

On this meaning, the concept of governance is concerned directly with the management of the development process, involving both the public and the private sectors. It encompasses the functioning and capability of the public sector, as well as the rules and institutions that create the framework for the conduct of both public and private business, including accountability for economic and financial performance, and regulatory frameworks relating to companies, corporations, and partnerships. In broad terms, then, governance is about the institutional environment in which citizens interact among themselves and with government agencies/officials. (Abdellatif, 2003, p. 5)

The World Bank is more concerned with the reform of economic and social resource control. In 1992, it underlined three aspects of society which they feel affect the nature of a country's governance

  1. type of political regime;
  2. process by which authority is exercised in the management of the economic and social resources, with a view to development; and
  3. Capacity of governments to formulate policies and have them effectively implemented. (Agere, 2000, p. 3)


However in World Bank discourse there is, the shift from the notion of governance to good governance introduces a normative dimension addressing the quality of governance. A good governance system puts further requirements on the process of decision-making and public policy formulation. (SANTISO, 2001, p. 5)

In seeming agreement with the World Bank, the Overseas Development Administration of the United Kingdom of Great Britain and Northern Ireland (1993) defines good governance by focusing on four major components namely legitimacy (government should have the consent of the governed); accountability (ensuring transparency, being answerable for actions and media freedom); competence (effective policymaking, implementation and service delivery); and respect for law and protection of human rights.

 According to Surendra Munshi, (2004, p. 33) good governance “signifies a participative manner of governing that functions in a responsible, accountable and transparent manner based on the principles of efficiency, legitimacy and consensus for the purpose of promoting the rights of individual citizens and the public interest, thus indicating the exercise of political will for ensuring the material welfare of society and sustainable development with social justice”.

 A more succinct definition of good governance is offered by Hirst (2000, p. 13) who propounds that it “means creating an effective political framework conducive to private economic action: stable regimes, the rule of law, efficient State administration adapted to the roles that Governments can actually perform and a strong civil society independent of the State”.

Finally, good governance can be identified with the following features:

  • Good governance is mutually supportive and cooperative relationships between government, society, and the private sector. The nature of relationships among these three characters, and the need to make stronger viable system to facilitate interactions, assume critical importance.
  • Good governance is defined as control of all, or some combination of, the following elements: contribution, transparency of decision-making, accountability, rule of law, predictability.
  • Good governance is normative in origin. The values that provide the foundation for governance are the values postulated by the defining characters and institutions. (Chaudhry, Malik, Khan, & Rasool, 2009, p. 339)


  1. Indicators of good governance:

Governance is a multi-faceted concept encompassing all aspects of the exercise of authority through formal and informal institutions in the management of the resource endowment of a state. Thus, the quality of governance is determined by the impact of this exercise of power on the quality of life enjoyed by its citizens. (Huther & Shah, 1999, p. 2)

According UN definition Good governance has eight major characteristics. It is participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law. It assures that corruption is minimized, the views of minorities are taken into account and that the voices of the most vulnerable in society are heard in decision-making. It is also responsive to the present and future needs of society. (Sheng, 2002)

Figure 1: Characteristics of good governanceaccording UN definition

Shah and Hunter have done one of the important researches about the ranking of countries based on good governance. According Hunter and shah (1999, p. 2) the quality of governance is determined by the impact of this exercise of power on the quality of life enjoyed by its citizens. While no single index can conceptually capture all aspects of this enabling environment, a focus on key observable aspects of the governance dimensions can be helpful in providing a comparative perspective on differentials in the quality of governance among different nations. The key observable aspects of the governance dimension considered in this paper are citizen voice and exit; government orientation; social development and economic management.


