Targeting Iran's Revolutionary Guard

06/30/2010 05:12 am ET | Updated May 25, 2011

In the aftermath of the 1979 Islamic Revolution, Ayatollah Khomeini established the Islamic Revolutionary Guard Corps (IRGC) to protect the ideologies of the Islamic Revolution from foreign and domestic threats. After the Iran-Iraq war, the IRGC was involved in modest postwar reconstruction efforts and eventually emerged as a dominant player in large infrastructure development projects. It has since extended its economic influence into the oil and gas sectors and entered the consumer goods market at the expense of private enterprises. The IRGC's monopolization of key sectors displaces traditional business elites and compromises incentives in the marketplace that would otherwise increase efficiency and long term growth. Today, the Revolutionary Guard reaches into nearly every sector of the economy; it manufactures cars, runs laser eye-surgery clinics, builds roads and bridges, develops gas and oil fields, constructs pipelines, and controls black market transactions. While the IRGC's role in the post-election crackdown and its involvement in the nuclear program make it an ideal target for sanctions, this approach is more likely to hurt the broader Iranian public.

Since Mahmoud Ahmadinejad took office in 2005, companies affiliated with the Revolutionary Guard have been awarded hundreds of no-bid government contracts in oil, gas, and construction projects. All of the IRGC's finances are free from state enterprise. Companies affiliated with the Guard are large enough to underbid competitors and are generally favored in the bidding process for large contracts. A lack of transparency in the IRGC creates room for widespread corruption, compromises consumer surplus, and creates a deadweight loss in the Iranian economy.

Khatam al-Anbia (Ghorb), one of the largest and most powerful contractors in Iran, is directed by a council of high ranking members of the Revolutionary Guard and chaired by the IRGC's commander in chief; it is considered the IRGC's major engineering arm. According to its website, Ghorb has received over 750 contracts in numerous construction projects including dams, water diversion systems, highways, tunnels, buildings, heavy-duty structures, and water, gas, and oil pipelines. Some of the most prominent Ghorb subsidiaries now direct tunnel construction and excavation projects throughout the country and work on Tehran's metro system.

Today, the IRGC's role in the Iranian economy is comparable to both an artificial monopoly, because it can drive all of its competitors out of the market, and to a natural monopoly, because trade sanctions on the Iranian business class creates a cost advantage for the Revolutionary Guards who maintain exclusive control over factor inputs through the underground economy and black market. Furthermore, the IRGC has access to and dominance over the country's most advanced technological undertakings. This technological superiority creates another barrier to entry and impedes private-sector growth. The IRGC does not face many of the short-run variable costs that its private-sector competitors may face. It runs its own trade ports and is not subject to import or export tariffs, it thrives off the black market, and it maintains cheap access to indivisible inputs. A lower average total cost curve allows the IRGC to provide its services at significantly lower prices, compromising the competitive nature of the market.

Iran's convoluted political and economic situation requires an innovative policy approach by Washington. Rather than focusing on further punitive sanctions, the Obama administration should move forward with its policy of engagement. To prove its commitment to change, the administration should offer to drop existing sanctions that hinder trade with Iran's private sector in exchange for cooperation on the nuclear front. These trade sanctions create barriers to entry for the private sector and ultimately strengthen the IRGC's monopolistic grip on the economy. Whereas imposing targeted sanctions on the IRGC could hurt the broader Iranian public, lowering variable costs for Iran's private sector and providing it with greater access to low cost inputs would facilitate the process of subverting the IRGC's monopoly in the Iranian economy. Integrating Iran into the international community through trade and empowering its private sector is more likely to result in gradual change in the regime's behavior and would create a mutually beneficial environment of gains from trade. While a successful sanctions approach that entails broad adherence could further damage Iran's already fragile economy, a targeted sanctions approach against an entity that thrives off the black market and holds a near monopolistic grip in many sectors is more likely to hurt the broader Iranian public and unlikely to achieve the ultimate goal of moderating the regime's behavior.