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Unreal Expectations |
There is great concern that reallocation of subsidies will gobble up the
next four years of his government and postpone implementation of more
important policies to rectify economic structures.
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At last,
the policy to reallocate subsidies, which has been a major challenge facing
the Iranian economy, has become a law.
This
policy was rejected until recently and critics called it a ploy by the World
Bank aimed at enfeebling the Iranian economy. Now, it is a major focus for the
government and the most important item on its agenda for the coming years. It
seems that economists who are trusted by state officials have been able to
convince those officials about necessity of this measure.
A glance at President Ahmadinejad’s statements about eradication of poverty
and unemployment following a few years into the implementation of this law
would reveal that those trustee economists have gone too far in convincing the
government and have raised unjustified expectations. When such expectations
are put to test in the real world, people will lose their trust in policies.
Therefore, just in the same way that a tool like hammer cannot be expected to
do what a screwdriver does, no economic policy can be expected to do what
other policies are supposed to do.
Subsidies
reallocation policy has two important functions: improving income distribution
and correcting consumer behavior. Both will happen at micro level and will not
have any bearing on macroeconomic policies. In other words, it has happened in
an economic system like that of Mexico in 1994 to 1995 when the situation at
micro level was good (free prices and very few trade barriers), but there were
serious imbalances at macro level (including budget deficit) and this
situation finally damaged the whole economy. This means that macro-policies
are needed to deal with macroeconomic problems and micro-policies are good to
deal with problems at micro level.
Regardless of the real function of the reallocation policy, it is sure that it
would not be able to remedy unemployment and poverty in a miraculous way.
Better distribution of income will somehow reduce absolute poverty, but it is
far from possible that it would also eradicate this phenomenon. Basically,
eradication of poverty is only possible through high economic growth just in
the same way that China has achieved a world record in alleviating poverty
after a few decades of high economic growth. At no juncture in human history a
government had been able to take millions of people out of absolute poverty in
a few decades. Ways of achieving such a high economic growth are subject of a
different discussion which has nothing to do with reallocation of subsidies.
When they
talk about the relationship between inequality and growth, they are cautious
when they say that improved distribution of income may increase human capital
and lead to economic growth. This viewpoint is opposed to another which claims
that improved distribution of income is detrimental to economic growth rate.
Therefore, at a theoretical level, this is an exaggeration to say that
improved distribution of income as a result of reallocation of subsidies could
be followed by such a major development as eradication of poverty.
The first
four years of President Ahmadinejad’s government were spent on increasing
developmental expenses in the hope that a rise in state investments will be
followed by growth. In practice, however, important economic policies were
either ignored, or the government moved in the opposite direction. There is
great concern that reallocation of subsidies will gobble up the next four
years of his government and postpone implementation of more important policies
to rectify economic structures. While economies in developing countries,
especially Arab states of the region, are rapidly moving ahead, this
postponement would mean nothing but to lag behind more than before. Let’s hope
the day would come when the government would move to correct its economic
policies by paying due attention to every policy. |
