According to President Khatami's speech to the tax authority officials at a meeting held during the week designated as Tax Week, it seems that he and his government are determined to pursue radical changes to steer the Iranian economy onto the right track. This attempt probably deserves a moment of reflection.

It is quite true that various types of economies round the world comprise different weightings of the private and public sectors due to a lot of factors. Their state of development, availability of natural resources, and most important of all, political ideologies dictating their preferences on what sort of mix they choose for their economies are just but a few to mention.

At the beginning of the Islamic Revolution of Iran, the public sector was given a lot of importance with the private sector covering only the traditional types of business. This was mainly due to nationalization on a large scale. The preoccupation of the authorities and extensive reallocation of resources due to the Iran-Iraq war also inflicted heavy losses on the Iranian economy. During this period, countries of Western Europe, the U.S. and Southeast Asia were embracing free market policies of privatization and deregulation, promoting the private sector at the expense of the public sector.

Within the last decade or so, Iran also embarked on a privatization program trying to reduce the state burden and give more priority to its private sector. However, confronted with so many core economic problems such as rampant inflation, high unemployment and roller-coaster oil revenues, the government found that devising a coherent and comprehensive package to cure all the economic ills once and for all was an overwhelming task.

Since public spending relies heavily on tax revenues, President Khatami noted that 90% of the state budget in most countries constitutes tax proceeds whereas in Iran it amounts to only 30%.

Expressed as a share of GDP, it represents 7% as compared with 40% elsewhere. Worse still, he is concerned that 70% of the government expenditure covers only day to day expenses, meaning the depletion of Iranian assets for generations to come. He was critical of the traditional and ailing tax system, which acted as a disincentive to taxpayers and perpetuated Iranians' historic attitude of unwillingness to pay.

A good tax regime he reckons requires a good tax law and proper implementation. Khatami said the object of reform entails reduction of rates in favor of the investor and the producer. This bill was passed recently by the parliament. The government and the parliament are currently considering value-added tax (VAT) and the lumping together of tariffs. The president believes the object of economic development and social justice needs a proper tax mechanism together with an efficient social security system. In his opinion, tax revenues play an important role in financing the heavy burden of government expenditures on housing, education, the National Health Service, and social security for all.

The establishment of a single exchange rate for the Iranian rial against other major currencies, reform of the tax regime and the introduction of the new investment law, together with the determination of the government to encourage private and international investment, are all clear signs that Iran means business. These efforts may go a long way in curing some of the economic problems facing Iran at present. But sustained economic reforms with the establishment of powerful and accountable watchdogs will hopefully ensure Iran's economic recovery in the medium to long-term.