Economy, Business And Markets

Checks and Balances

Checks and Balances Checks and Balances

The tremor from the salary scandals in the Iranian public sector unleashed recently by the disclosure of unusually high wages at state-owned banks and company executives continues to shake the socio-political psyche.

The revelations, accompanied by public indignation, have swayed the top brass to move swiftly to control the damage. Four bank chiefs were told to find another job and a government high-level meeting was held Saturday to fire more officials. One report suggested that a mass resignation of the head and executive board members of the National Development Fund of Iran -- a sovereign fund – had been the result.

The wrath is understandable.  People are wondering how public officials could enjoy fat cats dozens of times the average workers’ pay, when the country is still grappling with a painful recession that has seen paychecks and purchasing power of most workers become smaller like melting ice.

The Economy Ministry has responded by introducing new caps on payments and Vice President Eshaq Jahangiri issued a decree banning CEOs from holding two high-level jobs.

The Leader Ayatollah Seyyed Ali Khamenei has called the scandal an “assault on    values” and parliament is also considering measures with lawmakers conducting a probe of their own.     

While commendable, these measures do not address the root cause of the problem which goes back to the huge role of the government in the economy. While the latest whistle-blowing is widely believed to have been engineered by the political rivals of President Hassan Rouhani, it should be seen as an opportunity by his government to tackle, once and for all, a problem it inherited from the former administration.  

Furthermore, the incident has raised some visceral issues about executive pay and income inequality. The controversy should remind us of the wider pernicious effects that income inequality can cause–while inequality is noxious in society as a whole it becomes all the more damaging when public officialdom sets the wrong example. Rouhani, who came to office on promises of fighting corruption and creating decent living conditions for the fixed-wage earners, must push ahead with the promised reforms. The president and his men are indeed cognizant of the fact that heavy state involvement in the economy will breed corruption no matter how strong the oversight and a no-nonsense ombudsman.

Observers concur that the privatization process, which from the outset was hardly impressive, must be placed on the fast mode. That should be done in a manner so as to strike a balance between letting market forces play their role and protecting the minimum-wage from potential negative consequences.   

Thomas Pickety, the Noble laureate, in his groundbreaking work “Capital in the Twenty-First Century” has put much of the blame for wider income inequality in today’s world on the doorstep of pay rises for executives, managers and financial professionals.

 Peter Drucker, the renowned management theorist, was worrying about the gap between executives and the average worker way back in the 1980s, when the economy-wide difference between CEOs of big American firms and average workers was in the 40-1 range. The multiple now is somewhere between 140-1 and 335-1. Drucker reckoned that exceeding a 20-1 multiple of pay within a firm was bad for morale.

The issue is indeed in the spotlight in rich world: both of US presidential candidates have gone after the issue: Hillary Clinton has run ads lamenting excessive pay and Donald Trump has described CEO pay as a ‘’complete joke’’.

Sensible politicians should act swiftly to address inequality concerns in a time that opportunistic populist figures are riding the wave of public anger from America to Britain to Europe and elsewhere by utilizing tools already at their disposal to curb excessive pays: taxation is already a ready provision.