Index Name

Component Indices


CPCitizen Participation Index

PFPolitical Freedom

PSPolitical Stability

GOGovernment Orientation Index

RTBureaucratic Efficiency

JEJudicial Efficiency

COLack of Corruption

SDSocial Development Index

HDHuman Development

GIEgalitarian income distribution

EMEconomic Management Index

OOOutward Orientation

CBCentral Bank Independence

DBInverted Debt to GDP Ratio


Table 1: Components of Governance Index (Huther & Shah, 1999, p. 3)


Accordingly, the governance index they have composed has four composite indices, which have been chosen to provide an indication of a government's ability to

1) Ensure political transparency and voice for all citizens,

 2) provide efficient and effective public services,

3) Promote the health and well-being of its citizens

 4) Create a favorable climate for stable economic growth (Huther & Shah, 1999, p. 2)


In addition, World Bank used some indicators for measurement of good governance. World Bank has described the concept of good governance in various dimensions such as rule of law, government effectiveness, regulatory quality and control of corruption. These dimensions cover the whole society and economic sectors of the economies. Actually, this study will locate the variables that have more effect on these dimensions. Governance has engaged all concerns of society and economic operators for economic development but it is also considered as a fundamental element to be incorporated in the development strategy. Nonetheless, having its importance, differences also exist in respect of hypothetical formulations, policy prescriptions and conceptualization of the subject itself. Researchers have different ideology convictions due to which its formulation differs in different areas.

It should pointed out that this indicators are built according one political and economic ideology, the mainstreaming of good governance has been fragmented, leading to multiple understandings of the concept, as it originated within neo-liberal economic development paradigm. This approach tends to give governance a false sense of political neutrality, as it portrays development without politics. The Bank’s understanding of good governance continues to reflect a concern over the effectiveness of the state rather than the equity of the economic system and the legitimacy of the power structure. (SANTISO, 2001, p. 4)

According World Bank model, a good governance system puts further requirements on the process of decision-making and public policy formulation. It extends beyond the capacity of public sector to the rules that create a legitimate, effective and efficient framework for the conduct of public policy. It implies managing public affairs in a transparent, accountable, participatory and equitable manner. It entails effective participation in public policy-making, the prevalence of the rule of law and an independent judiciary, institutional checks and balances through horizontal and vertical separation of powers, and effective oversight agencies. Researchers at the World Bank Institute have distinguished six main dimensions of good governance:

  1. Voice and Accountability
  2.  Political Stability and Absence of Violence/Terrorism
  3. Government Effectiveness
  4.  Regulatory Quality
  5.  Rule of Law
  6. Control of Corruption (Kaufmann, Kraay, & Mastruzzi, 2009, p. 6)

Kaufmann, Kraay and Mastruzzi (2009) as World Bank researcher in this point of view, defined governance asthe traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.

 Sometimes referred to as the "KK", or "KKM" indicators, they measure the quality of governance in over 200 countries, based on quantitative data from different organizations worldwide. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governanceof public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide.

They used these six dimensions of governance corresponding to this definition for measuring quality of governance (Kaufmann, Kraay, & Mastruzzi, 2009, p. 6)


Worldwide Governance Indicators (WGI):

Capturing perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.


Voice and Accountability


capturing perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically motivated violence and terrorism


Political Stability and Absence of Violence


capturing perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies


Government Effectiveness


capturing perceptions of the ability of the government

To formulate and implement sound policies and regulations that permits and promotes private sector development.


Regulatory Quality


capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence


Rule of Law


Capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.


Control of Corruption



Table 2: World Bank measures for good governance (Kaufmann, Kraay, & Mastruzzi, 2009, p. 6)

  1. Data and Methodology

Since governance has various diverse, scope, in this paper, World Bank described six comprehensive measures is used that capture various dimensions of governance. The indicators include measures for “voice and accountability”, “political instability and violence”, “government effectiveness”, “the rule of law”, “regulatory Quality” and “control of corruption. The World Bank uses datasets of 212 countries and this data related to 1996, 1998, 2000, and annually for 2002-2008. (Kaufmann, Kraay, & Mastruzzi, 2009, p. 2). The Worldwide Governance Indicators(WGI) are a collection of the observation of a very diverse group of respondents, collected in large number of surveys and other cross country assessments of governance. Some of these instruments capture the views of firms, individuals, and public officials in the countries being assessed. Others reflect the views of NGOs and aid donors with considerable experience in the countries being assessed, while others are based on the assessments of commercial risk-rating agencies. this data set  have much information about Iran  and we use data about this  six  dimension  and pursuit  positive and negative changes specially after 2005. All of these Comprehensive measures have some related concepts that these measures were consisted from these concepts and indicators .these detailed indicators were used to better understanding of six measures.

