Lack of Competition

Professor of Economics
Lack of CompetitionLack of Competition

Now RichKids of Tehran is a known hashtag and another episode on the inequality debate in Iran has come and gone. The images of parties, luxury cars and high end living distributed via Instagram soon filled the media. It was a new discovery, a new understanding of social trends within Iran and the evolution of inequality.

Is it really surprising to see such excesses in an economy rich in natural resources, government monopolies and deprived of competitive international trade? It is not. What indeed is surprising is to see individuals who could not believe their eyes. RichKidsofTehran served the development process in Iran by reminding many once again that the government cannot substitute the markets.

For almost four decades Iran’s economy has been the function of the government and public entities. Reading the decisions of the government’s assorted high councils one cannot help noticing the detailed instructions: size, dimension, weight and age are set for the commodities and services.

Iranian bureaucrats do their job with a penchant for detail, like miniaturists of the Safavid era. However the same intelligent folks are oblivious of the fact that economic transactions take place as a result of demand and supply. What they endorse is often impossible to implement, encouraging many to use the sideways to get by! They try to tell the market what 'must be', while in actuality the market runs on what 'is'.           

Ignoring the market dynamism has shaped the foundation of Iran’s economy. True, market transactions continue, but in a distorted business environment. The subsidies, government intrusion in the economy and sanctions twist the market signals: an investment which would simply not be productive otherwise becomes profitable. One only needs to take a ride through Tehran’s streets to see ample evidence of this.

The luxurious life style of some is but an externality of this economy. Unlike what many think and say, this is not capitalism fueling inequality in Iran, it is the lack of competition.

Iran’s economy is not competitive because of endogenous and exogenous parameters. Although since the early 1990s governments in Tehran have made privatization a priority, our private sector is not fully private.

Many public entities have been privatized, but they have not been transferred to private hands, the majority of their shares are now held by different ministries or pension funds or public companies. This mixed approach has created an economy with three sectors: public, semi-private and private.

Competition is further hindered by several barriers to entry and lack of transparency in the markets. The privatization process so far has been unable or unwilling to transfer the role of government to that of a facilitator. Its role still is that of a landlord who has the final say in everything, everywhere.

To these endogenous facts, there is one exogenous reality: sanctions. Iran’s economy cannot be truly competitive as long as it is under siege of sanctions.

The internationally imposed sanctions have primarily hurt the private sector. This is the average businessman who needs banks, credit lines, SWIFT and access to markets.

The sanctions have denied private entrepreneurs access to global markets. The government entities are paying a higher cost but they can and do bypass sanctions. The question few cared to ask was how a country under the most severe international penalties still manages to import Porsche and Maserati.

If anything RichKidsofTehran thumbed their noses at sanctions and reminded the world something all businessmen know: as long as there is demand, there is trade.  The previous administration saw an increase in the volume of imported luxury cars; in its final year alone (mid 2012-2013) 563 Porsches were imported. One wonders what the sanctions truly accomplished in Iran.

Iran’s economy continues to generate wealth, even if in a biased way and Iranian consumers maximize their utility like other consumers in the world.

To think that RichKidsofTehran is only a sign of inequality is to ignore the size of Iran’s market and the true impact of sanctions and the government’s intrusions. It is yet another reminder that free and competitive markets are the best way to distribute wealth and opportunities. The government, despite the intelligence of its bureaucrats cannot and will not substitute the markets, and when it does the business environment suffers.