High and rising Inflation has become a structural problem in Iran. Why, economists ask, has it become unmanageable despite the regular dose of hope and assurances of apologists for the government?
Ali Dini Torkamani, economist and university lecturer, takes a closer look at the worsening price rises in an article in the Persian-language daily Shargh.
Prices of goods and services keep on rising at terrible speed and in the process dwarf and degrade household incomes. The common man is grappling with ingrained fear, insecurity and desperation. Hope has given way to desperation. Save for a few capitalists, the large majority don’t have any chance to grow their income relative to the painful inflation. The purchasing power of more than half the society, i.e. fixed-wage earners, teachers, medical staff and government employees continues to plunge and street protests have become more widespread.
Why has inflation turned into a structural, chronic phenomenon over the years? Why has it become ungovernable? The answer to these and many more queries lies in the concept regarding system and organism.
The concepts look at the relationship among the components of each phenomenon and the totality of their components. The totality operates within the framework of its defined ends and harmonizes them in order to achieve the ends. The components indeed do not have unqualified independence. Their function is influenced by the role and performance of other components and the totality of the system.
Entrenched inflation in Iran leaning on hyperinflation should be seen in the gamut of intertwined factors related to basic rules and regulations. Rules that have given rise to an army of institutional and decision-making bodies
For example, the forest is a natural system, an organism which has its own vegetation, rainfall, humidity, temperature and species. Each component is and apparently should be compatible with each other and the forest in its entirity. Without human intervention, a relative balance would appear between the components of this organism. The components in actuality are, and would be, meaningless without the totality of the forest.
Animals can be kept in the zoo but surely forests cannot be replaced by zoos or even national parks. In natural systems, the boundaries of harmony and balance are automatically established between the components and totality.
Political economy is like an organism. The only difference being that its defining totality is not eternal. It is the follower of basic and social rules. Unlike natural systems, it does not have a fixed form or shape and the balance is not automatic. It requires defined rules and regulations and takes different shapes depending on the type of rulership. Differences in these rules lead to differences in the totality of systems and their performance in economic, social and cultural spheres.
A social organism, when formed, cannot deviate from its governing rules. It is forced to conform to its principles according to the concept of “path dependence” (path dependence is a concept in economics and the social sciences, referring to processes where past events or decisions constrain later events or decisions. It can be used to refer to outcomes at a single point in time or to long-run equilibriums of a process).
In the short term, fluctuations in the system’s performance can be caused by challenges and shocks such as the outbreak of Covid-19, but in the long term, the trend is up and forward. If the basic rules are inaccurate, the path will and is bound to go awry.
The entrenched inflation in Iran leaning on hyperinflation should be seen in the gamut of intertwined factors related to basic rules and regulations. Rules that have given rise to an army of institutional and decision-making bodies and paradoxical governments -- a big government when it comes to an operational budget but small in terms of capital expenditure.
All and sundry decision-making bodies, budget-guzzlers on the one hand and the negative impact of misguided budgeting on the other have led to deepening holes in fiscal budgets forever. The former places a heavy burden (on expenditure) on the budget while the latter increases the likelihood of policy failures.
Under the conditions, the possibility of achieving sustainable economic growth and higher tax revenue decreases. The natural outcome is that money supply and inflation shoots up. So long as these rules persist, the growth of inflation-inducing money supply is uncontrollable. High Inflation occurs when oil and tax revenue plus borrowing from the central bank are spent on swollen organizations and a small fraction of the money goes for developing manufactures.
Money supply in and of itself is not the main problem, its growth and how it circulates in the economy is the issue. Political tensions, economic sanctions and inflationary expectations are other drivers of high inflation.
Inflationary expectations increase forex rates much more than the accumulated inflation through speculative practices. As a result, costs related to domestic production, goods and services, and the price of imports keep rising. The point is not that this or that government is dysfunctional. The structure and ends are a totality that includes the government, as the executive branch. Ends, in practice, are incompatible with development goals of the government.