Moreover, the new strategies and attitudes of Iran's foreign policy after Ahmadinejad will be discussed. This information is collected from various secondary sources like journal and books and fundamental changes in Iran foreign policy will be analyzed.

 Finally, the relationship between some foreign policy and WGIs in Iran will be examined. To examine these factors and their impact on six governance measures the detailed and related concepts have key role.

  1. Overview of Iran's foreign policy under Ahmadinejad

The foreign policy of the Islamic Republic of Iran (IRI) is analyzed in four distinct time periods: first, the foreign policy of the IRI under supreme leader Khomeini (1979-1989); second, the foreign policy of the IRI under former present Rafsanjani (1989-1997); third, the foreign policy of the IRI under Khatami (1997-2005); and fourth, the foreign policy of the IRI under Ahmadinejad (2005- ).


After Ayatollah Khomeini’s death, Iran put in the agenda to accept reality without revolutionary action and started economic reforms. Consequently, rationalism and pragmatism dominated over Iranian foreign policy decision-making system, particularly during President Hashemi Rafsanjani. In fact, the principle of Iran’s foreign policy during the leadership of Ayatollah Khomeini stated in the motto “neither East, nor West” was affected theoretically and practically by a new principle, which may be called “both North and South. (Haji-Yousefi, 2010).The domination of the Reformist Faction in the institutionally Conservative-dominated power structure has transformed Iranian political culture since 1997. (Alam, 2000)Foreign policy orientation under Khatami followed Rafsanjani's pragmatic considerations of the national interest in Iranian foreign policy, but added a democratic dimension. (Ramazani, Ideology and Pragmatism in Iran’s Foreign Policy, 2004) The foreign policy of Khatami came to be known as Khatami or Iran’s “détente policy” and covered the normalization of relations with all countries. (Alam, 2000).

The administration of Khatami increased efforts to attract foreign investment into predominantly the energy- and telecommunication sectors and improve Iran's relation with Arab and Middle East countries as well as EU members.

Hence, after the end of the Iran-Iraq War in 1988 and the Cold War in 1991 until 2005 that is during Hashemi and Khatami government, it can be said that coalition-making (of course with regional  powers as well as some western states  became the main strategy in Iran’s foreign policy. In this era, Iran tries to find some allies in international scene and improve its relations with other countries, particularly its neighbors so that it could reduce its external threats.

Ahmadinejad became Iran’s president in August 2005 and he was declared as IRI president in June 2009. During his election campaign in 2005, Ahmadinejad promised social justice at home and moderation abroad. (Ramazani, 2005)  However, almost immediately after his election, it became clear to the Iranian elites and the rest of the world that the Islamic Republic would not continue the rapprochement policies of Rafsanjani and Khatami. The election of Ahmadinejad signaled a prompt shift in the IRI’s foreign policy outlook and instantly destroyed Iran’s reputation that it had so carefully tried to restore from the mid-1980s.

Ahmadinejad, unlike his predecessors refers to Ayatollah Khomeini’s revolutionary foreign policy orientations. Ahmadinejad would like to see Shiite fundamentalists rule the world and Iran to dominating the region and the world. (Kazemzadeh, 2007)

Ahmadinejad disapproves of the global power structure and in particular criticizes the legitimacy of the UN Security Council and its actions. In every UN General Assembly, Ahmadinejad attended and made critics against UN Security Council and its structure.

Moreover, the policies of Rafsanjani and Khatami are considered by the Ahmadinejad and neo-conservative/ Young Conservative faction as “a betrayal of the ideals of the revolution and ineffective in warding off America’s threats. (Kazemzadeh, 2007)

In addition to diplomatic overtures to the US, Khatami’s 2001 Dialogue among Civilizations initiative “replaced the previously existing belief that Iran’s foreign policy was closely connected to, and indeed an extension of the priorities of the theocratic regime and its dominant elite. (Ehteshami & Zweiri, 2008,)

The election of president Ahmadinejad left another mark on Iran’s foreign policy and nuclear negotiations: As soon as Ahmadinejad assumed office, he dismissed some forty ambassadors and diplomats who were supportive of the rapprochement policies of Rafsanjani and Khatami towards the West.



