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June 2017, No. 84


Opinion

 

High Inflation, Low Growth


What brought the growing trend of the economy in the 60s to an impasse was disorder in financial and monetary policies along with exercising heavy bureaucracy and creating market repressive organizations, which altogether made the business atmosphere turbulent and insecure.


Dr. Mousa Ghaninejad, Economist

Iranís economy for more than four decades has been affected by a chronic disease the symptoms of which are manifested in the form of high inflation and low growth rate in the long run. By taking a glance at the process of these two variables over the past four decades, it will become clear that the two elements in the course of time have recorded severe and unpredictable fluctuations. Total productivity in the national economy during the said period has become depleted.

In some years when the growth rate was high, it was mainly due to the rising level of an exogenous factor called oil revenues. If we compare the situation of the recent four decades with the golden ages of Iranís economy in the 60s (before the Islamic Revolution), when the inflation rate reached an average rate of below 4 percent and the economic growth rate was above 10 percent and the change pace was relatively stable with no turbulence, we will better understand the dimensions of the chronic disease that has affected our economy.

Had that evolutionary trend continued, today Iranís economic power would have been naturally higher than those of South Korea, Turkey and many other similar countries. Indeed, how that experience became possible and why it did not continue? What was the disease that affected an economy which was proudly taking its right and safe course and made it crippled gradually? To provide an answer to this question that would cover all its dimensions is not possible in this limited space, but a few key and meaningful points can be cited which could perhaps shed further light on the issue.

Important features of that golden era differentiate it from the subsequent decades in Iranís economy some of which are mentioned here. The 60s started with the regulated fiscal and monetary policies of the government for inflation control and those policies continued up to the beginning of the Fifth Development Plan, in early years of 1970s. Credit policies were such that liquidity growth in this period was in harmony with the economic growth and as a result, the general level of prices did not suffer severe fluctuations.

In addition, in the wake of the adoption of the law encouraging foreign investment in the late 50s and the opening of the business atmosphere, capital and advanced technology began entering the country unprecedentedly in the 60s. The open business atmosphere and lack of market suppressive institutions provided the possibility for accelerated market growth of the private sector with the help and cooperation of foreign enterprises and advanced technologies.

Of course, heavy industries such as steel, auto manufacturing and petrochemicals with the government investment and foreign technology in late 60s further accelerated the economic growth. However, the main engine of the economic growth of the country was a brisk and agile private sector, which was quickly developing thanks to its successful operation in trade, services and processing industries.

What befell the growing Iranian economy like a nightmare and disrupted its balanced progress was the huge and irrational increase in the costs of the Fifth Development Plan by the government in 1973, which was tripled as compared to the Fourth Plan. Unfortunately, this unjustified and illusory ambition which was inspired by the unexpected success of the previous two development plans coincided with an unprecedented increase in governmentís oil revenues after the adoption of the Fifth Plan. As a result, a new illusion was developed as though the financial bottleneck as the most important obstacle in the way of accelerating growth had been removed and implementation of any project from then on would be possible! In this way, the Fifth Plan was revised and its credits were doubled and the annual economic growth was projected at more than 25%!

The injection of a massive volume of liquidity into the society in a short period of time which was mainly done by the government caused disorder and confusion in the harmonized movement of the national economy. Infrastructural bottlenecks generated a massive wastage of the resources. The general level of commodity prices started to increase and in order to check the trend, the government on the one hand created market suppressive institutions such as Price Monitoring Center and, on the other hand, switched on the pipes for low cost imports by relying on the petrodollars. The result of these policies was weakening of the private sector against the public sector which was getting fatter every day.

Since that time, the government cast its shadow on the national economy from two directions and pushed the emerging and growing private sector into the margin; one measure was through direct involvement of all kinds of economic and entrepreneurial activities which made it harder for the private sector; the other was through comprehensive and crippling interventions in all markets by creating wide and long bureaucracy which was very costly and deterrent for the private sector.

Unfortunately, the vicious legacy remaining from the overall government control of the economy in mid 70s, continued after the (1979) Islamic Revolution; of course the exception was that the abundance of oil revenues did not repeat up to mid-2000s. The result of this hurtful legacy has been continued and irregular monetary and fiscal policies, two-digit inflation rate, and weak economic growth rate.

Various governments have time and again tried what has already been tried in order to restore sustainable economic prosperity to the country with the lever of supportive policies but to no avail. Granting all types of subsidies to producers and consumers, introducing high tariffs to support domestic production, distribution of financial resources to inefficient and loser enterprises have been repeated for four decades with the only result being waste of resources.

Hasnít the time arrived to try things that have not been tried over those four decades? What brought the growing trend of the economy in the 60s to an impasse was disorder in financial and monetary policies along with exercising heavy bureaucracy and creating market repressive organizations, which altogether made the business atmosphere turbulent and insecure.

Liberalization of the business atmosphere through suspension of investment deterrent permits and elimination of interventionist agencies in the market is the only production boosting policy, which has no financial cost. Is there anyone to take this cost-free solution seriously and try it once?

 

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  June 2017
No. 84