Clerical era: Iran’s elections

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Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. First he was a Wall street upstart, then he became a legend, then a convicted felon. Now he's got a clean record, thanks to a presidential pardon this week. For many, Michael Milken is emblematic of Wall street avarice and greed. For others, he remains a hero. And traveling the world is much easier if your passport is widely accepted without a visa. By that measure, Japan's is the world's most welcomed. So why is it that so few citizens have them? First up though, Iran will hold its parliamentary elections today, but they'll be far from democratic.

The Guardian Council, which is a group of clerics and Islamic jurists, they decide who is allowed to run in the election.

Roger McShane is our middle east editor.

And they're a pretty conservative bunch, as you might imagine. They blocked many of the reformers and moderates who would have liked to have stood. 14,000 people in total applied to be candidates. It's a 290 seat parliament and the Guardian Council rejected more than half of those candidates. It's mostly people who wanted to see more outreach to the west or who wanted to see changes to the nature of the clerical regime. Now, the Council has always been strict about who can run and elections. You are never going to get a candidate that forcefully rejected the system of clerical rule. But the range of candidates allowed to run this time around is more narrow than it has been in years. I mean, in many constituencies, voters don't really have any choice at all.

And if the only choice is the country's hardliners, that could have consequences for America.

A few days ago, we took bold and decisive action to defend American lives and deliver American justice.

Last month, the Trump administration killed Iran's top military commander, Qasem Soleimani, in a drone strike.

The world's number one terrorist.

It was taken as an act of war, igniting anger on Iranian streets and from the government pledges for harsh revenge. Public anger soon turned though to the Iranian regime itself when it was revealed to have accidentally downed a passenger plane during the standoff, killing 176 people. And then hiding its mistake. Iranians filled the streets to protest against the COVID up, their rage compounded by the cratering economy and a leadership that seems completely out of touch. In today's polls, though, Iran's leaders were aiming to unite the public in a show of strength against America. But they're likely to get something else entirely.

As weird as it sounds, hardliners are trying to paint the election as a further form of revenge against America, a way of sort of showing it up. They want to be able to point to the vote and say, look, America, the Iranian people are united against you. So, for example, you get the supreme leader, Ayatollah Ali Khamenei, saying, even if you don't like me, you need to come out to vote for for Iran. He's even called it a religious duty. That, of course, is a pretty convenient thing for him to say, because there are only hardliners running. There's no way for Iranians to both vote in the election and express their disapproval for the clerical regime.

And how do you think the people will respond to that? With their hands? If you like ideologically tied, you should.

Expect to see incredibly low turnout. Part of it is because Iranians don't feel like the election offers them a real choice. But their frustration goes well beyond the limited pool of candidates. The economy has been battered by American sanctions reimposed after Donald Trump pulled out of the nuclear deal that America signed with Iran in 2015. Late last year, there were big protests in Iran over a hike in the price of fuel. This clearly rattled the regime, which responded with the bloodiest crackdown since the Islamic Revolution in 1979. So Iranians are increasingly fed up with their leaders.

So what sort of effects will that.

Have on the sort of internal politics in Iran? If the hardliners view here was to try to drum up support, to drive turnout, make people more committed to their cause, and instead, turnout goes through the floor and people remain disaffected.

The clerical regime has always had this sort of pretense of legitimacy, because underneath it is this sort of democratic system, quasi democratic system. It's always been sort of limited democracy, but it does give the regime this pretense of legitimacy. And, you know, if Iranians sort of now give up on this idea of democracy, if it's exposed as completely faith, I think that pretense goes away, and it really undermines the clerical regime's claim to power or legitimate power. And that could lead to more people coming out onto the streets against the regime.

And so the mood of the country.

Then is much different now from that of the last election in 2016.

