A major feature, which is taken into account when studying evolution of economic development theory, is diversity of approaches taken to economic development in the past decades.

Dr. Masoud Nili, Senior Economist

If we only paid attention to experiences gained in 1960s and 1970s, it may seem that different paradigms could led to improved welfare and better economic situation in human societies; so that, no single paradigm is more important than others. For example, in Latin America, economic development based on powerful role of state companies took place through widespread interference of governments in 1970s. Realization of high economic growth rate in those years made experts believe that the method may have positive consequences.

From the middle of 1960s up to the first half of 1970s, Brazil managed to experience an economic growth rate of over 9 percent over 10 years. Under those conditions, state-run companies were major means of investment and foreign investors mostly worked with state-run companies while the government had undertaken major financial obligations with regard to economic development.

Economic tools and policies at that time were used differently from today. They not only did not believe in flexibility of the foreign exchange rate, but its actual rate even fell for many years. In addition, the actual interest rate was negative. However, the economic growth rate was high. The government prevented impact of global economy on domestic economy by using various leverages and, through setting high tariffs and considering various limitations, provided good conditions inside the country for encouragement of developmental investment.

Another paradigm which was introduced as an ideological rival for market economy was communist system and ideological framework governing east block countries. Economic reports issued by those countries indicated high economic growth rates and rapid improvement of their economic conditions (regardless of correctness of those figures). Anyway, outward manifestations of economic performance of those countries showed that their economies were managed properly.

Great achievements of the former Union of Soviet Socialist Republics with regard to space, military, heavy and intermediate industries, made the world believe that a centralized economic system will not only perform well, but will also emerge as a serious rival for the capitalistic system. During 1950s, the United States was very concerned about continued high economic growth rate in the Soviet Union as a major threat to capitalist countries. Some traditional economic theories were the result of that situation.

Another theoretical framework was pursued in Southeast Asian countries, which was based on exports in addition to powerful role of the government and its interference, though state control was in line with market principles and to develop exports. Major tools used in that paradigm, such as foreign exchange rate and interest rate were used in quite the opposite direction compared to Latin America. The foreign exchange rate was quite flexible and changed to encourage exports while the interest rate, provided good incentives for saving and creating surplus money for investment in the economic fields.

Therefore, there was a diversity of viewpoints on economic development in those years, which gave rise to diverse practical paradigms too and there was no form of convergence among different economic theories of that time. As time went by, countries following suit with the first paradigm, including Latin America, were faced with a crisis in the form of heavy foreign debt and soaring inflation rates. The communist regimes also started to fall apart after the middle of 1980s.

In fact, both paradigms were given up. Since the beginning of 1990s we have witnessed gradual emergence of some convergence in economic theories. The 19^th century was a time for changing ideas while the 20^th century was the time to see the fruit of those ideas in the form of high growth rates of per capita income. Most developments occurred in the second half of the 20^th century, especially in 1990s. Therefore, we are in a unique juncture of human history when different experiences abound. Abandonment of economic paradigm of Latin America and collapse of the communist system, which presented an ideological paradigm for economic developments as well as more tendency toward export-based model in Southeast Asian countries are major experiences that have led to some convergence among economic ideas.

Today, there is not much diversity in the field of economic development as well as policymaking. That is, not more than one paradigm can be discerned for economic development. Countries that have been successful with regard to economic activities enjoy commonalties and do not avail of different paradigms. In view of domestic conditions in any country, different solutions are used, which indicate that there are different approaches to this issue. However, in general, countries that have been successful in economic developments share the following features:

Firstly, they have come up with a powerful legal framework for private ownership and have provided needed guarantees to encourage private sector’s investments.

Secondly, they have been able to establish strong ties with the outside world in three important fields of trade, investment as well as technical and technological relations. They have also been able to connect the said fields. That is, trade development is greatly tied to foreign investment and both of them have close relation to technological development.

Therefore, economically successful countries have established good foreign relations around the abovementioned axes and have availed of economic advantages in international sphere as a result of having relations with bigger markets. Also, since high accumulation of capital in advanced countries has reduced capital return rate, capital has been transferred from advanced countries to other states and has enabled them to achieve very high and persistent economic growth rates.