US, Western countries and Israel:

All and all this led to the pursuit of a confrontational policy by the IRI under Ahmadinejad towards the United States, Israel and the European Union. The belief in the end of the power of the United States, and the rise in the power of Iran support these confrontational policies with the confidence that is needed to make the policies appear credible. The rise of world oil prices has strengthened the financial resources of the regime and Iran’s ability to upset the world oil markets. (Gasiorowski, 2007)

The prevailing view in the United States is that Ahmadinejad’s foreign policy and Iran’s increasing presence in the region has been offensive, expansionist, opportunistic, and often ideological. Though Iran has occasionally taken advantage of new opportunities, these characterizations have been exaggerated in the United States. (Barzegar, 2010)

Besides a hasty push for nuclear technology at the expense of international cooperation, Ahmadinejad’s fiery anti-Israeli and US rhetoric alienated Iran from both the West and neighboring Arab states. In his 2005 speech from the “World without Zionism Conference”, Ahmadinejad agreed with the late Ayatollah Khomeini’s belief that “the occupying regime [Israel] should be wiped off the map”, calling the bellicose pronouncement a “very wise statement. There is possibility of Israel attack on Iran's nuclear facilities and new conflict in the Middle East.

Nuclear issue:

The last seven years have seen a growing concern over Iran’s nuclear program, and an escalation of tensions between Tehran and Western powers.

Iran’s nuclear issue has become a symbol of the confrontational relationship between Iran and the West (Bonab, 2009). Whereas Iran has repeatedly claimed, the peaceful nature of its nuclear programs, the West, and in particular the United States, have since the mid-1980s questioned this.

The summer of 2005 marked the election of neoconservative candidate Mahmud Ahmadinejad, as well as escalating tensions resulting in the passage of several UN sanctions regimes. In Europe, the EU-3 was expecting the election of the former pragmatic president Rafsanjani, who in all likelihood would have continued the dialogue for alternative solutions. Ahmadinejad made it immediately clear however that he rejected his predecessor’s relative openness with the West. Every previous possibility of a diplomatic solution vis-à-vis the Iranian nuclear program was refused. (Zweiri, 2010)

Iran’s foreign and nuclear policy changed in spring 2005 when Ahmadinejad came to power. Iran’s most significant aim of negotiating with the European states and IAEA was to maintain its nuclear enrichment cycle and expected its activities such as voluntarily enforcement of the attached protocol and suspension of nuclear enrichment would culminate in recognition of its nuclear rights.

Sanctions against Iran:

The election of Ahmadinejad indicated a rapid change in the IRI’s foreign policy attitude and directly destroyed Iran’s reputation that it had so carefully tried to restore from the mid-1980s. Almost immediately after his election, it became obvious to the Islamic Republic and the rest of the world that Iran would not continue the Moderate policies of Rafsanjani and Khatami.

These aggressive and confrontational policies have reaction in International community. U.S and other western powers imposed sanction against Iran through United Nations Security Council Resolution 1737, United Nations Security Council Resolution 1747, UN Security Council Resolution 1803 and United Nations Security Council Resolution 1929.Gradually, the sanctions packages included in the UN Security Council Resolutions have intensified. President Ahmadinejad, however, continues to ignore them by continuing to enrich uranium.

Summary of Provisions of U.N. Resolutions on Iran Nuclear Program (1737, 1747, 1803, and 1929)

  • Require Iran to suspend uranium enrichment, and to refrain from any development of ballistic missiles that are nuclear capable (1929)
  • Prohibit transfer to Iran of nuclear, missile, and dual use items to Iran, except for use in light-water reactors
  • Prohibit Iran from exporting arms or WMD-useful technology
  • Prohibit Iran from investing abroad in uranium mining, related nuclear technologies or nuclear capable ballistic missile technology
  • Freeze the assets of over 80 named Iranian persons and entities, including Bank Sepah and several corporate affiliates of the Revolutionary Guard. Require that countries ban the travel of over 40 named Iranians Mandates that countries not export major combat systems to Iran
  • Calls for “vigilance” (a non-binding call to cut off business) with respect to all Iranian banks, particularly Bank Melli and Bank Saderat.
  • Calls for vigilance (voluntary restraint) with respect to providing international lending to Iran and providing trade credits and other financing and financial interactions.
  • Calls on countries to inspect cargoes carried by Iran Air Cargo and Islamic Republic of Iran Shipping Lines—or by any ships in national or international waters—if there are indications they carry cargo banned for carriage to Iran.Searches in international waters would require concurrence of the country where the ship is registered.
  • A Sanctions Committee, composed of the fifteen members of the Security Council, monitors Implementation of all Iran sanctions and collects and disseminates information on Iranian violations and other entities involved in banned activities. A “panel of experts” is empowered by 1929 to make recommendations for improved enforcement