Yeah, things could not look more different compared with 2016. I mean, then there was still hope that the nuclear deal would boost the economy, lead to more engagement with the world, and perhaps even prompt reforms at home. In the parliamentary election that year, you saw the reformist and moderate bloc make big gains, winning 41% of the seats. But since then, there's been only disappointment. And the frustration is not only directed at the hardliners. Iranians also feel that more pragmatic politicians, such as the president, Hassan Rouhani, have not really delivered on their promises from 2016, their promises of a better life and their promises of social and political restrictions being lifted. And what you see now is sort of the reformist camp in a state of disarray. Now, of course, Rouhani has been hobbled by the clerics and hardliners who hold the real power. And there's really no better evidence of that than the fact that 90 current members of parliament, nearly a third of the body, and these are mostly moderates, have been barred from running in this election.

But if Iranians are going through hardship.

Because of the economic situation, some of that is coming not from within, but from without in the form of America's maximum pressure campaign. How much do you see the effects of American policy as essentially part of the politics here?

I think it's a big part. And I think the election tells you something about US Policy. It tells you how dependent US Policy is on revolutionary, as opposed to evolutionary change in Iran. I mean, the authors of the nuclear deal hoped it would empower more moderate and pragmatic politicians. In Iran, which it did to some extent. And they also hoped it would lead to more gradual changes in Iran's foreign policy. Now, there was never any guarantee that those changes would have developed. And Iran certainly continued to meddle in the Middle east after the nuclear deal was signed. But Donald Trump cut that whole experiment short by pulling out of the nuclear deal and implementing that policy. Maximum pressure, which has really completely undermined the pragmatists in Iran and pushed the clerical regime into a corner. Now, the regime has responded by doubling down on its confrontational approach, lashing out in the region, restarting parts of its nuclear program and attacking American interests in the region. And the elections are likely to result in big gains for those who support that confrontational approach, while at the same time really signaling the political demise of Iran's pragmatic and moderate bloc.

So with hardliners becoming only more entrenched, doubling down, as you say, that speaks to a future in which the recent behavior of Iran on the world stage of regional aggression, nose thumbing and the like, that could only get worse.

I don't think Iran's appetite for revenge against America has been sated. And I think you're going to see more sort of lashing out in the region through its proxies. And this is troubling because with hardliners ascendant on both sides, the risk of an actual war between America and Iran grows.

Roger, thank you very much for joining us.

My pleasure.

Earlier this week, President Donald Trump pardoned Michael Milken. In the 1980s, Mr. Milken set the tone of American finance, driving a bond trading frenzy. He was the leading figure in an investment bank called Drexel Burnham Lambert. For a time, it was the most profitable on Wall Street.

His expertise was in junk bonds, high yield bonds.

John o' Sullivan writes Buttonwood, the Economist's column on global finance.

He discovered that a portfolio of so called fallen angels, these are investment grade bonds of companies that then fall on hard times, would actually give you a better return without a great deal of risk than holding a bunch of investment grade securities.

Mr. Milken became known as the junk bond king. Soon he and Drexel began issuing their own bonds. Those, though, were junk from the outset.

So they were instantly risky and high yield. And a lot of these bonds were used to fuel the takeover boom of the 1980s.

They were financing big, expensive projects, ideas that were madcap at the time, like a 24 hour news channel, CNN, or a casino with a fake volcano inside.

So lots of businesses that were sort of up and coming but risky looked to Drexel for financing to get them started.

If you had an idea and a toehold On a business, Mr. Milken and his team would raise the necessary debt. The point is, ladies and gentlemen, that greed. Greed, for lack of a better word is good. Greed is right. Their brazen, aggressive tactics helped inspire the character of Gordon gekko from the 1987 film Wall Street.

And it's these confluence of things. The buyout boom, the establishment of junk bonds as a sort of asset class in its own right. Well, Michael Milken was at the center.

Of all of that, but he wasn't.

At the center forever.

