in the interest to get your questions and comments as much as possible. ali? >> a good morning. today, i am going to talk about factualism and its effect on a presidential election next week and also on u.s.-iranian relations. . >> since the presidencies,

fascism has been on the rise. this has affected iran's policies both domestic and foreign on a number of issues. point to is that -- point no. 2 is that there are fundamental agreements on the need to over throw the government and establish and as long as a form of government. -- an islamic form of government. 0.3 is that opposing factions have diverse views. -- point no. 3 as the opposing factions have diverse views. -- is the opposing factions have diverged views. afula engagements of normalized relations could actually threaten one of the pillars of the islamic revolution.

the iranian political system is a breeding ground for fascism. this is because of the system of government. you have two parallel systems working side by side. you have a republican system of government were you have an executive, legislative and judicial branch. when the leader of the revolution cleared the islamic republic, he wanted a purely theocratic system, but he had to adhere to the democratic norms. he had to create a republican system along with the theocracy. with this system, the supreme leader is a most powerful person. he is not supremely powerful as he likes to believe. his powers are balanced and checked by other government institutions. for example, the president of

iran is the second most powerful person. he commands the executive branch and he sets domestic policy. he chairs the national security council. this duality within the system creates a lot of decentralized decisionmaking and dysfunction. this leaves a vacuum for factionalism to thrive. iran has a history of very informal and opaque decision making. this goes back to the time when decisions were made behind closed doors and out of public view. there are two broad a factional groupings competing for power in iran. this is not a strict interpretation of these actions, but you can divide them to the right and to the left. they do not have established

voting constituents and they tend to be very malleable organizations. factions have to operate within the system of the islamic republic, meaning that they have to accept the role of the supreme leader. secular, democratic and nationalist forces are not allowed to operate freely. they have a relatively open system, but it is rather confined when compared to countries in the west. the islamist white and left have fundamental agreements, but they also have some disagreements. for example, when it comes to the rule of the supreme ruler, the right believe that the leader has divine authority over the state while those on low left believe there should be a more democratic term.

there is a social contract between at the supreme leader and the people. the left traditionally believes that the state should step in to create some of the economic injustices in iranian society. on religious values, the right is very conservative. whereas the left believes women should participate in the political system. on foreign-policy is, the right has a pragmatic policy whereas the left has pursued a more cooperative foreign policies. when we think of some of their radical behavior semipaste, we think of the rhine, whereas the

left was really one of the motivating forces behind those policies. the candidate of the left was actually a fire breathing radical. the left has developed very differently over the years. unfortunately for the left, and i think -- i think the bright will -- i think the right will dominate. when ayatollah khamenei was a lie, he balanced without showing favoritism to one side or the other. his successor has changed that. on foreign policy, ayatollah khamenei realized that iran could not a live in that way

after the run-iraq war. -- the iran-iraq war. in the mid-1990s, ayatollah khamenei was on the extreme right spectrum. this is because he has perceived a growing threat to his authority. there has been a lot of criticism. not just from the left, but also from the moderate and members of the right. this has led to iranian hostility towards the united states. he is still beholden to the group that supports him. there have been occasions of pragmatism. iran played a crucial role in establishing the karzai government.

the love controlled the of fuel -- the few key theocracies. they were controlled by the left. this allowed ayatollah khamenei to say that he is not engage in the united states. -- not engage in the united states. of course, he wanted to open air run -- open iran to a more democratic society. he ultimately failed. you then had mahmoud ahmadinejad become president. they have pursued more radical foreign policy.

