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Domestic Economy

How Command Economy Impacts Stock Market

Some governments have nurtured the disingenuous idea that they know the interest of the people better than the people themselves and, therefore, interfere in every issue. But at present, the impact of this type of administration can be seen vividly. 

The situation in Iran today is the result of the same guardian-like attitude of the governments during the past 100 years, Alireza Tavakkoli Kashi, a capital market analyst, said in a write-up for the Persian daily Donyay-e-Eqtesad. The translation of the full text is as follows:

In Iran, the government has a prominent role in the economy and its most distinct footprint can be seen in the capital market. Consequently, the government, as the top regulator, has set the regulations in all economic fields. 

As a result, the government is entitled to make decisions to regulate the market, and there is a possibility that such decisions may not be within the framework of market regulations and amount to interference in the market mechanism. In this regard, we can refer to the capital market, on which the government’s shadow looms heavily. For instance, as the government’s revenue comes from the oil sector, the authority to decide the crude oil price, allocate gas to steel and petrochemical companies, etc. rests with the government. This is while a large part of the capital market is being formed by the same refining and petrochemical companies. 

Therefore, due to the authority vested with the government, its decisions can directly and indirectly affect the capital market 

The government is in charge of Anfal (safeguarding public wealth); that is to say, it must protect the general rights of public property belonging to the whole country. On the other hand, it should be in charge of the long-term development of the country. Now, as the government is struggling with problems such as sanctions and declining tax and export revenues, it will resort to selling mining exploitation rights, or setting oil and gas prices to balance its budget. In other words, to balance economic parameters, the government takes decisions that pay little attention to long-term interests in that field and deal heavy blows for claiming some short-term achievement.

Many positive and negative developments have taken place in the past hundred years. A review of the successful pricing experience in the field of energy, especially gasoline, since the establishment of the first gasoline station in Abadan in the fiscal 1927-28 until the management of fuel consumption during 2007-11, which led to a sharp reduction in gasoline consumption, shows how a healthy mechanism could be applied through sound policymaking and in the absence of command economy. 

The capital market, as a mirror image of the economy, can reflect the results of the government’s decisions and strategies more than any other market.

In fact, as the prices are set momentarily in the stock market and the companies react to political, economic and even international events, news and decisions, it can be reiterated that the effect of government decisions, whether right or wrong, can trigger volatility in the economy, especially the stock market.