Economy, Domestic Economy

Gov’t and Market Mechanisms

Gov’t and Market Mechanisms Gov’t and Market Mechanisms

In Iran the government is identified as the major player in the markets. While some economists believe that the government must minimize its role in favor of a competitive market in which prices are set based on the basic economic principle of supply and demand, others who believe that the government’s interference in the market would ultimately help the domestic industries run their businesses without having to be challenged by outside competition.

The latter argue that the government should apply high taxes on the import of foreign products to increase their ultimate price; thereby allowing domestic suppliers to charge more for their products. Whether the government’s role is curbed or reinforced, it would have a direct impact on the market. In an editorial written for the Persian daily Donya-e-Eghtesad, prominent economist, Mousa Ghaninejad argues that the government has failed and continues to fail to understand that the market is better able to regulate itself and adjust to the consumers’ needs if left alone.

It is nearly two centuries since the emergence of economics as an academic discipline. Despite the progress so far, many of its achievements are still subject to controversies. Economists are still debating as to whether the market should be competitive, i.e., a self-regulatory market free from government control, or it must be supported by the government.  

It is good news that government officials have ultimately come to understand that economic development can be accomplished only through a competitive economy which itself is the inevitable outcome of price deregulation and liberalization.

On the other hand, the government’s support for the industries is highly contested. In that regard, two incidents which took place in recent weeks need attention. The first was the preferential tariffs agreement (PTA) reached between Iran and Turkey after almost 11 years since it was initially discussed; and the second was the letter written by the minister of industry, mine and trade to the president regarding deregulation of car prices.

The PTA with Turkey was criticized by Iranian manufactures who argue that the agreement would further open Iran’s markets to Turkish commodities and ultimately work to their disadvantage. This is not a new debate. The argument dates back to the era of the first Pahlavi regime when the first textile companies were established. Protective policies were adopted by the government to support the new industries under the pretext that such nascent industries were in need of temporary support to develop before they can enter into competition with foreign industries and commodities. Such industries, however, still need government support almost 70 years after inception. Does it not indicate that such policies have been counterproductive and ineffective or, or worse, detrimental to the industries?

Furthermore, as economic professor, Mohammad Mehdi Behkish wrote in an article in Donya-e-Eghtesad on February 5, despite the high tariff rates currently imposed by the government on imports, the Iranian textile and apparel market is inundated with smuggled products from Turkey. Therefore, a reduction of tariff rates, as per the new PTA involving certain Turkish commodities, will ultimately help control the growing rate of smuggling, much to the benefit of everyone including the government, which can in turn increase its tax revenues.

Moreover, the preferential tariff could be seen by Iranian businesses as a prelude to increased competitiveness in the global markets. Therefore, although it could have come much earlier, the Trade Promotion Organization’s attempt to sign PTAs with Turkey is appreciable, since it is the only way for the government to tackle smuggling and stimulate competitiveness in the domestic markets.

The industry minister’s letter addressed to the president and the head of Management and Planning Organization (MPO) wherein he has called for deregulation of prices in the auto industry, is a welcome move that needs to be analyzed carefully. The industry minister has dismissed allegations of monopolistic exercises in Iran’s auto industry, arguing that the industry is competitive enough to take care of itself.

Therefore, he insists that the government has to refrain from price setting and let the prices be determined by market forces. Aside from whether or not monopoly exists in Iran’s auto industry, a few questions need to be answered first. What are the advantages of a competitive market? Is it not true that in a competitive market high quality products are supplied with lower prices? If yes, is it really applicable to Iran’s auto industry that has been flooding the market with low quality products with high prices?

If the minister’s intention is to bypass the Competition Council and take the initiative to set the prices, he is better off to make another argument. Otherwise, if he is really concerned about competition in the auto industry, he has to do something about the high tariff rate imposed on imported commodities. Ironically, the only body that is against price deregulation is the so-called Organization for the Protection of Consumers and Producers, which is affiliated to the ministry of industry, mine and trade. According to its statute, the organization is licensed to set the prices in all markets, a practice that is completely against economic sense and against the minister’s own beliefs, wrote the minister in his letter to the president.