the upcoming presidential collection will be a critical juncture. the correct president can facilitate engagement. i do not think that mahmoud ahmadinejad is the right choice because of his behavior and his denial of the holocaust. we have a few other candidates from the right and left who are better candidates for engagement. you have a former commander from the revolutionary guard and he sees himself as being on the right. he thinks of himself as being in the same camp as mahmoud ahmadinejad. he thinks that has wasted iran's position in the middle east. on allow, we have the former

prime minister during the iran- iraq war. he is a unique figure in iran because he is seen as a revolutionary but also as a technocrat, as someone who is capable difficult times. he was not seen as a revolutionary, whereas the left and right see him -- he did not get along with ayatollah khamenei. because some have questions about his ability to become president, in 1989, when ayatollah khamenei became president, the role of the prime minister was completely eliminated. however, he has talked about a policy of reaching out and engage in the united states. you can say that this is part of

his campaign rhetoric. he does have the backing of the islamist left and he figures they will draft the foreign policy. the revolutionary guards are wary of full engagement. i think he still thinks of the united states as being a committed member of the revolution. he also believes that iran is operating from a position of strength, now that the taliban and saddam hussein had been overthrown, that iran is the linchpin for security. he believes the u.s. must make the first move. in his recent speech, he mentioned a few steps that the u.s. should take. interestingly, the first up was

to stop the support for the insurgents. he even said that we had intelligence intercept showing that the u.s. is supporting them. he also mentioned lifting sanctions and unfreezing iranian assets in the united states. his views are echoed by the top echelon. people like the former commander of the guards and the supreme leaders adviser on national security affairs. the guard believes that iran is key to security in the persian gulf. there are some questions as to whether they will play a similar role in this election. it has been a very controversial issue. in fact, the representative to the supreme leader made a speech

where he said that we have been criticized for becoming involved in politics. they do not intend to interfere at all as long as the right candidate gets elected, they do not care. >> what other u.s. policy implications are there? do not wait until the presidential election to engage iran. in some ways, it is too late. i talk about the correct president. if the as long must write one engagement, to some extent, there will be engagement. there are indications that iran is interested in a limited engagement. knott full engagement, because that would be against one of the red -- one of the pillars of their establishment. i do not think that the islamic republic, especially the right,

once a fully normalized relation. if the u.s. opens an embassy in iran, then there will be pressure for the system to open up. this is not something that the revolutionary guards are interested in. the third point is that full engagement is under that type of environment. he was able to engage in the united states because that gave them some wiggle room. now covers all levels of government, from supreme leadership to the parliament. even if he becomes president, he will just be part of the executive branch. he will not be able to make major decisions. so, in conclusion, the u.s. should be a very patient. i do not think that sanctions will work with it planned.

i think the leadership is pragmatic enough to engage the u.s. on a limited number of issues. it is a very dysfunctional system. thank you. [applause] >> dr keith crain will now explain the vulnerabilities in the iranian economy. >> i'm going to turn to talk little about longer-term issues. the fundamental message is that time is on the united states side, not on the supreme leaders were the islamic republic side in terms of changes in iran. i will talk about that, but also turned to talk about some of the

social changes as well. first, we will focus on energy. we talk about social changes and what happened with the employment pressures and then we will finally look at the vulnerability is facing the leadership. to start off, first and foremost, iran -- periodically, we have heard statements that they will run into some severe production problems regarding oil and the islamic republic has seen a sharp decline in output. in the past two or three decades, texas -- technological expertise in the oil industry has spread far and wide. we have seen russian companies that are much better able to get

technology. they have been able to maintain output. output in 2008 is still higher than the energy information agency had expected for 2010. that said, they are their own worst enemies. they are difficult to negotiate and deal with. they throw up their hands and back out of deals just because they cannot come to an agreement. i do not really see -- there is really no problem to continue maintaining oil production. at the same time, they have had extraordinary increases in natural gas. another issue with the iranian in the situation is its natural

gas reserves. a 10% of gas is florida right now. we see increasing energy concern's and this is such a waste. first and foremost, what this says is that if there is any need for nuclear power, there is no information that shows they need to invest in nuclear. as everybody else of the world is shifting toward natural gas. oil is very important to the

