The Forum for Partners in Iran's Marketplace

October 2018, No. 89


Invisible Hand Is Indisputable!

It is really surprising that some critics of the current economic situation attribute the current failures of the government to the outcome of free economy thinking.

Dr. Moussa Ghaninejad, Economist

A look at Mr. Hassan Rouhani’s administration in the 11th and 12th governments shows that since the beginning of its formation, the government has not had a coherent and integrated economic team, and there have been different opinions on the issue. During this time we saw that there was no coordination between the activities of the Ministry of Finance and Economic Affairs, the Central Bank, the Management and Planning Organization (MPO), and the Ministry of Industry, Mine and Trade, while there was no trace of a coherent thinking in these organizations individually. Therefore, we have seen virtually no achievement one could attribute to the application of a clear and consistent approach in the cabinet.
Instances such as reducing the inflation rate and stability in FX market in Rouhani’s first term should be defined in the form of overflow of a political breakthrough, because after the nuclear deal (Joint Comprehensive Plan of Action) was signed, there was great optimism about the future. Also, positive expectations reduced the turbulences inherited from the former government in macro indices. If we put aside these cases, virtually no other economic achievement can be attributed to the government.

Rouhani’s first government did not make tangible changes in reforming the system of targeted subsidies, adjusting the price of energy carriers, improving the business environment, and many other things. Last year, under Rouhani’s second government, we faced challenges that showed continued delay in making structural reforms in the economy. The accumulation of the problems left from the Ahmadinejad government, the dramatic increase in liquidity over these years, stabilization of the exchange rate despite two-digit inflation, the inadequate business environment and the lack of a sustainable economic prosperity along with external pressures, have created turbulences in macroeconomic variables, and have taken us back to the early days of the 11th government and the difficulties of those days.

Under these conditions, some people think a reshuffle of high-level economic officials is the way to come out of the impasse; but it is necessary to reiterate that, in principle, the displacement of individuals is not important; what should change is the line of thinking that controls the decision making process of the government. For example, according to some news reports even from the very beginning, at the level of some ministers, an agreement was reached on the creation of a secondary foreign exchange market and crossing the 42,000 rials per USD, but had faced the opposition of high-ranking officials, including the President himself.

Another example is the price of energy carriers where no change has occurred and Oil Ministry experts have not been able to convince the government to correct prices and this has faced the resistance of the MPO.

Therefore, changing the economic team would not be effective because the final decision makers would not change their approach, and since final decisions require their agreement it is their economic line of thinking that should change.

In the current situation, the most important requirement is for the government to admit that it cannot control the economy through an imperative approach and as long as it refuses to accept this fact, no policy would yield result. When Mr. Es’haq Jahangiri (the First VP) stated that the exchange rate (USD) approved by the government was 42,000 rials per USD and that the government would not accept any other rate, this clearly showed how ignorant were the top decision makers about the reality of the market mechanism! This is similar to saying that as of tomorrow you would not accept the law of gravity in physics! The market has nothing to do with our beliefs and continues to operate under its own mechanism. The prerequisite for all structural reforms is to accept the basic rules of the economy, and without it, no proper policy can be implemented.

Strangely, these days there are talks that some high-level government officials have said that it is not logical to speak of a free economy under the status quo, and that the situation required the government to exercise more control over different markets. Regrettably, it must be said that this remark shows how poor is their economic knowledge! That a politician states that “we are not in a position to accept the law of gravity” lacks scientific logic. Unfortunately, in the field of humanities and economics this is not the case, and politicians easily refute the laws governing these sciences. Which economist has claimed that economic laws are not effective in economic war conditions, and under what logic? Based on which book or reference such a claim is made? 

The truth is that wherever and whenever politicians have tried to replace economic laws with their own will in the form of imperative government instructions on the pretext of state of emergency, they have failed. Wherever and whenever they have denied the invisible hand of the market (economic laws) they have been slapped with the same hand! The problem is that the government would pass the pain of the slap to ordinary people like you and me.

It is really surprising that some critics of the current economic situation attribute the current failures of the government to the outcome of free economy thinking. If these critics are honest and fair, instead of resorting to cliché and leveling charges against certain individuals should explicitly state which government policy has so far represented the implementation of free-market thinking. And with what mechanism has this policy created this chaos and turbulence?

The mere presence in the government of a few prominent personalities advocating free economy or the election campaign slogans of the President which were not realized should not encourage some people to beguile people through rowdyism and commotion and attribute the appalling outcome of the comrades’ leftist policies at the MPO and other government institutions to implementation of free economy recommendations. These behaviors can only be a sign of non-compliance with ethics and prioritizing factional interests over the realities and public interests.


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  October 2018
No. 89