I wouldn't actually describe it as a fall from grace. It was never clear that there was a grace period for Drexel and for Michael Milken. They were an upstart bank. They like to be a sort of poke in the eyes of the sort of Wall street establishment. But towards the end of the 80s, he was indicted.

He faced 98 charges of fraud.

Milken eventually pleaded guilty to six counts, was sentenced to 10 years in prison, and served 22 months in prison.

But this week, a presidential pardon cleared his name.

Mike Milken, who's gone around and done an incredible job for the world with all of his research on cancer, and he's done this, and he suffered greatly.

It's fair to say that opinion is divided about the extent of his guilt. People around Drexel felt very strongly, and I think still feel very strongly, that the case was essentially a vendetta. Drexel upset a lot of people. It upset corporate America because it enabled the corporate raiders to take down what they saw as being lazy incumbent management. It upset Wall Street. It was very successful, and it wasn't slow about boasting about its success. It started to move into underwriting and mergers and acquisition, which was supposedly the baby wick of the Wall street establishment. But he was also, in a sense, blamed for the greed is good doctrine of the 1980s, and he became something of a scapegoat. I would also say, though, that if you are so central to a market as Milken was, it's probably very difficult. It'd be almost a miracle, in fact, to not at least transgress some securities laws. There are many conflicts of interest if you are both a market maker and an underwriter. And it may well be the case that those conflicts were not brilliantly managed. So the truth probably lies between those sort of two extremes.

These accusations, the prison time, all of this is now in a distant past. Why is he being pardoned now?

I think it's worth contrasting the environment now in finance to the one when he was indicted and subsequently jailed back in the late 1980s, Milken was an anti establishment figure. These days, the financial establishment are to a large extent people who worked with Milken at Drexel Burnham in the late 1980s. Just think of the cohort effect. If you were a very bright MBA graduate in the mid-1980s, the place you wanted to go and work was Drexel. And the person you wanted to go and work with is Michael Milken. And that cohort of people who went there are now at the top of Wall street, particularly in private equity. But in finance more generally, they're the boss of Goldman Sachs, the boss of Apollo, the boss of Jefferies, the investment bank, the head of Bain Capital. It goes on and on. The list is basically a who's who of who's important in finance. He is a kind of godfather figure to these people. So it's an environment where he is much more likely to be viewed kindly and to sort of secure a pardon, I think.

Why does Mr. Milken want this pardon? He's long since out of jail, he's made his name, he's a well known, well liked philanthropist. What difference does it make?

It's a really good question and I've puzzled over it. One of the things that went with the indictment was that he was barred from the securities industry. I don't think at age 73 he wants to get back in the game. In a sense, he's already in it in a kind of informal advisory role. I think it's something, I mean, it's always a about legacy, isn't it? I suspect he wants to be recognized as a financial innovator and a thinker about finance. And to the extent that his reputation is tied up with this prosecution and jail time, that gets in the way of that. So I suspect it's legacy, but also wanting to be known as a different sort of figure than this, than the totem of the greed is good decades.

So where does the balance fall then?

If he ended up viewed by some as a shady figure, by others as the founder of some principles that are now useful. Has he been good for finance, bad for finance? Would somebody else just have done it in his place had he not done what he did?

I think he's a pretty unique figure. I mean, in order to be able to create a market for very disparate and very unusual securities and have an instant recall about their attributes, who owns them, who might want to own them, who's Selling them. That's an unusual set of abilities to have. And to have it in one person is quite unusual. And he marries that as a practitioner with a sort of deep theoretical understanding of corporate finance. So those two things aren't often found in the same person. So I think he is rather a unique figure in that regard. Has he been good for finance? Well, I think yes, he has. The idea of having a risky bond as something that allows mid market companies, smaller companies, to access non bank finance is in general a good thing. Now you can have all sorts of arguments about how much debt a company should take on, but having access to it, I think has been generally a good thing. A lot of companies might not have been built that were built if it weren't for Milken. So I think the balance sheet has quite a lot on the credit side, even if it has some things on the debit side too.