Table 3: Summary of Provisions of U.N. Resolutions on Iran Nuclear Program (1737, 1747, 1803, and 1929) (Katzman, 2010, p. 34)


Moreover, some countries like Japan, Canada and EU imposed new and separate sanction against Iran. According the Sanctions Iranian financial institutions are barred from directly accessing the U.S. financial system and foreign investment are limited in Iran.

  1. Iran and Good governance:

Iran's position on good governance in the world before Ahmadinejad was not desirable.Shah and Hunter have done one of the important researches about the ranking of countries based on good governance. According Hunter and shah (1999) , Iran was ranked as poor governance in their model.

Table4: Governance quality in some countries according Hunter and Shah Indicators (Huther & Shah, 1999)

I use Worldwide Governance Indicators (WGI) for analyzing of governance quality in Iran. According this KKM model and data there is six dimension that were discussed .The Report displays the country's performance for all available years between 2004 and 2008 in six governance dimensions: i) Voice & Accountability, ii) Political Stability and Lack of Violence/Terrorism, iii) Government Effectiveness, iv) Regulatory Quality, v) Rule of Law, and vi) Control of Corruption.

These graphs show the Iran's percentile rank on one of the six governance indicators. Percentile ranks indicate the percentage of countries worldwide that rate below the selected country. Higher values thus indicate better governance ratings.


As the KKM evaluation, Iran has critical position in country's percentile rank. Especially in two dimensions after 2005, there is meaningful decrease: voice and accountability and regulatory quality.



Voice and accountability:

According to KMM Significant Changes in WGI Estimates of Governance 1998-2008 has very bad change in voice and accountability. (Kaufmann, Kraay, & Mastruzzi, 2009, p. 33).

This means that Iran during these 10 years had negative movement in this dimension of governance. Voice and accountability measures the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. Concept Measured variables like: Orderly transfers, Vested interests, Accountability of Public Officials, Human Rights, Freedom of association, Democracy, Freedom of speech, Freedom of assembly, Freedom of demonstration, Freedom of  religion, equal opportunity, excessive governmental intervention, Political Rights, free and fair elections, representative legislative, free vote, political parties, no dominant group, respect for minorities and  Freedom of the Press.

Table 5: Significant Changes in WGI Estimates of Governance 1998-2008 (Kaufmann, Kraay, & Mastruzzi, 2009)

However, in Ahmadinejad era, the power of hardliner increased and neo-conservatives have sufficient authority to restrict civil society activities and groups.

Human right watch in World report (2008) cited Respect for basic human rights in Iran, especially freedom of expression and assembly, continued to deteriorate in 2007. The government of President Mahmud Ahmadinejad routinely detains people solely for peacefully exercising their rights to freedom of expression and association, and regularly tortures and mistreats those detained. The Judiciary, which is accountable to Supreme Leader, is responsible for many serious human rights violations. The government increasingly cites “national security” as a pretext for silencing expressions of dissent or calls for reform. (Iran Events of 2007, 2008)

Human right watch has same view in 2009:with the government of President Mahmud Ahmadinejad continuing to invoke "national security" as a justification for silencing dissent, 2008 saw a dramatic rise in arrests of political activists, academics, and others for peacefully exercising their rights of free expression and association in Iran. There were numerous reports of the torture and mistreatment of such detainees. The Judiciary and the Ministry of Intelligence continued to be responsible for many serious human rights violations. The number of executions also increased sharply in 2008.

Therefore In chart 1 we can see decreasing of voice and accountability index in Iran.

Regulatory quality:

Although good governance deal with internal aspect of government and its qualification in domestic sphere but some foreign policies have direct and direct impact on quality of governance .

