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July 2013, No. 67


Economy

Stagflation

Great Legacy of Government


The main policy that the next government should adopt is development
of monetary and economic order and discipline and the existing
irregularities should be put to an end.


Dr. Ahmad Mir-Motahhari

In order to pass through the present condition, it is required to implement a transitional plan and two budgetary plans so that we would be able to move on in a path which would take us to our direction and position in the Iranian calendar year 1384 (2005-2006).

The future government should take measures to modify the structure in the field of policy making and their implementation at the beginning of its tenure. The workbook of the government shows it has not been successful in dealing with and solving economic problems, especially in removing economic stagnation and in reducing inflation.

Stagflation is now the nation's most important challenge. On the one hand, we are faced with a decline in employment and on the other an ever-increasing rise in prices. By looking at the prevailing conditions, we will notice that for certain reasons some have been within the authority of the government and some others have not. Issues related to the international sanctions have been out of the government control but cases such as self-sanctioning which have emerged as a result of government's economic policies are among components that have been under the control of the government.

In this period, we were faced with declined oil revenues, reduced development budgets, immense government debts especially to the banking system, to contractors and to the Central Bank, the collection of which has created conditions that the future government cannot move along the path of the policy of generosity in the field of reproduction of income; as the pace of investment has been reduced and economic growth rate has become negative.

Under the hard stagflation condition, increase in liquidity would make the economy highly vulnerable. The nature of stagflation is such that if we intend to stop stagnation, inflation would be accelerated and if we decide to tackle the inflation problem, economic stagnation would be fueled.

Economic Stability, Major Priority of Government: In the future administration, any president with any political and economic disposition should first seek to create stability in the macro economy which necessitates dealing with production sector and finding mechanisms to provide the required resources for addressing the demands of the production sector. To this end, public and banking savings should be directed towards production sector. In the next step, focus should be on increase of prices and affect them so that they would go up further. This should not be compulsory but needs management.

To reach the mentioned outcomes, develop economic stability and secure resources for bringing about evolution in the production sector, monetary and banking policies should be adopted in proportion with these demands. Annual budgets too should be regulated with the aim of increasing economic activities and coming out of the status quo. The main policy that the next government should adopt is development of monetary and economic order and discipline and the existing irregularities should be put to an end. Meanwhile, by reviewing the social security policies, conditions should be created that people would sustain the least harm from the present irregularities.

Targeted Subsidies, an Instrument which Turned into a Target: Targeted subsidies (the Economic Reform Plan) and cash payments were initially an instrument to reach great objectives such as saving in energy consumption by modification of prices. Under such conditions, the revenues obtained through this system were expected to be consumed in the production sector. This instrument, however, turned into a target itself in the 10th government and the money obtained thereby was funneled towards cash payments to people instead of being spent in the production sector.

Taking into consideration the living condition, inflation and economic stagnation in the society, the forthcoming government has no alternative but to continue cash payments and its removal would be dangerous for people of certain walks of life. This trend should continue under the current conditions, however, the country's economic status does not allow increase in the payments; but by continuing the current trend, employment and economic grounds should be prepared for its removal within the next one or two years.

A Two-Year Plan for Returning to 2005: In case the target of the next president would be the above-mentioned cases, first he should adopt and implement a two-year plan in order to transit from the present status quo. After implementing the two budgetary plans, we could be in a condition that we could move toward the status the country had in the year 2005. In that transitional plan, the level of acceptance of supervision and systematic orientation should be promoted and then we should move forward in line with the Vision Plan.

 

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  July 2013
No. 67