The Forum for Partners in Iran's Marketplace

January 2019, No. 90

Q & A

Resilient Economy versus Rentier Economy

Economic activists in the globalized and international economy today cannot rely solely on what we have inside.

Uncertainty in Iran’s economy has probably reached its peak these days: A climax that does not seem to descend so soon. A combination of uncertainty and frustration has driven the economic community into hasty and emotional actions. Moreover, the government’s record in making sudden decisions, which are often retroactive, has left economic activists more skeptical about making decisions. Dr Mousa Ghaninejad, an economist, believes that today’s uncertainty is the result of yesterday’s interferences: chronic and repeated interventions by the government in the economy, which has always led to violations of principles such as property rights and disregard for market rules and regulations. The unavoidable result cannot be anything other than the state of instability and confusion today. Nonetheless, this situation also has a solution: liberalization, which can gradually clear the economy from rent seeking and replace it with competition. 

What are the optimal tools to deal with uncertainty?

As government interventions increase, insecurity and uncertainty grow and, in general, the state of the economy deteriorates. What’s the solution? One word: liberalization. In practice and in reality the best supervision over the market is done by competition. When there is rent in a society people may be forced to resort to corrupt practices such as bribery and forgery to get a business license. Meanwhile, unprofessional people enter the market to benefit from rents and because of being close to power institutions. This disturbs the state of the economy. The best example of this situation is the recent crisis facing monetary institutes where certain individuals were able to obtain permits that are not granted to anyone under normal conditions through collusion and links with the power bases. The result was the collapse of the money market, which is still unresolved and has inflicted heavy damage on the economy.

Consequently, regarding the concept of uncertainty it should be taken into account that it does not mean that every economic activity is definitely successful and will be fruitful; in a competitive market, a person may fail or make mistakes and must pay a high price for any blunder... Uncertainty is an unnatural risk outside the framework of competition and normal business environment; that is, political risk or the risk arising from government interventions. For example, when the authorities decide not to join FATF, economic activists who have to interact with the world generate excessive or uncertain risks and cause their gradual withdrawal from the market. 

In fact, the uncertainty in the Iranian economy is due to government policies?

True. In addition to direct and indirect government interventions in the business environment, wrong economic policy is also very effective in emergence and exacerbation of uncertainty. The government’s wrong monetary policy causes inflation, while the government’s decision to stabilize the exchange rate, in conditions of growing inflation, and the government’s inability or procrastination in checking the inflation, as well as the gradual correction of exchange rates, in the long run, will cause a sudden jump in exchange rates value and depreciation of the real value of the local currency on the market.

Foreign exchange fluctuations over the past year are one of the main causes of uncertainty in the market. Contrary to what is supposed, this problem will not be solved with more government involvement and decisions like supplying USD rate at 42,000 rials. The only solution is to adhere to the rules of the game. Compliance with the rules of the game is not a normative or ideological debate. That some, for this reason, describe us as market lovers or market fundamentalists is incorrect because what we say is a purely scientific argument. What happens if a civil engineer ignores the laws of physics and mechanics in constructing a building? What he has made will collapse and his scientific credibility will be questioned.

Unfortunately, in economics, this situation is not apparently dominant, and as a result financial and monetary policies are totally opposed to economics, and the consequence is the existing instability without the real perpetrators being truly accountable. When we talk about the rules of the game, we are actually talking about the rules of economics. Ignoring these rules is like building a structure without regarding the laws of physics and mechanics. The economic structure, which is based on the rules of the market, or the laws of economics, will inevitably collapse. The difference here is that if an engineer makes such a mistake, his license will be invalidated and will lose his credibility and people would never ask him to build another building. But in the realm of economics, since the issue is complicated, and the policymakers are both the government and power-wielders, no one is accountable. The statements made by the economic authorities in the aftermath of the foreign currency crisis are significant. The government set the price for the foreign currency and banned any other rate! We still have not come out of this situation and the government has not learned a lesson from this wrong policy.

Although the government created a secondary market, it imposed so many restrictions that a third market had to be formed. In addition to the limited amount of USD at 42,000 rials rate allocated solely for basic goods, the secondary exchange market should be free and unrestricted. Unfortunately, until politicians learn that this market should not be limited, heavy costs are inflicted on the economy and people. These conditions add to uncertainty and insecurity. The wrong monetary policies of the government have led to inflation and the government is responsible for the inflation but this is not something they can make it up.

However, with the continuation of wrong policies such as price suppression and market constraints, the result, in addition to inflation and rising prices, is shortage of goods and famine. Inflation will not be resolved by pricing, as in the past few months, despite the intense activity by the State Punishment Organization and the Consumer Protection Organization, the upward trend of prices continues. But the activities of these price oppressive institutions will have a consequence, namely shortage of goods. The experiences of the 80s, 90s, and the tenth government show that the suppression of prices and what is happening in the so-called coping with hypermarket in reality is nothing more than an exacerbation of the shortage of goods. 

How foreign policy issues contribute to this uncertainty?

In fact, there is a great fallacy in this story. I admit that our problem is internal, but one of the internal problems is that the body of governing institutions does not want or sometimes cannot correct the foreign relations. Why have not we yet joined the FATF? Because, there is opposition in the Parliament and other organs. It is our internal problem that we do not join a transnational organization with international goals and in some way we are exposing ourselves to suspicion. The statement by the economists that our problems will not be resolved until trade relations with international markets become sustainable is right. But the root of this problem is the power struggle inside the country.

There are some inside who are opposed to improving foreign relations for the sake of their own interests. The same people who sustained losses from the Joint Comprehensive Plan of Action (JCPOA) are now making profits from bypassing the sanctions and creating people like Babak Zanjani. This group is opposed to improvement of relations with the outside world. In this debate, one should realize these misrepresentations. They say if we solve our own internal issues, the US cannot do anything. These words are slogans. Why should we take a position to cut all our banking links with major international banks?

In China and Vietnam, the Communist Party is ruling and opposes the US and imperialism and Western domination, but they are moving in the right course. We are hurting ourselves. They block any action that may improve relations with the outside world. Some people are after destroying international relations by shouting false and useless slogans and cause uncertainties in the Iranian economy. There is an important point about the intensification of economic sanctions in the previous round and the global consensus against us, which is sometimes forgotten; one of the factors that exacerbated the sanctions was to question the Holocaust by the former president. My question is what was the national interest or public good for our people to raise this issue? Why should our official president say something that most of the influential and powerful countries in the world take stand against us? That was one of the main causes in sending our case to the UN Security Council. The economic consequences of this statement were very dear for us.

Economic activists in the globalized and international economy today cannot rely solely on what we have inside. Our economy is an oil economy and about 30% of the state budget comes from oil money. Oil is a global commodity and traded on the world market. We are more dependent on the global market. Does the common sense tell us that in such a situation, we have to fight the world market or give slogans that would disrupt our relations with the world? At the same time, some people in opposition to joining the FATF say that this is tantamount to submission to imperialism, while they present no reasonable argument. These actions and these slogans are contrary to national security and interests. This may have benefits for them but brings misery and anxiety to the people.


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  January 2019
No. 90