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June 2019, No. 91


Cover Story

Revision of Iran Economy


Our mistakes begin with the unbalanced definition of state functions and resources, and reforms must also begin with the fitting of the two.


Dr. Masoud Nili, Economist


It can be said that Iran’s economy has been performing significantly in some areas -mostly social and somewhat infrastructure - for example, in addressing deprived villages and areas, creating transportation infrastructure, expanding health-care homes, and developing medical services around the country. Also, as we were faced with a massive population shock in the field of education, the Iranian economy was able to digest this shock. In the past few years, the number of our students reached nearly 20 million (a figure that was really impressive compared to the 13 million today).

With the rapid and massive development of education and higher education, the country was able to pass through these stages without encountering crisis.

However, that part of Iran’s economic performance, which is considered to be a weakness and open to criticism, is a macroeconomic imbalance; important imbalances have emerged since the second half of the 1960s in the macro economy of Iran, and continue to this day. For example: if one wants to examine the rate of liquidity growth in an advanced economy, the changes observed in statistics are roughly equivalent to the policy of the central bank and thus reflect their monetary policy. Thus, the developments in liquidity growth tell us how the monetary policy tool has been used in this economy. However, in the Iranian economy, liquidity growth does not reflect monetary policy or the like, but is an indicator that reflects the macroeconomic imbalances; in the sense that any imbalance ultimately results from the Central Bank of Iran and turns into money through the CBI. If we consider this as an indicator of macroeconomic imbalances, the liquidity growth rate has always been fluctuating around twenty plus since the second half of the 1960s.

Iran’s economy faced abundant oil revenues in the last years of the past regime (toppled in 1979). If we calculate at today’s prices for approximation, our foreign exchange earnings between 1959 and 1971 was 25 to 26 billion dollars a year on average, but with a significant rise in oil prices in the 1970s, the petrodollars went as high as $200 billion a year. It means that between 1959 and 1971, at today’s prices, we had less than $350 billion in foreign exchange earnings, but over the five years after, this revenue reached over $1,000 billion. This was also due to the fact that Iran’s gross domestic product at that time was at most half of today’s GDP.


Let’s not forget that our macroeconomic imbalances are in fact the balances of political economy.


Note that at that time, more than 15 million people lived in villages in Iran, and most urban dwellers did not have much welfare. In such a society, when a high-income government comes alongside low-income people, redistribution tendencies are strongly reinforced. People urged the government to inject at least part of the $1,000 billion in oil revenues in the society and transform their lives. Given the severe inequalities that occurred in the Iranian economy between 1974 and 1977, immediately after the victory of the 1979 Revolution, a very strong tendency was created for the economic role-playing of the state, not through policies but through direct allocation of resources, and this led to a sharp increase in government budget deficit.

If I am not mistaken, from 1977 to 1983, the government’s revenues did not change significantly, but its costs were raised by 1.5 times. To cover all these costs the government had to borrowing from the CBI, and as a result, until the middle of the 1980s, the monetary base in the Iranian economy increased by ten folds. Thus, the basis for macroeconomic imbalances was laid out according to what people expected from the role-playing of the government; people thought that it was enough for the government to pay attention to the low-income population; the rest would be solved. Many believed that the existence of a “popular government” was a necessary and sufficient condition for solving all the economic problems.

Of course, an important point to keep in mind is that if we survey those times at global scale, we will see that even until the late 1990s, the “macroeconomic management” in its today sense - that yields the independence of the CBI and tough constraints imposed on the budget deficit – was not taken seriously. In the mid-1990s, we had countries with a thousand-percent or a few thousand-percent inflation and many countries had three digit inflation rates (including Turkey in our neighborhood). Therefore, this was a very common problem, and we should not judge three or four decades ago with the understanding of macroeconomics today.

But today, when the problem of managing macroeconomic imbalances has been turned into a dominant phenomenon in administration of economies, and its importance has been touched upon in the course of action, the thing that is not forgivable to us and can be cited as a major disadvantage of Iran’s economic performance is that we have still not joined the club of countries which have achieved results about the dangers of macroeconomic imbalances. This is an indication of what is happening in our economy. Still, some politicians say that if the government is indirectly borrowing from the CBI, it’s no problem, and it’s important that the money is spent on proper work and properly “guided”. That is, the perceived risks of macroeconomic imbalances have been limited to a few Iranian economists and have not become politicians’ belief. While in other countries of the world, this has become a serious belief and an important constraint for politicians.

Our mistakes begin with the unbalanced definition of state functions and resources, and reforms must also begin with the fitting of the two. But this is a technical response and does not take into account the requirements of political economy. In the real world, we will not be protected by the people when we want to apply this technical response and start reform. And the politician is always on the side of the people because they need their support and vote. So, our main question is how to find a solution to our economic imbalances that includes considerations of political economy.

Let’s not forget that our macroeconomic imbalances are in fact the balances of political economy. Because their stakeholders overcome their suffering and are somehow “shaped and well-formed”. In addition, a significant proportion of those who are affected by the equilibrium of political economy are among the next generation and do not have an understanding of what is happening today. In sum, this requires a very tangible discussion. Otherwise, the technical solution has always existed and economists have always provided it.

 

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