Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion. Read more opinion Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London. Read more opinion SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Atta Kenare/AFP/Getty Images Photographer: Atta Kenare/AFP/Getty Images

A few weeks ago, Bloomberg View economics writer Noah Smith wrote a blog post on his website, noahpinion, arguing that Iran was a fundamentally weak country. He bounced his idea off Bloomberg View's international affairs specialist, Marc Champion, who disagreed. They took the exchange online.

Noah: Opponents of the Iran nuclear deal often talk about Iran as a powerful, ascendant adversary and claim that the deal would make it even stronger. Now, I'm no expert on foreign policy, but I know a little about economics, and the claim of Iranian strength has always rung false to me.

Iran is a petrostate dependent on oil and the recent drop in oil prices has hit it hard and probably won't be reversed because of U.S. shale production. The rest of Iran's economy is corrupt and dominated by the Revolutionary Guard corps -- a typical outcome in countries suffering from the "resource curse." Shouldn't we take all of this as a sign that Iran's position with or without the deal is fundamentally weak?

Marc: Noah, your instinct to question some of the hyperbole about Iran is right. Yes, Iran suffers from the oil curse and its economy is so corrupt it prevents the efficient extraction of oil and gas. In the year before the Shah was toppled in 1979, Iran produced about 6 million barrels of oil a day. Today, that figure is about 2.8 million; even before the latest sanctions bit, output struggled to reach 4 million barrels a day. By the same token, it would only take a few good political decisions to restore some of that lost opportunity.

The Revolutionary Guard and other beneficiaries of corruption will resist the economic liberalization Iran needs, but the essential point is that Iran's structural problems don’t prevent it from being a regional power. The economic weaknesses you outline have applied since 1979, and despite this Iran has managed to project power, support proxies such as Hezbollah and Hamas, conduct or sponsor terrorist attacks abroad and challenge U.S. interests in the Gulf region. Even after expanded international sanctions were imposed over Iran’s nuclear program in 2012, roughly halving Iran’s oil exports and severely shrinking the government’s budget, Iran was able to provide Syrian President Bashar al-Assad in Syria with an estimated $6 billion annually in financial, as well as military support.

QuickTake Iran's Nuclear Program

The concern for the U.S. and Middle Eastern countries such as Saudi Arabia and Israel is that when sanctions are lifted, Iran will have at least an additional $55 billion in unfrozen assets, plus tens of billions of dollars in increased revenue from resumed oil exports, to lavish on its foreign policies. Again, beware of hyperbole -- the vast majority of this money would be spent on the domestic economy, to assuage an unhappy population (the regime's primary concern is to hold onto power). Even so, it would be naive to think that none of this cash would go toward the regime's foreign adventures.

Noah: OK, let’s talk about Iran's ability to project power. Not only is Iran outspent by its Middle East rivals, but it's rapidly running low on manpower, a key determinant of military strength. Its total fertility rate is now about 1.8, below the replacement level of 2.1. This is a spectacular decline in fertility -- the number was more than six in the early 1980s, and plummeted to replacement level by 2001. That means that the number of young Iranian men fit for military service has already fallen, and will continue to fall dramatically. Shouldn’t we regard this as a substantial weakening of Iranian military strength, relative to three decades ago?

Marc: Iran's total military consists of about 530,000 troops. Of these, 220,000 are 18-year-old conscripts, so there could be some pressure on the ability to recruit those as a result of the low birth rate -- even for a nation of about 80 million. But Iran doesn't rely on troop numbers or conscripts to project power, because it has no intention of invading its neighbors in a conventional war. Iran's military has been designed for asymmetrical warfare. That’s one reason why so much of Iranian defense spending goes to the Revolutionary Guard, rather than the numerically larger regular armed forces:

The Revolutionary Guard accounts for about 125,000 troops. This is a well-trained, professional, financially favored and ideologically motivated force. It also serves as the command structure for the Basij paramilitaries that crushed democratic protests in 2009, and the militia that would be called up to fight should Iran ever be attacked. Iran will have no difficulty in continuing to recruit for the Guard, unless the regime fundamentally changes. There is no sign yet of that.

There's one other thing to say about the collapse in Iranian fertility rates. The drop was, in part, the result of policies that encouraged contraception in the 1980s, as the regime sought a more developed-nation demographic profile. Now, as the high birth rates of 20 to 30 years ago pass through the workforce, Iran is enjoying a high ratio of workers to dependents. In 2010, a U.S. National Intelligence Council paper found the best analogy for Iran's particular demographic pattern to be Japan in 1955, which did very well in the following decades. So it isn't demography that's holding back Iran right now, but the regime.

You note the huge gap between military spending by the Saudis and the other Gulf Cooperation Council states and Iran. The disparity is even bigger than this chart on military procurement spending suggests:

The GCC countries have built up their militaries as adjuncts to the allied U.S. forces that are hosted in the region. For Iran to launch any kind of conventional attack on these countries would be suicidal, triggering an overwhelming U.S. response. Iraq's Saddam Hussein discovered that when he invaded Kuwait in 1990 and Iran won't make the same mistake.