Thirdly, the role of governments in those countries has not been weakened, but has increased. Of course, the government does not interfere in production or trade activities, but provides needed infrastructures for economic development. The government plays a major role in providing and developing legal and physical infrastructures as well as supporting human resources (through emphasis on education), establishing institutions and other issues. Therefore, disputes in past decades about whether the governments should play a role or not has given way to new arguments about what role should be played by governments.

The government, in modern theories, supplements market and defends economic development. It is not an alternative for the market. During past decades, expert defended the theory of government replacing market, which would have decreased efficiency of national economies. Therefore, a new paradigm is currently emerging both for the involvement of government and the private sector in economy and for establishment of relations with the outside world. For this reason, there is less diversity of viewpoints. Despite past decades when there were many controversies about the main approaches, today, most discussions are focused on solutions and executive mechanisms and less attention is paid to "what the government should do," or "what the private sector should do," or "what role should be played by the private sector?" those stages have been passed and the scope of economic development theories has become narrower.

From the viewpoint of economic policy making, passing through this stage will enable thinkers to pay more attention to adapting conditions of their countries with the new paradigm and prevent appearance of new problems instead of being preoccupied with philosophical and general topics. It seems that this is a vast field and there is a lot of room which should be filled up. This is a major development in international arena.

Our economy is currently facing a dichotomy. One side of the coin is that our economic conditions are fairly stable. Although a five-percent economic growth rates is lower than what is needed to assure a secure future, it is not considered too low. Inflation rate is lower than average inflation rate of 20 percent which existed last year. These are examples of positive performance of our economic system.

However, we must pay more attention to lower layer of this issue because it will enable us to foresee the future, identify the main concerns and find out the direction in which we should move. Some concerns have been there for long years and have become part of the identity of our economic system. Some of them have become more serious in recent years and have led to new fears. Those concerns are discussed blow and it seems that there is some for of consensus about them in our society.

1. Everybody would agree that the government is expanding despite the current talk about downsizing it. They always say that the government should give more room to the private sector and limit its interference to policy making.

2. Our economic system contains in it a hidden, though very big, system of subsidies. The most important example is subsidy that is paid on energy, which amounts to staggering figure of 50 billion dollars a year.

3. Budget deficit has been nagging our economic system for years as the most important short-term economic challenge that is facing the country and has overshadowed performance of our financial system, reducing quality and quantity of government’s services. Remarkable increase in people’s expectations from the government in 1974-1977, increased governments expenses and subsequent burgeoning liquidity and rising inflation during those years and the resultant pay rise or civil servants in reaction to the said conditions, were major economic factors that brought about the collapse of the former political system of Iran along with a host of cultural, social and political reasons. Repeating the same expansionary policies despite evident budget deficit and undertaking major financial obligations by the government in cities and villages, is a dangerous game, which is started, it would be very difficult to stop.

4. Inflation is another problem facing our economic system. During the past 20 years, inflation rate has stood at an average of about 18 percent. In some years, expansionary monetary policies have increased inflation and, then, new policies were made to bring it down. Anyway, there is no doubt that inflation is a major obstacle on the way of economic growth and improvement of people’s living standards and welfare.

5. Another concern is instability of government’s financial obligations. In general, a major role for the government is to assure economic stability. That is, the government should be center of gravity of economic stability. Basically, since the government is facing financial problems, it undertakes obligations that, in turn, affect people’s behavior in various fields. However, since the government is not able to meet its obligations both with regard to investment, and current expenses, this leads to financial instability and confusion.

6. Another problem is stability of foreign exchange rate due to considerable difference in inflation rate in Iran and other countries. This will reduce real parity rate of foreign currency. When this happens, economy will lose its competitiveness. As a result, exports became more expensive and imports became less costly. Therefore, domestically produced goods will suffer in terms of competition in international arena with the end result being rent seeking and widespread administrative corruption.

7. The next concern is lack of good relations with the outside world. We have not been able to establish good economic relationship with the world and avail of its advantages. The most active economic sector, which connects us to the world, is oil sector. So, we have no performed suitably with regard to getting connected to the world.

8. Our country does not have a powerful social security system or any other system to enable us fight poverty in a suitable manner and improve welfare conditions of low-income social strata. Despite the fact that a lot of emphasis has been put on this issue, we are witnessing an unacceptable situation with regard to lower deciles of the society.

