Mild and severe economic fluctuations and business cycles of boom and bust are at the core of a free market economy based on private sector investment and entrepreneurship.
These fluctuations are caused by the evolution of technology and innovation, optimism and pessimism toward the economy and price shocks stemming from wars and droughts. However, one of the key responsibilities of governments is to stabilize the economy by using various political tools at their disposal.
These statements were made by Jafar Kheirkhahan, an economist, in an article for the Persian-language daily Donya-e-Eqtesad. A translation of the text follows:
All governments are expected to make the business environment as predictable as possible for private sector players by enforcing efficient economic policies and providing a competitive playing field. Investment is the most volatile of all four components of production (consumption, investment, government spending and export) in any economy. It is highly sensitive to speculation, uncertainty and even rumors and narratives about the future of the economy.
Iran in Comparison
Fluctuation is inherent in every economy. However, basic variables of the economy, such as domestic production, investment, export and employment are expected to register an uptrend.
All the fundamental variables in Iran’s economy have registered an uptrend in the last 100 years, despite the ups and downs, wars and revolutions and other severe shocks.
However, given the country’s demographic window of opportunity and its untapped potential, the growth rate has not been satisfactory. It even indicates the failure and backwardness of the economy when compared with other countries.
Over the past 150-200 years, all rich countries with annual per capita income of $50,000-60,000 (with the exception of few lucky oil-driven economies like Qatar and Kuwait) have posted the average growth rate of about 2% per year. They managed to reach high income level by keeping this growth rate for nearly two centuries. Such a seemingly normal growth rate doubles the per capita income every 35 years.
As a result, a poor country with a per capita income of $2,000-3,000 in the middle of the 19th century has now increased its per capita income 30-40 times.
A Volatile Economy
Rich countries need to be more careful about not falling into the abyss of negative growth than registering high growth rates.
One of the significant differences between wealthy countries and countries classified as poor and middle-income (those stuck in the middle-income trap) is that the latter group has not been able to maintain a moderate and stable growth rate for a long period of time. Iran’s economy is a telling example of an extremely volatile economy. Iran has experienced a positive double-digit economic growth rate and at the same time a negative double-digit growth rate in various years. Fluctuating, unpredictable growth deals heavy blows to the economy. One of which is that private sector enterprises won’t be able to grow and operate independently without government support to become a decent representative of Iran in the world.
In the 1960s, Iran moved from the ranks of poor countries to middle-low-income countries and then very quickly to middle high-income countries. It has remained in the middle-income category, not even getting close to rich countries after the first positive oil shock, when the price of oil multiplied and oil revenues suddenly flowed into the government budget. Over the past decade, the economy has even shown signs of backwardness. Over these years, decision-makers were not willing to understand that the worst policy is tying the fate and well-being of people to the price of a commodity they have no role in determining its price.
Note that politicians had the greed to spend windfall money from a God-given blessing to fulfill their wishes as soon as possible.
Oil-Stricken
Thanks to the oil, a subsidized economy was created, special interest groups were formed, state and semi-state companies were established and rent-seeking monopolies and corrupt networks gained power.
There are multiple ways of achieving economic success and development, but what all developed countries adhere to is to avoid throwing the country into the lap of extreme policymaking and costly uncertainties.
Governments in Iran have to keep the price of the dollar high during hardships and shortage of foreign resources to provide an opportunity for the domestic private sector to find a chance for production and even export. However, such a situation will not last long.
As soon as the price of oil goes up and oil revenues increase, they keep the exchange rate artificially cheap. As a result, the domestic market will be inundated with cheap imports, destroying the small production capacity of the private sector.
In other words, the temporary satisfaction of domestic consumers ends up at the cost of the healthy and efficient production activities of the private sector, especially in industrial and agriculture sectors.
The responsibility of the government is to create an even playing field for production and the responsibility of the private sector is to make calculated investment to promote production.
However, governments’ non-compliance to laws and the creation of rent-seeking networks for insiders at the time of elections are obstacles in the way of creating powerful and innovative private sector enterprises that are the foundations of the national economy and economic prosperity.