Iran's Foreign policy has direct influence on economic aspect of governance and every scholar should consider this variable. This dimension is Regulatory quality.

WGI introduced Regulatory quality for evolution of this dimension of governance. It Measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

This indicator more focused on the policies. It includes measures of the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development.

According chart 2 Iran's rank after election of Ahmadinejad decreased. Ahmadinejad ignored    fourth Economic and Social development plan Act. He Considered Liberalization, Privatization and empowerment of private sector as western conspiracy for neo-colonialism and suggested Iranian-Islamic model of development. However, this model remained much rhetoric.

More over his foreign policy cause some problem for economy of Iran the consequences is elaborated.

According  WGI (Kaufmann, Kraay, & Mastruzzi, 2009),regulatory quality Measured variables like: Foreign Investment, Banking / finance, Trade policy ,Trade & foreign exchange system, Export Regulations Import Regulations Access to capital markets (foreign and domestic) is easily available, Foreign investors are free to acquire control in domestic companies Price.

Ahmadinejad's Confrontational and aggressive foreign policy influenced all mentioned variable .Foreign investment and economic relation were affected by these policies. Nuclear Issue as main conflict between Iran and west has negative role.

Sanctions are not new issue in economy of Iran. The Islamic Republic of Iran, a resource-rich and labor-rich country in the Middle East, is a central focus of the U.S. national security policy. Sanctions were imposed by the US after the seizure of American hostages in the aftermath of the revolution, and the 1980 Iran-Iraq war. But In recent years a fresh wave of UN sanctions has attempted to curb Ahmadinejad's nuclear ambitions.

UNSC sanction practically cause some problem for economic regulatory in Iran. 

Ahmadinejad's foreign policy and his domestic and populist economic plan caused decreasing of Iran's regulatory quality rank in comparison with other Middle Eastern countries.


In Chart 3 Iran's poor condition compared with the Middle East countries has been depicted.

Finally, it should be noticed how Ahmadinejad's foreign policy influenced Regulatory quality. The question then will about the poor performance of Iran in spite of it possessing all the required resources.  For answering this question, we should emphasize on the components of this indicator and   finding answer of this question that what is  the influence of aggressive and confrontational Iran's foreign policy on foreign investment, banking, finance and business climate?

Foreign Investment

 Iran's official statistics for foreign direct investment in the past few years have been contradictory. Some official figures include memoranda of understanding, which were never signed into contracts. Nevertheless, all statistics show a decline in foreign investment since President Mahmud Ahmadinejad took office in 2005. Unlike his reformist predecessor Mohammad Khatami who encouraged foreign investment, Mr. Ahmadinejad's defiant policies have discouraged foreigners from investing in Iran.

Iran has sought foreign investment in the development of its gas fields and has sought to increase its export market of natural gas as well. In the near-term, the petroleum sector appears to be healthy, but is plagued with aging infrastructure and old technology. In order to boost oil production to levels to pre-Iran-Iraq war levels and develop refining capacity, Iran needs international investment. (Katzman, The Iran Sanctions Act (ISA), 2007, p. 3) U.N. and some U.S. sanctions are targeted toward obstructing Iran’s development of its oil and gas sectors in order to constrain Iran’s resources for uranium enrichment.

Foreign investment in Iran’s oil and gas sectors is a mixed picture. Foreign investment has been limited. In part, this is because foreign companies have had difficulty obtaining financing due to U.S. Treasury Department pressure on international banks to cut off ties with Iran, and in part, it is due to the hesitancy of foreign companies to incur U.S. opposition. Additionally, many U.S. allies are wary of how their business deals with Iran may affect their relations with the United States. International sanctions have reduced foreign investment to some extent, particularly by Western countries, but Iran appears to be successfully negotiating deals with some Asian countries. While new agreements have been negotiated, their successful completion has been slow. According to a GAO report, State and Treasury officials assert that U.S. sanctions have contributed to a delay in foreign investment in Iran’s hydrocarbon sector. (Ilias, 2008, p. 24)

Political uncertainty has been a cloud over Iran’s economy and has made foreign business and investors wary about economic involvement in Iran. Capital flight remains a serious concern for Iranian policy makers. A U.S. military attack on Iran may not be completely discounted

