Economy, Domestic Economy

Critical Juncture Following Nuclear Deal

Critical Juncture Following Nuclear DealCritical Juncture Following Nuclear Deal

Tehran University Faculty of Engineering had a special guest speaker on 22 July: Top presidential economic advisor Masoud Nili who also serves as the head of the Institute for Management and Planning Studies. His speech centered on the current state of Iran’s economy and its prospects after the July 14 nuclear deal between Iran and the permanent members of the United Nation Security Council—the US, Britain, France, Russia, China—plus Germany.

In his speech, Nili invoked the theories by Turkish-American economist Daron Acemoglu from the Massachusetts Institute of Technology and political scientist James A. Robinson in their 2012 book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty. The following report explicates concepts in the book and Nili’s remarks.

Nili expressed hope for the successful implementation of the deal and said, under the most optimistic scenario, the final quarter of the current Iranian year (December 22-March 19) would see the end of all economic sanctions in trade, technology, finance and energy sectors. “In practical terms, it means that hopefully we’ll see the positive impacts of sanctions relief as of next year,” Eghtesad News quoted him as saying.

According to Acemoglu and Robinson, ‘critical junctures’ are major events that disrupt the existing political and economic balance in one or many societies. They can create enormous profit opportunities and offer the potential for rapid but also disruptive changes in the structure of economies around the world.

Nili regarded Iran’s nuclear deal as a ‘critical juncture’. To make the best of the current situation Iran should carry out economic reforms and aim for ‘inclusive, extrovert’ economy instead of ‘extractive, introvert’ economy, he said.

Acemoglu and Robinson believe that inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity.” Acemoglu and Robinson call the institutions with opposite properties to inclusive as extractive economic institutions because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

Presumably the Iranian official had the above concepts in mind when he said, both the government and the public have to make a very important decision between the two options they have in the post-sanctions era.

The first is to build the economy on oil exports, he noted. This way foreign investment would pivot on government and semi-government companies and the entry of foreign resources would be realized on the condition that the Central Bank of Iran guarantees them, he said.

“The second choice we can make is to aim for expansion of tourism and trade based on industrial exports. Foreign investments would then be channeled into boosting exports and production via private sector,” he added.

Policymakers in Iran have always opted for the first choice, he claimed. “They always exported oil and imported commodities to improve economic conditions tangible for the public; this is while such approaches would do nothing to resolve our main problem which is unemployment,” he continued.

“If we view the nuclear deal as a channel to inject foreign currency into the economy, given the current structural problems, the only achievement we’ll make would be low productivity and a short period of economic growth,” the economist said.

In Acemoglu and Robinson’s words, for a while the state may be able to create rapid economic growth by allocating resources, but this process is intrinsically limited. “When the limits are hit, growth stops.”

Nili viewed the current Iranian year (started March 20) as the toughest fiscal year for the government and said the two main challenges of the present time will be how to sustain economic growth and the slow-down in inflation.

“A look at Iran’s history shows that the country has faced critical junctions on many occasions; however we failed to learn from past experience. If we deal with the new condition by employing the same old policies and traditional ways, we won’t be able to take full advantage of the nuclear deal. We may even face bigger crises which would push us into an era even worse and more dangerous than sanctions,” Nili concluded.