9. Problem with pricing and government’s interference in setting price of economic corporations, is another problem which has an on-and-off nature. Every few years, the government increases its interference in setting prices and imposes sever limitations both on the private and state-run companies.

10. Another issue is passive role of the private sector. The private sector in Iran is too weak and plays a passive role in economy. It has very limited influence in entrepreneurship and low capacity for creativity. Under conditions when the sector is surrounded by all forms of instability and uncertainties, private sector activists have reached the conclusion that instead of spending time on boosting creativity, they should pay more attention to boost their lobby with the government to meet their interests. The interests of the private sector are closely related to the government. Therefore, the private sector is totally ineffective and passive. We have restricted the capabilities of our private sector and claim that since the private sector is weak, the government cannot transfer its economic activities to it.

If a new private entity is taking shape in our ministries, it is subject to governmental regulations and lacks due effectiveness of a real private sector. This type of private sector takes orders from government and enjoys powerful relations with the executive bodies that are affiliated to the government.

11. Another feature of our economy is overreliance on oil revenues. Our economic indicators are heavily affected by oil price fluctuations.

12. Low competitiveness is another problem nagging our economic system. What we produce right now can rarely survive under competitive conditions in international markets, except when natural resources play a dominant part and there is less need to technology, creativeness, and efficiency. Chemical, metal, and foodstuff industries account for more than 70-75 percent of our industrial exports. All those industries are heavily dependent on natural resources.

13. The final problem is existence of monopolies in our market, which have reduced dynamism of the Iranian economic system. Only those companies fare well which enjoy monopolized conditions in the market. Due to the surplus that they create as a result of monopolies, have a high capacity for attracting scarce economic inputs, both in terms of manpower and other inputs. However, those inputs do not increase effectiveness of such companies because monopoly is always associated with inefficiency

In this way, high-quality economic inputs are attracted by monopolistic companies, which are the least efficient economic entities in the world. Therefore, when our economic system, for any reason, is exposed to international competition, our competitive sectors, which have not been able to create much surplus and have failed in attracting inputs, as well as monopolistic companies that have wasted good inputs will come to harm. This trend can face of with serious problems in the future.

In view of the dominant attitude in our decision making system and the common culture in our society, the government is supposed to develop incessantly and this notion has been institutionalized. That is, we consider that state management as efficient which could continuously expand its domination. Governmental-based development is deeply rooted in the minds of our managers and people and it goes without saying that such development will be accompanied with increased government spending. In fact, the main problem is that development of the government takes place without costing anything for the society or in the absence of good balance between development and its social costs.

If government’s services are to be developed, its revenues should also increase. However, the government owes more than 60 percent of its revenues to oil exports. Oil revenues mean the money earned through oil exports minus domestic oil consumption, which is multiplied by oil price and foreign exchange parity rate. Since foreign exchange rate has been constant over the past few years, any change in government’s revenues will depend on a parallel change in exports and international prices of crude oil.

A temporary increase in global oil prices will result in permanent increase in government’s expenses. This phenomenon is the main reason for the budget deficit in our economic system. On average, increase in oil revenues has not matched the increase in the size of the government. Since the real economic sectors are weak, the government cannot earn much through taxation.

Therefore, if we consider the growing financial obligations of the government, on the one side, and lack of suitable growth in revenues, on the other side, we would find out that budget deficit is an integral part of our economic system. Therefore, expectations from the government and its limitations for increasing revenues have institutionalized budget deficit in the Iranian economic system. The budget deficit has two major consequences: inflation and financial instability of the government.

When inflation increases, so does the government’s involvement in setting prices. This has been frequently occurred in our country. When the government assumes a more active role in setting prices, its interference will include the private sector and ownership rights are seriously jeopardized. On the other hand, pressure mounts on state-run companies, with the end result of reduced governmental investment.

Whenever the government faces financial pressure, state-run companies constitute the first place for its interference and they are often required to settle certain sums to government’s account. Therefore, inflation facilitates government’s interference in the economy. More interference by government in economic activities will further restrict investment in state-run companies, on the one side, and undermine private ownership rights, on the other side. When the private sector is deprived of suitable ownership rights, or uncertainties resulting from government’s interference increase, the private sector will naturally play the same passive role in the economy which was discussed above.