“Economics is for donkeys”

While oil prices remain high, Iran can afford its contempt for economic orthodoxy

Whatever else he is remembered for, Mahmoud Ahmadinejad is unlikely to go down in history as an economic wizard. Indeed, the Iranian president has worn his contempt for economic orthodoxy as a badge of honour. The late Ayatollah Ruhollah Khomeini, leader of Iran's Islamic Revolution, was famously quoted as saying, "Economics is for donkeys." It is a maxim Ahmadinejad has mirrored assiduously, saying once that he prayed to the Almighty that he would never know anything about a subject he views as a tool of western domination.

His disregard has its roots in political populism. The president sees the prescriptions of seasoned economists as little more than recipes for social injustice. Ahmadinejad's election victory in June 2005 was based on a pledge to sweep away such inequality. It would be achieved, he said, by putting the proceeds of Iran's vast oil wealth "on people's tables". The time for fancy economic theories was past; henceforth the preference would be for old-fashioned redistribution.

Ahmadinejad's government set about its task oblivious to precedent or expert advice. The Management and Planning Organisation, a state body charged with mapping out long-term economic and budget strategy, was broken up and experienced managers sacked; oil revenues were ploughed into state projects in run-down regions; the minimum wage was raised; interest rates were slashed by presidential decree to below the inflation rate; ownership of state enterprises was offered to the public in the form of "justice shares", the government's response to a constitutional amendment requiring it to introduce privatisation.

The results have been a swelling budget deficit, sluggish growth, rising unemployment and soaring inflation caused, economists say, by Ahmadinejad's policy of injecting excess liquidity into the economy. Even the government's own statistics put inflation at more than 27 per cent, and one government official recently said the true jobless rate could be three times the official rate of roughly 10 per cent. The banks have responded to interest rate cuts by refusing to lend money while, for all the talk of privatisation, the economy remains overwhelmingly in state hands.

These consequences have been compounded by a rising chorus of complaints over soaring food prices and housing costs. Further disenchantment has been caused by a previously unthinkable decision to ration petrol, forced on the government by the increased cost of importing petroleum, made necessary by Iran's lack of refinement capacity. Despite possessing the world's second-largest reserves of natural gas, the country has also suffered energy shortages, leading last winter to heating cuts, and to power blackouts this summer.

It seems like a tale of woe, but Ahmadinejad has remained remarkably upbeat, if not always familiar with the facts. In January 2007, he responded to MPs' alarm about a rise in tomato prices to £1.50 a kilo by urging them to visit his local grocer, where he claimed they were cheaper. When I went there a few days later, the shopkeeper said he had stopped stocking tomatoes because customers would not buy them at current prices.

Yet there may be good reason for the president's relaxed demeanour. Thanks to continuously high oil prices, Iran's economy is not facing imminent collapse. The supreme leader, Ayatollah Ali Khamenei - who could be expected to jettison his protégé if the economic problems became a source of instability - has told Ahmadinejad to prepare for a second term when his first ends next year.

Such support is available because not everyone is unhappy, as I witnessed last autumn in the eastern province of South Khorasan during the saffron harvest. Ahmadinejad's decision to more than double saffron's wholesale price had delighted farmers and their impoverished pickers, whose wages had risen in proportion. Cheap government loans and grants had allowed many to renovate their homes and instal indoor bathrooms. To such people, the president was a saviour.

Their view is a far cry from that of many economists, as characterised in a recent report by the International Monetary Fund which warned that Iran's "poor economic policies" would be unsustainable once oil prices dropped. But, with the support of Iran's rural poor and the supreme leader, Ahmadinejad is unlikely to lose sleep over such judgements from a sector whose expertise he does not recognise.

Robert Tait is the Guardian's Istanbul correspondent. He was previously the paper's correspondent in Tehran from March 2005 until December 2007, when he was forced to leave after the authorities declined to renew his residence permit