Thanks for your time, John.

You're very welcome.

Japan's chrysanthemum decorated passport opens a lot of doors. More than 190 countries admit Japanese visitors without a visa. It is by that measure the most welcomed passport in the world. Yet not many citizens have them.

Only 24% of Japanese people have a passport, which for comparison is about half the proportion of Americans that have passports.

Miki Kobayashi reports on Japan for the Economist from Tokyo.

Japan also has the lowest percentage of passport holders in the G7. And the share of people who hold passports in Japan has also been declining from about 27% back in 2005.

So why is it so low and getting lower?

So I spoke to Morishita Masami, who chaired a government committee to promote outbound travel from Japan. And she guesses that about 2/3 of Japanese population are very excited about traveling abroad. And one reason is that people simply don't get enough annual leave. Employees, for example, only get somewhere around two to three weeks of paid leave a year. And, and another reason is that the Japanese generally see the world outside of Japan as a very dangerous, very unsafe place. And another big issue is their fear or embarrassment of using non Japanese foreign languages. So Morishita san even referred to this phenomenon as almost an allergic reaction to using other foreign languages.

There's just not a culture of international travel.

Then money is another big issue. So sluggish wage growth plus a weak yen has made overseas travel less affordable for many Japanese people. And even pensioners with presumably a lot of time and a lot of disposable income are traveling less because they worry about not being able to support themselves financially in the Future you might be.

Able to understand that about pensioners, but what about the other end of the age spectrum? What about the young people, the backpackers, the wide eyed about the world?

So in the 1980s and 1990s, yes, the young backpackers, the young people, they were traveling and backpacking around the world a lot more frequently than today. And the strong yen back then made travel affordable for these young backpackers as well. But since then, backpacking for weeks, or overseas travel in general, has lost its luster, if you will. It's just become one of the many leisure options available to the Japanese population.

Well, what about the contingent of young.

People who are studying abroad?

So the number of young people studying abroad has also been declining. According to the oecd, the number of students seeking university degrees abroad outside of Japan has actually dropped by a third from its peak in 2004. And this is partly due to the fact that the number of young people in Japan is unfortunately shrinking. And, and it's also partly due to the high cost of studying abroad, especially in the United States. And there are also institutional hurdles. So because the Japanese academic year starts in April, students often find it hard to enroll in overseas programs. And most university students also go through a recruiting system during the third and fourth years of university. And this basically discourages them from leaving Japan to study. And another big reason is because they simply don't see the point. Japan's labor crunch means that companies across the country are in dire need of new employees. And so basically, these firms will hire new graduates whether they do or don't have study abroad experience on their resumes. And this mentality that studying abroad doesn't really mean much for their careers and whatnot, and has actually been quantified by a government study from last year. So the survey found that 53% of Japanese students are not interested at all in studying abroad, which was unfortunately the highest ratio among the seven countries that were covered in that survey.

So it sounds as if there are some sort of fixed structural reasons why people are leaving Japan less, but also some possibly transient economic ones. I mean, what do you, where do you think these trends will go? Will there just be ever fewer people who hold passports and use them?

Well, you know, the Japanese government, for example, has been pushing to create committees on outbound travel. And also there are a lot of study abroad scholarships that the government has been providing. And then, so there might be some uptick in the number of people that study abroad or travel. I think one of the biggest reasons why the Japanese government has been pushing for it is because it creates really good people, really good workers to work in a more international environment. In Japan, for example, we don't use a lot of English. And then so creating that incentive for people to travel abroad to see the world, study in different countries and languages, it enables them to, you know, come back and contribute to Japanese society and make the Japanese society even more international.

Miki, thank you very much for your time.

Thank you, Jason.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple podcasts and you can subscribe to the economist@exterator.com radio. Offer 12 issues for $12 or 12 pounds. See you back here on Monday.