The Forum for Partners in Iran's Marketplace

September 2017, No. 85


Major Problems of Iranís Economy

Major economic problems of our society are that markets due to government interventions do not act properly and by giving false price signals cause deviation in the allocation of rare resources.

Dr. Mousa Ghaninejad,
Senior Economist

Without identifying the root causes of the problem, no efficient solution could be sought. This clear order of common sense is often overlooked in the analysis of issues pertaining to Iranís economy. The reason for the emergence of such a dilemma rests in the complexity of economic phenomena and sound diagnosis of cause and effect relationship among them which, in itself, returns to the lack of a coherent scientific theory for explanation of the issue.

The point which most of the time is neglected, is the presence of the concept of the market in all economic phenomena; no economic proposition, either macro or micro, can be found wherein the concept of price and as a result the market, is not concealed in it. Therefore, understanding complicated economic phenomena and the causal relationships governing over them calls for recognition of the market and its actual functioning.

The most important function of the market is to specify the exchange rate or the relative price which, as a sign shows the relative scarcity of resources in relation to the constantly changing demands of human beings. With regard to the changing physical condition of the resources, technological advances, and perhaps most important of all, evolution in human demands and desirability, it could be said that the relative prices are constantly exposed to changes. Speaking about price stabilization in fact is nothing but rejection of the reality about existence of the market. In this way, the market can be considered the online notification system about the constantly changing relative scarcity of resources due to the developments in the physical and technological conditions, as well as taste tendencies of human beings.

It is on the basis of market price information that economic players, either consumers or manufacturers, can use rare resources in an optimal or favorable form in order to let ďoptimum allocationĒ of rare resources take place in the society. Any disruption in this information dissemination system would naturally result in making decisions on the basis of incorrect information which would deprive the society of the efficient use of the rare resources. Sound decision making cannot be made with incorrect information. By accepting such a theoretical framework, one can say with certainty that the main cause of most economic problems, which emerges from the wastage resulting from the incorrect use of the resources, is due to the disruption created in the information dissemination system of prices. In societies like Iran, where there is no organized market for any reason, such a dilemma exposes itself with more severity.

Pointing to two specified cases about Iranís economy will shed further light on the subject. For consecutive years, our country has been standing on the first front of the countries with highest per capita consumption (read wastages) of the most important natural resources; that is water and energy. These days, experts are constantly referring to the unwise use of water resources in the country and the impending and catastrophic water crisis. On the other hand, consumption of all types of energy carriers in our country in comparison with the world average is intensely high; this is to the extent that in spite of possessing huge oil and gas reserves, we are forced to import significant amounts of gasoline from abroad.

The root of both problems returns to a question that is disruption in dissemination of information of the market system. The ownership of the countryís water and energy reserves, in common, belongs to the entire people of Iran and the government, as the representative or the legal representative of the owners, should subject the use of these reserves to the maintenance of the rights of the owners. In other words, the use of these reserves should be through the payment of their real price, namely by considering the physical and technological conditions as well as desirability of the consumers. But, since the governments from a distant past have not soundly undertaken their duties in safeguarding the ownership rights of their clients and have merely considered short-term political interests, the result of their performance has been nothing but wastages of these resources.

On the use of rare underground water reserves in agricultural areas not only no price has been required from the consumers but in practice in different ways subsidies have been paid to their activities which are devoid of any economic justification. Wheat production by using energy subsidies has been achieved through widespread waste of water resources and has been encouraged with a reward as guaranteed purchase at a price higher than the world prices. The main cause of the destruction of underground water resources has been the incorrect price set by the government for the agriculture sector by every means which means active participation in encouraging the plunder of common properties of the people. Despite the slogans of some authorities on water crisis this destructive policy is still being practiced by spending out of public resources.

 I would like to remind that the government in order to implement a policy of food self-sufficiency in the Persian year 1395 (2016-2017), with borrowing and fanning the flames of budget deficit, spent about 150 thousand billion rials on guaranteed purchase of wheat and since the purchasing price was twice the international prices, traffickers were encouraged to import wheat and sell it to the government, and the government is now faced with the problem of surplus wheat reserves!

The policies governing the energy sector more or less have the same situation. The government by holding down the prices of energy carriers within the country is sending the wrong signals to the consumers ranging from corporations or households and encourages them to irregularly consume rare energy resources. It is more than two years that the nominal price of gasoline in the country has not been changed; while during the same period the general level of prices has increased by more than 20%. In other words, the relative or real price of gasoline in this period has decreased by 20% and naturally its consumption and trafficking has increased so much so that domestic production does not meet demand and the government has inevitably turned to the import of gasoline.

All of this is happening while our metropolises are all severely suffering from air pollution -- a pollution which entails human and financial losses. It is said that over 70% of the pollution is related to auto fuels. Added to this, the government is heavily plagued by financial bottlenecks and in order to meet some of its costs inevitably it has to borrow from different sources. Here too, the main problem rests in governmentís indifference towards economic logic and giving false price signs to the economic players. But it should be noted that the catastrophic results of the governmentís anti-economic behavior is not confined to the common water resources; rather anytime the market system has been distorted through the interference of the government similar results have been achieved.

Major economic problems of our society are that markets due to government interventions do not act properly and by giving false price signals cause deviation in the allocation of rare resources. In order to solve the economic problems the causes should be dealt with not the effects. The drop in the level of revenues, shortage of general demand, stock surplus in the warehouses of corporations, and the massive unemployment are not the main reason for economic problems, rather they all are the effects of a cause. Corporations, due to receiving incorrect price information from the disturbed and manipulated markets have made wrong decisions and are faced with the problem of their product not being sold.

This problem might be solved temporarily by stimulating the demand through the trick of granting a variety of subsidies to consumers or through export, the measure the government took in 1394 (2015-2016) in the automotive industry; but the result would be nothing except procrastination, stockpiling and complicating the problems. The mushroom growth of credit institutes which have brought the monetary and financial sector to a standstill through their irresponsible behavior is the result of incorrect policies for the suppression of money market on the one hand, and the unsparing powerful injection of money by the Central Bank on the other.

The merger of these institutions is not the ultimate solution. As long as the prescribed policies are governing over the money and credit market, this dilemma will continue in various forms. This string is too long and in all economic sectors there are numerous similar examples. The 11th government despite its valuable achievements in foreign policy and in restoring tranquility to the national economy, unfortunately failed to deal with the main cause of economic dilemmas, that is to say the inefficiency of the information dissemination system of the market due to different interventions in its mechanism and powerful presence of institutions suppressing the market.

Could the 12th government be expected to focus its economic approach to the major economic problems? The initial answer to this question could perhaps be found in the composition of the economic team of the 12th government.


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  September 2017
No. 85