How to Make the Iranian Economy Flourish

How to Make the Iranian Economy FlourishHow to Make the Iranian Economy Flourish

Iran’s economy is recovering from years of stagflation and is due to become one of the most powerful economies in Western Asia. Transformation into an emerging economy, however, has some prerequisites:

1. Macroeconomic management;

The populist policies of the former government such as 'The fast return fund' and  the 'Maskan Mehr' mass-housing initiative strained money supplies relentlessly and pushed up inflation rates to record highs of around 40 to 50 percent in 2011.  Ahmadinejad's policies did not appear to rely on sound economic principles. For instance, his policy to reduce inflation by lowering interest rates resulted in a negative real interest and led to unproductive activities such as fueling rent-seeking.  This was because demand for borrowing by lobbyists and special interest groups escalated. Elementary rules of monetary policy such as regular reserve requirements and mandatory central bank deposits were forgotten, which opened the money supply floodgates. The oil boom and income bonanza under Ahmadinejad enabled the economy to absorb the short term inflationary pressures, but this came at the cost of hiking up cheap foreign goods imports.

2. Normalization of foreign relations;

No economy can survive and flourish in isolation, without a constructive interaction with the outside world. We cannot neglect economic sanctions and hope they will strengthen our economy.

In the coming years, Iran moves away from a budget supported by income from oil and gas, as it exposes industry and agriculture sectors to what is termed as “Dutch disease”. Dutch disease occurs when ultra-high oil income is injected directly into the domestic economy, which in turn stunts productive sections of the economy and impedes competition.

  3. A Level Playing Field

The rule of law can only be exercised in a world without corruption. The lion’s share of the Iranian economy is controlled by governmental and semi-governmental institutions. Success cannot depend on informal relationships and clientelism.   A further example of incompetence during the former administration was the handling of the oil industry. Qatar, a very small country compared to Iran, was producing far more of gas than Iran was from their common gas fields. Iran needs competition and a level playing field to attract talent, otherwise the brain drain will continue and we will lose further growth potential.

The above mentioned cases are a number of well established truths for the Iranian administration to take into account when planning their ongoing strategy.