Similarly, Iran’s naval fleet is but a swarm of gnats compared to just one U.S. carrier fleet. So it has developed a missile capacity to threaten the Strait of Hormuz, and its little boats and few submarines are adequate to harass shipping if need be. In other words it has invested just enough that military planners in the U.S. and the Gulf States always have to worry about Iran's potential to disrupt the 20 percent of global oil supplies that pass through Hormuz.

Even though much of Iran's equipment is obsolete, its military is surprisingly effective. Without Iranian advisers and Hezbollah ground forces, for example, Syrian leader Assad would have fallen long ago, costing Iran a critical regional ally. Similarly in Iraq, Iranian backed and advised militias have proved more effective than the country's U.S.-equipped and -trained national army. Iran’s support for Hezbollah and Hamas, meanwhile, has posed significant threats to Israeli security for years.

By comparison, the Saudi military is impressively equipped but ineffectual (look at its two incursions into Yemen in failed efforts to defeat the Iranian-allied Houthis).

Noah: I agree that Iran tries to project power mostly through its various proxies in the region -- Hezbollah, the Assad regime, the Shiite-dominated Iraqi government, and the Houthis in Yemen. However, most of these proxies seem to be entangled in unwinnable wars. Given that these proxy wars also cost Iran money (and sometimes lives) don’t they too represent a significant source of weakness for Iran?

Marc: Let's take these one at a time. Hezbollah was created by Iran to do two things: contain and attack Israel, and ensure that Shiite and Iranian allies control Lebanon. So to that extent, Hezbollah's natural state is to be embroiled in endless, unwinnable conflicts and it has been pretty successful at that. Saudi Arabia invested a great deal in trying to break Hezbollah's grip in Lebanon, and it failed. In Syria, clearly, Iran would be better off if Assad wasn't under siege. On the other hand, thanks to intervention from Iran and Hezbollah, Assad has defied all comers (including the U.S., the Saudis, Islamic State, al Qaeda and a majority of his own population) to stay in power. Never before has Iran had this much control over the government in Damascus. The financial cost is considerable, but the regime in Tehran seems happy to pay it.

How about Iraq? Well, until 12 years ago, Iraq under Saddam Hussein was Iran's most implacable enemy -- it invaded Iran in 1980, and by the time the war ended in 1988, as many as 1 million Iranians had died. Thanks to an ill-advised U.S. invasion in 2003, designed to install a Western-style democracy in Baghdad and topple the regime in Tehran in a domino effect, Iran is at its strongest and least isolated since 1979. The government in Baghdad is now a Shiite ally instead of a Sunni foe: Iraq is open to trade with Iran; the Iraqi prime minister can't be chosen without Iranian approval; and Iranian intelligence roams freely in Iraq. Sure, Islamic State's dominance in the western Sunni areas of Iraq is a bad thing, but it is a problem to be managed -- IS isn't going to invade Iran. Iraq under Saddam was a threat.

As for the Houthis in Yemen, it isn't clear how deeply Iran has been involved in their latest campaign. No matter, this is a very low-cost way for Iran of causing much larger problems for Saudi Arabia and the United Arab Emirates, which have become directly involved in the conflict. Iran doesn't need to run Yemen, just destabilize it.

Noah: One final source of Iranian weakness, it seems to me, is the fact that it is a Shiite country surrounded by Sunni powers. Saudi Arabia is weaker than Iran, but it has deep pockets that it can use to fund Sunni terrorists and proxy armies to bleed and terrorize Iran. Meanwhile, Iran is also close to Pakistan, Turkey and Egypt -- large Sunni countries that serve as a long-term check on its power. Don’t you think this is the case?

Marc: This is a big reason why I and many others don't believe Iran when it says it isn't pursuing a nuclear weapon. Iran is a Shiite nation, surrounded by mostly Sunni states, at least one of which is nuclear armed and the rest of which are backed by the U.S. So the immunity gained by acquiring a nuclear deterrent is rational for the Iranian regime, especially so long as it pursues provocative foreign policies that might trigger a military response.

Even so, the two founding tenets of the Iranian regime’s foreign policy are its opposition to the U.S. and Israel -- how would Iranian actions against Israel be constrained by, for example, Turkey? At the moment, Turkey is almost as hostile to Israel as Iran. As for the U.S., yes, its alliance with the region's Sunni powers certainly constrains Iran and has since the revolution. But that merely explains why Iranian policies so often threaten U.S. interests.

Noah: To sum up my view, Marc makes some good points but it still seems to me that Iran is in a position very similar to that of the Soviet Union in the early 1980s, another country whose strength we greatly overestimated. That doesn’t mean the nuclear deal is a good idea for the U.S., but I think Iran may need the deal simply to stay afloat a lot more than many realize.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the authors on this story:

Noah Smith at nsmith150@bloomberg.net

Marc Champion at mchampion7@bloomberg.net

To contact the editor on this story:

James Greiff at jgreiff@bloomberg.net