An economic crisis is not similar to a cardiac arrest or stroke because basically it is not accidental; it is the culmination of a process.
The crisis does not happen overnight. It is more like a cancer that gradually grows root and takes hold of a person’s body. During all these stages, mild and severe symptoms warn the patient of what might happen. Those who heed the symptoms and seek treatment are the ones who defeat the disease, while those who don’t have to face the consequences later; there will come a day when this seven-headed beast of a disease incapacitates them from putting up a fight.
This was the introductory passage of an article by Kayvan Kashefi, a member of Iran Chamber of Commerce, Industries, Mines and Agriculture, for the Persian economic daily Donya-e-Eqtesad. A translation of the article follows:
The seven-headed beast is gripping Iran’s economy today, sapping its energy and weakening it. Is the crisis facing us now asymptomatic or did we turn a blind eye to what was happening? For sure, we followed the latter course.
Over the past decade, market ecosystem and real economy sent messages to policymakers, but one after the other, these messages were ignored. Ever-increasing money supply, banks getting stripped of resources, diversion of funds to liquid markets and markets with inbuilt added value such as gold, car and housing, people’s rush to convert their rials into foreign currencies were all messages the society sent to decision-makers.
Decline in Capital Formation
These unheeded warnings bore another acute sign: the decline of capital.
“Capital formation at fixed prices of 2011-12 stood at 1,710 trillion rials. By March 2021, this figure declined to 1,000 trillion rials. Even in two fiscals, namely 2019-20 and 2020-21, capital erosion outweighed capital formation.”
This was the last of warnings showing that although the disease afflicting Iran’s economy might not be inoperable, it sure is very difficult to cure.
Iran’s economy is not strange to crisis. Some people compare today’s crisis of decline in capital to the one that emerged in the 1980s. You cannot reject this hypothesis outright but what we are seeing now is more intense than that of previous decades.
First of all, it is the work of an institutionalized recession created by the dominance of politics over economic affairs. For example, the developments of 2009-10 [following the presidential election] resulted in a gap between people and the government, and the deepening of recession. On the other hand, international sanctions reduced the country’s economic resilience. The extensive injection of foreign currency and provision of cheap energy compounded the challenges; productive activities were outdone by unproductive ones. The whole thing increased speculative practices, weakened the economy and resulted in negative growth of capital formation.
Main Causes
Whenever a country’s capital formation registers a negative growth rate, you can expect its economic growth to follow suit and land in negative territory. That’s what Iran went through in the 2010s.
Regardless of theoretical arguments, the following list consists of main causes of the decline in capital formation over the past decade: Lack of investment, significant capital outflows due to economic uncertainty, international sanctions, severance of cross-border financial relations, non-membership in international pacts, including FATF, lack of monetary and financial discipline, structural budget deficit and the outbreak of Covid-19.
The synergy of these factors inflicted heavy losses on the economy, including the decline in foreign trade and economic growth, increase in unemployment and inflation, and degeneration of manufacturing infrastructures.
The deterioration of productive activities and recession gave way to speculative practices. Misguided rentier policies reduced people’s trust in the government to a low level, such that during the period under review, capital flight from the country hit a record high.
Solution
What is the solution? Should we pronounce Iran’s economy dead, or should we look for a cure?
Normally, the prerequisite for solving any problem depends on two important principles: first, we must acknowledge that we are at a critical juncture and that we have to accept that it is not possible to solve a problem with the same vision that created it in the first place.
Many of the existing problems have institutional and historical roots formed over years; short-term solutions will only serve as painkillers. Therefore, it is necessary to review many political decisions in the domestic and foreign spheres. It is possible to present a new image of the economy over time by creating reliable conditions.
Three fundamental moves, including “financial reform aimed at achieving sustainable macroeconomic stability”, “removal of hurdles in the way of foreign trade and investment” and “improving the business environment” can resolve the current economic crisis and direct capital to the productive path. But none of these will be achieved easily or through command.
Today is the time to make great strides in rebuilding trust. Measures such as redefining the protection of property rights, supporting individuals against government-affiliated institutions and organizations, and reducing the costs of doing business can help restore public confidence in the government.
The return of trust will not only pave the way for the realization of the above three goals, but will also act as a metaphorical red carpet for new investors.
