A look at Iran’s economic history shows command pricing has been the mother of all the evils of the economy over the past half century. Here, evil does not imply financial corruption alone; it refers to moral gangrene that leads to the squandering and misuse of resources.
Government-mandated pricing policy is evident in almost all markets, but it has been one of the key causes of moral gangrene in our national economy in the past half century, economist Mousa Ghaninejad prefaced his article for the Persian economic daily Donya-e-Eqtesad with this note.
A translation of the rest of the text follows:
Iranian governments have failed to resist the temptation to interfere in the economy since the early 1970s, when windfall revenues generated from oil exports increased in an unprecedented manner. Their financial power, which was not coming from tax income, allowed them to employ price subsidy policy in a large part of the economy and bolster their popularity among people in the short run.
The policy started with subsidizing fuel and some essential goods. With the passage of time, especially after the Islamic Revolution, the subsidy system expanded and gave the government an excuse to extend its pricing policy to all recipients of subsidies. As a result, the government found greater leeway to implement command pricing in practically all markets.
The moral gangrene of subsidy policy and pricing is not evident when oil revenues are high. But when oil income drops, the policy becomes extremely problematic and sows seeds of discontent among people.
Under [former president] Mahmoud Ahmadinejad, when oil exports increased dramatically, the government’s intervention in the economy and consequently its pricing measures expanded to an unprecedented extent, yet the squandering of resources remained intangible to people. The annual average inflation, despite the exponential increase in money supply, was less than 20% because the then government prevented the rise in the prices of tradable goods by manipulating the exchange rate and subsidizing imports.
Flogging a Dead Horse
Once the grip of sanctions tightened during the final years of Ahmadinejad’s administration and the country’s foreign-source income declined, the inflation rate shot up. If it were not for the positive atmosphere of the nuclear negotiations and the Joint Comprehensive Plan of Action, the inflation would have kept increasing.
Following the withdrawal of the United States from JCPOA in 2018 and the reimposition of restrictions on the country’s foreign-source earnings, the inflation reemerged with greater force.
When foreign exchange earnings fall, the subsidy policy accelerates the growth of inflation because the government is no longer capable of keeping the exchange rates low via cheap imports; it is forced to tap into the central bank’s resources. Removing import subsidies, which some senior officials call economic reforms, has nothing to do with economic reforms. It is simply a decision taken out of necessity. The true meaning of economic reforms is the revocation of pricing policy; the policymaker needs to acknowledge that the market has its own logic and does not follow orders.
Unfortunately, Iranian policymakers are still reluctant to accept the rational, scientific statement that they cannot govern something which is ungovernable by nature. That would be the case of flogging a dead horse.
From the headline-grabbing case of Mobarakeh Steel Company, which has been revealed by the Article 90 Commission of Iranian Parliament, to many other cases of corruption in the country’s monetary system that have been exposed in the past, all have their roots in the government’s pricing policy.
With the government’s capital market interventions, an unimaginable room for rent-seeking activities have been created, which give rise to widespread financial corruption. With the inflation rate exceeding 40%, the mandated interest rate of 20% would mean that the borrower receives an interest of 20% or more as soon as they take out the loan. Under the circumstances, bank managers are tempted to grant loans to relatives or banks’ affiliated companies.
The whole thing leads to financial corruption and a waste of resources. In other words, the scarce resources will be allocated to professional rent-seekers instead of applicants who produce economic value.
On the other hand, given the negative real interest rate of deposits, banks lose the ability to attract sufficient resources and inevitably resort to the inflationary process of borrowing from the central bank. Also, the subsidized pricing of fuel, medicine and other items leads to outbound smuggling and waste of resources.
Two Sides of the Same Coin
Theorists who attack the market system blame the current chaotic economic situation on the lack of government supervision; by supervision, they mean more government intervention in the market mechanism.
Government supervision over the economy exists in all advanced economies, but it is not synonymous with mandatory pricing. It rather is the monitoring of companies, organizations and economic institutions’ compliance with the rules of property rights and ensuring the transparency of contracts and the quality of goods and services.
Unfortunately, corruption has penetrated the warp and weft of our state-controlled economy, from the banking system to the automotive industry, but the government is unable to deal with it because corruption and pricing are practically two sides of the same coin.
Contracts forged in the banking system and draws held in the automotive industry are telling examples of corruption; their existence is unimaginable without the inevitable and deliberate neglect on the part of government supervisory institutions.
The establishment seems to have lost the ability to fight the scourge of pricing, although the corruption it has caused for half a century and in different governments is undeniable.
The pricing system was born of a wrong ideology, but as time passed, it created its own “profiteers” in Iran’s state-run economy. They earned astronomical incomes and turned into influential and powerful groups in decision-making positions who throw a wrench into real reforms. It seems that the way out of this complicated and miserable situation is basically to expose the corruption stemming from pricing.
As long as the economic cognoscenti hold sway over public opinion and policymakers remain oblivious of this corruption, we cannot be hopeful about reforms. That’s because the ideological justification of pricing under deceptive titles such as social or economic justice is the best tool in the hands of the profiteers of status quo to prevent real economic reforms.
