Containment of inflation is one of the main concerns of policymakers and economists in all societies, as it affects other economic and social variables.
In Iran, curbing inflation was one of the top goals of all six five-year development plans implemented after the 1979 Islamic Revolution; the new Iranian year [started March 21] has also been named after this issue. However, after the revolution, the inflation rate has been unremittingly in the double-digit territory and increasing (except for a couple of years), Morteza Afqeh, an economist, prefaced his write-up for the Persian daily Donya-e Eqtesad with this note. A translation of the text follows:
Several reasons might be behind the failure to control inflation and maintain economic growth over the past many years. Some of them are the country’s anti-production and anti-development policies and structures, and others are the outcome of instabilities and tensions in foreign relations.
Unfortunately, solutions proposed by some domestic economists who do not have an adequate understanding and knowledge of the main roots of inflation in the country have failed to curb inflation and bring about sustainable growth. Inflation, like other economic and social variables, has many underlying reasons, each of which can play a greater or lesser role depending on the time or place. Inflation can stem from supply or demand as well.
Wrong Diagnosis
In order to curb inflation [like other economic and social variables], you cannot recommend the same prescription in all conditions [just like what happened in the past].
One of the reasons behind the failure to restrain inflation in the past four decades is the wrong diagnosis of the roots of the problem. Many solutions now focus on the effects rather than the root cause or reasons.
One of these mistakes has been the overemphasis on the demand side of the economy, while the evidence shows that the supply side has a significant contribution to the country’s current inflation given the decline in domestic production on the one hand and the import restrictions [because of sanctions] on the other hand. Insisting on reducing liquidity in the past decades has not solved Iran’s chronic inflation.
The economists have even misidentified the patient, which is Iran with its idiosyncratic characteristics. Therefore, the remedy prescribed up until now is meant for other countries with different features.
When the growth of liquidity outstrips economic growth, inflation will increase, but there is no doubt that liquidity itself is a result of chronic budget deficit that is also affected by two major reasons. One, excessive expenditure that does not help the growth of production and welfare, or improve government services. Second, low productivity due to the incompetent appointments at all levels.
Oil Addiction
In the past decades, the country’s economic, social, political and even religious structures have become highly dependent and addicted to oil revenues.
As long as the country had oil revenues, the effects of this destructive addiction were not evident, but with the reimposition of sanctions in 2018, economic problems, particularly inflation, became more biting. With the continuation of sanctions, non-governmental sectors [production and private consumption] have tried to adapt to the new challenges, but the government sector has not been able or willing to modify its anti-production and cost-generating structures.
Therefore, in the current situation and without the aforementioned reforms, there is neither the possibility of reducing liquidity nor the possibility of reducing inflation. The proof of this claim is the failure of governments to control liquidity and, as a result, inflation.
Even President Ebrahim Raisi and his ministers, who considered the rise in liquidity and inflation being their redline in their election slogans, failed to control them 18 months into their administration.
In fact, the economic, social, cultural, religious, administrative and executive structures generate liquidity and inflation. Therefore, without addressing such anti-production and anti-development structures, it won’t be possible to control liquidity and inflation sustainably.
Risk of Recession
Lastly, without introducing changes in the structures governing production, the decrease in liquidity can lead to more recession. In view of obstacles in the way of production, the available liquidity tends to flow to the non-productive sector, which is profitable and free from legal supervision.
Therefore, if the recommendations of this group of economists in the reduction of liquidity are followed, the non-productive sector will still absorb most of the available liquidity, and the productive sector will suffer even more from the decline in liquidity and the economy will fall deeper into recession.
Removing hurdles in the way of production is one of the necessary measures to reduce inflation. In doing so, the productive sector will become more profitable and less costly compared with the non-productive sector. Otherwise, the blind reduction of liquidity will lead to recession and unemployment, and hit the economy and people’s livelihood.
