The Economy: A Future Less Bright; The conservative Parliament has slowed moves toward reform, which could prove costly when oil prices fall.(Iran)

Byline: Richard Ernsberger Jr. and Emily Flynn (With Maziar Bahari in Tehran)

A year ago, Iran's economic future looked relatively bright. The country's religious leadership had taken an isolationist, hard-line stance on most political and strategic issues. But its views on the country's economy have seemed more pragmatic. In fact, there's been a cautious consensus that the economy needs to be cracked open to boost growth and create jobs. Iran has 68 million people, and 30 percent are under the age of 14. That youth bulge is sure to exacerbate an already troublesome unemployment problem over the next decade, if GDP growth cannot be accelerated.

In recent months, however, Iran's gradual economic-reform movement has ground to a halt. Booming oil profits have fueled GDP growth of 6.5 percent in each of the past two years--and masked the need for liberalization. The crop of conservative mullahs elected to Parliament a year ago has turned out to be far less pragmatic than originally hoped. The new legislators have adopted a nationalistic, populist economic stance that's more hostile to foreign investors and aims to improve standards of living in the run-up to this summer's presidential election. Recently deputies ousted the reform-minded Roads and Transport minister for securing a deal with a Turkish-Austrian consortium to operate the new Imam Khomeini International Airport. Experts say Tehran is letting a golden opportunity slip away. "The current period of high oil prices... provides an opportunity to implement major reforms that would put the economy on the long-term path of high growth and job creation," the IMF said in an August 2004 report. Without more structural reform, the IMF warned, Tehran could find itself in tough circumstances when oil prices fall.

Iran's previous Parliament seemed to understand the problem. It passed legislation designed to boost foreign investment in non-oil industries, even offering majority control of Iranian enterprises. It also --passed a new five-year economic plan aimed at revving annual growth up to about 8 percent. The plan called for opening key sectors to private competition, including banking, telecoms and railways, and enhancing foreign trade. "Iran needs a more efficient and active private sector," says Howard Pack, a professor at the Wharton School at the University of Pennsylvania. "The pumping and processing of oil doesn't create a lot of jobs." The new economic blueprint received important backing from the Expediency Council, a judiciary body headed by former president Hashemi Rafsanjani that mediates disagreements between the Parliament and the powerful, nonelected Guardian Council. "[We] prefer not to have these industries remain under state monopoly," the Expediency Council declared.

Some observers thought the new conservative Parliament would continue the reform trend and bring some clarity to Iran's often ambiguous economic policies. That has happened--but not in the way many had hoped. The new Parliament is largely opposed to reform, and has actively sought to undermine the new economic plan and foreign-investment law. Last year, two days before the election, the government announced a watershed $3 billion deal with Turkcell, Turkey's largest mobile-phone company, to build and run the first private cellular network in ...