Access to capital markets (foreign and domestic) is easily available

The impact of international sanctions on trade financing in Iran is difficult to gauge. Since 2006, European Union countries, including France, Germany, and Britain, have curtailed export credits to companies doing business in Iran. For example, in 2007, German export credits backing trade with Iran totaled about $730 million, about half the value of German export credits in 2006 and one-fifth that in 2004. Germany does not actively dissuade companies from doing business in Iran, but it is conducting extra scrutiny of export authorizations requests and evaluating the financial risks of doing business with Iran more closely.  (Ilias, 2008, p. 28)

Some large European banks have reduced businesses with sanctioned Iranian bodies. For instance, Germany’s Commerzbank and Deutsche Bank have been reducing or stopping business with Iran. The United Kingdom’s HSBC and Standard Chartered have also reduced business with Iran. (German imports from Iran up despite nuclear row-paper, 2008)

 Many European banks that have curtailed business with Iran are leaving offices open on a minimal basis in case there is a change in the international climate towards Iran. (Ciszuk, 2008).

The merchant class has particularly been hurt by the international sanctions. Iranian businessmen reportedly have increased difficulty opening bank accounts abroad and getting foreign banks to honor letters of credit. According to Iranian officials, over half of the banks in Dubai no longer provide credit to businesses based in Iran. (Fifield, 2008)

 As Iranian businesses experience setbacks in obtaining trade financing from international banking partners, they may turn to lesser-known banks or to other banking partners not susceptible to international pressure, but potentially raising the cost of business. In particular, the Islamic Republic has turned toward banks in Gulf Cooperation Council (GCC) countries. Bahrain, Qatar, and Dubai in UAE are viewed as especially critical in propping up Iran’s economy. (Ilias, 2008, p. 29)

Trade policy andExport Regulations Import Regulations

In 1995(Hashemi Rafanjanani's time), Iran became a WTO observer state and, since then, has repeatedly put forth applications to become a permanent WTO member. Accession to the WTO was a stated priority of the Rafsanjani and Khatami's government. Iran cites the more favorable treatment that WTO members give to one another and competition from Asian countries in textiles and manufactures as important challenges to Iranian exports. (IMF, March 2007, p. 18)

 The United States repeatedly blocked Iran’s bids to join the WTO over concerns about Iran’s nuclear program and support for terrorist activities. On the other hand, many European Union countries and developing countries have supported Iran’s accession. Iran and many other countries maintain that WTO membership should not be based on political reasons, but rather, on economic and business grounds. (Fleck, 2004)

In a significant policy shift toward Iran in May 2005, the United States agreed to stop blocking Iran’s attempts to join the WTO as part of economic incentives to Iran to resolve the nuclear program issue.

In other hand, Iran after Ahmadinejad sought new policies and was not interested to be a member in WTO.

Hence, Iran is not currently a member of the WTO and the most recent negotiations for accession have ceased because of political reasons. (IMF, March 2007, p. 18)

 The WTO accession process is lengthy and some Iranians have expressed concern that domestic momentum for the reforms necessary for accession has waned. Iran, along with Russia, now remains the two largest economies outside of the WTO.


Banking / finance:

Iranian financial institutions are barred from directly accessing the U.S. financial system. In September 2006, the U.S. government imposed sanctions on Bank Saderat Iran, barring it from dealing with U.S. financial institutions, even indirectly.

As of November 2007, the following Iranian banks were prohibited from transferring money to or from United States banks:

  • Bank Sepah
  • Bank Saderat Iran
  • Bank Melli Iran
  • Bank Kargoshaee (aka Kargosa’i Bank)
  • Arian Bank (aka Aryan Bank)

As of early 2008, the targeted banks, such as Bank Mellat, had been able to replace banking relationships with a few large sanction-compliant banks with relationships with a larger number of smaller non-compliant banks.

 The total assets frozen in Britain under the EU (European Union) and UN sanctions against Iran are approximately 976,110,000 pounds ($1.64 billion). In 2008, the US Treasury ordered Citigroup Inc .to freeze over $2 billion allegedly held for Iran in Citigroup accounts.

