Repetition of past mistakes in policymaking is more pervasive than many would imagine. Many countries scored spectacularly with economic indicators for a period of time but then mistakes made by their policymakers pushed them into recession. One of the best examples of such countries is Iran.
In a write-up for the Persian daily Donya-e-Eqtesad, Economist Hossein Abbasi outlines policies he believes the incoming government should not pursue. Below is the translation of the text:
One of the best examples of an economy beleaguered by its policymakers’ repetitive mistakes over the past half century is Iran: an economy blighted by recessions and production downturns for more than one-third of the past 50 years.
A comparison with neighboring Turkey would give an insight into these recessions. GDP per capita in Turkey has been 30-50% more than Iran’s for decades. Prolonged recessions in Iran starting in late 2000s coincided with Turkey’s economic growth; the neighboring country’s per capita income is 2.5 times higher than Iran. In other words, Iranian people are getting poorer compared with their neighboring country.
There aren’t any set policies for all countries to follow, as each country should design its own policies based on their requirements and conditions. But years of policymaking has taught us that there are policies that would only result in economic stagnation. The main items of a list on “don’ts of economic policymaking” are as follows:
1. Not a single economy has succeeded in achieving economic growth by severing ties with other countries. Having extensive relations with other economies reduces risks and increases the odds of success. Economic ties with other countries have at least three benefits: it provides large markets for domestic products, helps the inflow of investment and above all, paves the way for economic players’ learning that won’t be achieved unless cooperation and partnership with other economies are ensured. Today, the production of goods is not restricted to the physical production of the item. Products must find their way to other countries, which is premised on meeting financial, legal, commercial and auditing standards of global markets. That’s why most countries are not necessarily keen on producing all products domestically. Instead, they opt for making one or two components of the final product. A shirt sold in Tehran with the label “Made in Turkey” is a combination of cotton produced in Turkmenistan, fabrics made in Egypt, dye produced in Germany, buttons made in China and sewing carried out in Turkey and supported by financial, legal and auditing companies in one of the advanced countries. Out of this partnership, manufacturers learn to produce an item up to par with global standards. Those who claim they can produce the best of goods and services without reliance on the global process surely have no idea of how the present-day economy works. We are a part of this world; isolation will only have one loser and that’s us.
2. Not a single economy has succeeded in achieving economic growth without the allocation of resources through market mechanisms. These mechanisms are not a set of plans drafted by international spies in hidden, secret chambers. In simple words, the mechanism by which the use of money exchanged by buyers and sellers with an open and understood system of value and time trade-offs in a market tends to optimize the distribution and prices of goods and services. It’s absolutely not a task of an individual or an organization to replace this mechanism. The government’s responsibility is to set regulations that improve the efficiency of this mechanism. In many economies, including Iran’s, the government’s policy of pricing goods and services is aimed at controlling inflation. That has been a failed policy anytime, anywhere. Inflation is no longer a challenge in today’s world; you only need to avail yourself of the economic tools and experiences gained by others to solve this problem. Anyone who argues that the government can implement a pricing policy on a large scale to protect producers and consumers from the negative effects of price increases neither has the knowledge of economics nor has learned from the bitter mistakes of others. Repeated interventions in pricing have always disappointed policymakers and wreaked havoc on the economy.
3. Not a single country has succeeded in improving the long-term welfare of its citizens through injection of foreign currency or manipulating foreign currency exchange rates. The value of local currency depends on the power of the country in producing goods and finding customers in global markets. Countries like Iran, Saudi Arabia and Venezuela might be able to prop up the value of their currency and the purchasing power of their citizens for a short period of time through the sale of natural resources. As soon as these earnings decline, their economies begin to falter. Venezuela is a shining example of how petrodollars brought an unusual amount of welfare at first and then production nosedived along with the decline in oil revenues to a level where people are now struggling for food. The opposite example is China: for years, China kept the value of foreign currency high by limiting its supply in order to maintain export markets for Chinese products. Keeping the value of foreign currency stable despite an inflation rate of above 20-30% has been Iran’s forex policy since the mid-2000s. Besides all other adverse effects, sudden inevitable jumps in the value of foreign currency have imposed destructive losses on the economy. One who believes the value of local currency increases by suppressing the value of foreign currency, is actually paving the way for the collapse of production and consequently the deterioration of its people’s wellbeing.
4. Economies, except those with low populations like Qatar, can’t ensure the wellbeing of their people by doling out significant payments to all. Economic booms result from the efforts made by people and opportunities seized by them. If someone claims that they would create wellbeing for most people through subsidy payments in a country as large as Iran, they have only opened the way for torpedoing the productive economic sectors. For having a healthy economy, supporting those who have the power to generate revenue to motivate them to economically improve is as important as supporting those who lack a sustainable source of income. The experience of 2000s proved that not paying attention to the expenditure and revenues of welfare programs will mostly cause distress to the people for whom these programs were designed in the first place. Like it or not, the extent of support lent to low-income people depends on the actual production of the economy, not its potential, capacities or credentials.
At the end, it must be noted that, hiding shortcomings by manipulating statistics or not releasing them on the pretext of protecting people’s calm is nothing but self-deceit, hiding one’s head in the sand and ignoring the weaknesses.
Statistics and data are the thermometers of economy. Breaking the thermometers won’t break the fever and heal the patient. It only leads to missing the opportunity for bringing about recovery.