budget and to exports. iran has the more diversified energy in the gulf. energy is about a quarter of gdp, but it is inefficient in its manufacturing and automotive sectors. they produce cars for domestic consumption. we see a fairly vibrant transport and retail sales sector. 70 million people rely on oil for budget revenues and at the same time, look for job growth and economic activity from other sectors. i think another issue to put

iran in context is that iran is not the iran of the 1980's. during the war with iraq, iran, to to a situation where they were a low work middle and come -- a lower middle income. their government had social policies and policies with a number of economic relations. there was the unification of the exchange rate, but what it said was that prior to this, if you had contacts with the regime, you got to buy dollars or euros at much lower exchange rates than someone would on the local market. by unifying the exchange rate, they eliminated the extraordinary opportunity for corruption and level the playing

field. that ended up improving economic efficiency and help spur a steady growth -- helped spur a steady growth. these reforms, many of them have blasted cut -- have blasted, -- have blastlasted. these foundations are owned by some of the religious establishment. we have seen more distortions in the economy. growth has been rapid, but much less so than you would see in other countries in the gulf and there has been all lot of losses in terms of efficiency. what about today?

the presidential campaign has focused on foreign policy, but there is an underlying backdrop in terms of a lot of economic dissatisfaction. one of the key issues facing the government is this very sharp drop in revenue. what i have done here is look at average oil prices remain. this would be a what they did lashed year. you see a very sharp decline. oil revenues are likely to be back for the were in 2004. -- back to where they were in 2004. the world economy is still in recession and to think that oil prices will continue to rise is unlikely.

whatever happens, we have seen a lot of pressure on the budget. on top of that, so much of the budget is wasted. that has really sapped money. but, the key political question is one to be inflation. unemployment is unpopular, but there is nothing more unpopular than inflation. inflation affects everybody at all income levels across society, and in most countries, the poor are the most unprotected in terms of inflation. we have seen a continuous rise in inflation levels throughout the mahmoud ahmadinejad for jan.

he has kept interest rates and they have been churning money out like there was no tomorrow. a lot of this money has been squandered. inflation, on an average level, hit 25% last year higher. i have never seen an economy see the current regime return to power after that type of performance. inflation is probably your best indicator of who is warm to come to power. i think it has to be squarely focused in terms of the role of inflation in the economy.

turning to some longer-term points, we have seen a kind of gradual evolution in iran since the revolution. shortly after the revolution, iran had a notable anomaly in terms of population growth and small population worth dramatically accelerate from about 3% to about 4.4%. for those who know a thing about democracy, -- about growth, that is remarkable. that has shifted completely the other way and now iran has the slowest rate of population growth, running just over 1.8%.

that was dictated partly by crumb -- by how people lived in iran and the fact that young iranians are the most western of the populations in that region. but government policy is in 1989 and the religious establishment came out with a strong support for birth control and there was discussion of abortion. a number of laws were supported that supported birth control. these children that were born through the late 1980's are now entering the labour market. this is one of the most important pressures of their time and it the president's policies have been effective in denying these people interesting job opportunities.

we have seen pressures in terms of making it difficult for the private sector. if you want a job in the government, you have to have connections or be vetted in terms of your ideology. a lot of these well educated individuals have -- what has happened is that day had been thwarted by the relationships of the government. so, what does this have to do? -- what does this have to do with sanctions? >> they are highly dependent on oil. that is self-inflicted with the use of high import tariffs.

the government has not created alternative exports. from a purely public policy point of view, everything goes through the straits. in addition, the government has hoped to develop liquid natural gas exports. this is one area where u.s. sanctions have been quite effective. lubrication technology is very complicated. it is like having a refrigerator the size of a shopping mall to have a liquidation plan. -- a liquid vacation planner --

a liquification plant. they are seeing quite a bit of economic frustration iran is very vulnerable to any cut off in terms of oil exports. sanctions have been effective against certain individuals and they have been little less effective because of the buildup of iranian reserves because of high oil prices. technology has become less effective than those technologies and services are available for nine u.s. providers, so u.s. sanctions are less effective -- available for no