In a major summation of the western countries effort, Treasury and State Departments officials, as of early 2010, say that they had persuaded at least 80 banks not to provide financing for exports to Iran or to process dollar transactions for Iranian banks. Among those that have pulled out of Iran are UBS (Switzerland), HSBC (Britain), Germany’s Commerzbank A.G. and Deutsche Bank AG. U.S. financial diplomacy has reportedly convinced Kuwaiti banks to stop transactions with Iranian accounts and some banks in Asia (primarily South Korea and Japan) and the rest of the Middle East have done the same. The July 27, 2010 EU sanctions discussed below impose restrictions on European country banking relationships with Iran.

On June 9, 2010, the United Nations Security council passed a resolution to impose new sanctions on Iran for the continued disagreement over its nuclear portfolio. Hence, more limitation imposed to Iranian banks.


Business environment:

What appears to be clear is that numerous major international firms have become are unwilling to risk their position in the U.S. market to do business with an increasingly isolated Iran. Many experts believe that, over time, the efficiency of Iran’s economy will decline as foreign expertise departs and Iran invites in or makes purchases from less capable foreign companies.

Some examples of major firms leaving Iran can be noted. As discussed above, Siemens of Germany was active in the Iran telecommunications infrastructure market, but announced in February 2010 that it would cease pursuing business in Iran. In April 2010, it was reported that foreign partners of several U.S. or other multinational accounting firms had cut their ties with Iran, including KPMG of the Netherlands, and local affiliates of U.S. firms PricewaterhouseCoopers and Ernst and Young. (Baker, 2010)

Among foreign subsidiaries of U.S. firms in March 2010, Ingersoll Rand, maker of air compressors and cooling systems, said it would no longer allow its subsidiaries to do business in Iran. (Nixon, 2010)

  1. Conclusion:

Good governance essentially deals with Domesticpolicy and internal environment.Governance can be broadly defined as the set of traditions and institutions by which authority in a country is exercised. This includes (1) the process by which governments are selected, monitored and replaced, (2) the capacity of the government to effectively formulate and implement sound policies, and (3) the respect of citizens and the state for the institutions that govern economic and social interactions among them. The  Domestic policy covers a wide range of areas, including business, education, energy, health care, law enforcement, money and taxes, natural resources, social welfare, and personal rights and freedoms. It differs from foreign policy, which refers to the ways a government advances its interests in world politics. 

Nevertheless, we cannot separate between external sphere of government action and domestic sphere. External variable have direct and indirect effect on internal issues and domestic situation shapes foreign policy. Thus, we can find some external variables that have significant impact on good governance.

WGI measures six dimensions of governance. They include Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance. Generally, based on indicators of good governance, Iran among world countries does not have a good ranking.

After election of Ahmadinejad, two governance quality indicators were drop significantly. Voice and accountability decrease can be interpreted as Islamic and fundamentalist approach of Ahmadinejad and his supporter. Unlike the moderate Khatami and his liberal values and his respect to human rights, new president was not interested in human right and modern political system.

However, another significant fall is related to regulatory quality indicator .This dimension of quality of governance considers economic aspect of governance.

Thus, External and internal factors affect Iran’s economy in Ahmadinejad' time, and analysts differ over which affect the economy most significantly. Based on the above discussion and analysis, this section reviews some of the major issues facing Iran’s economy. The main external factors affecting Iran’s economy are international sanctions. There is considerable debate on the impact of U.S. and United Nations sanctions on Iran’s economy. According to this paper, U.S. economic sanctions on Iran have had affected Iran, and the extent of these effects on Iran’s economy is considerable.

Ahmadinejad confrontational and aggressive foreign policy especially nuclear policy was faced with western powers and UN. U.S and UNSC imposed a variety of sanction against Iran and this sanction cause some problem in foreign investment, banking and finance, business climate and leads to economic isolation of Iran.  

Consequently, the international tensions associated with Iran’s nuclear program and regional policy undoubtedly have complicated Iran’s business environment. Some analysts point to Iran’s low levels of foreign investment, difficulties obtaining trade finance, and challenges in developing its oil and gas sectors as evidence of the impact of sanctions. All of these variables have important role in measuring of regulatory quality and quality of governance.








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