Economy, Domestic Economy

Price Regulations Undermining Production

Price Regulations Undermining Production
Price Regulations Undermining Production

Government interventions to regulate the market through price fixing for various products has generated new rounds of criticism by manufacturers and economic experts who argue that the government intervention should be limited only to staple products whereas in other markets, such as the automotive industry, a free market can create healthier competition and more reasonable prices.

The issue resurfaced recently with the disputes over the price of Iran Khodro Company’s (IKCO) new car, Dena. The car’s delivery, initially set to hit the market in 2012, was postponed following disagreements between the manufacturers and the so-called Competition Council, the government body in charge of market regulation. The manufacturers refused to sell the sedan in the domestic market at the price set by the Council due to lack of sufficient profit margins. The manager of IKCO announced last week that his company has decided to sell Dena only in the international markets after the first batch of 10,000 vehicles is delivered to Iranian customers as promised.

In view of the hardships created for the manufacturers due to government interventions, at a time when so much emphasis is being put on boosting production, experts are once again questioning the government’s role in market regulation and whether it benefits the manufacturers, in an article published by Persian daily newspaper, Forsat-e-Emruz.

  Chaos in the Market

Member of Iran Chamber of Commerce, Industries, Mines and Agriculture and the secretary of Auto Parts Manufacturers Association, Mohamamd-Reza Najafimanesh dissaproves of government intervention in setting prices for commodities, on the grounds that it “disturbs the market’s natural equilibrium and fails to protect the manufacturers.”

The expert argues that while the government’s regulatory interventions is, to some extent, logical in case of staple product market which has limited suppliers, efforts by the government to regulate non-staple markets such as automotive, with 17 manufacturers and 21 importers, leads to “nothing but chaos” in the market.

Economic expert, Mohamamdgholi Yusofi on the other hand points out that while no individual or government body can make precise prediction about demand and supply fluctuations in the market, the effect of social factors on market predictability cannot be underestimated.

He argues that while in an ideal economy, with a transparent and secure business environment, the market could regulate itself without government intervention, Iran’s economy is highly influenced by the government.

He explained that since the private sector in Iran is highly affected by government decisions regarding bank loans and interest rates, incentives on foreign currency and import/exports regulations, government decisions could harm the market greatly, if not taken with due care and wisdom.

  Lack of Enthusiasm

Another argument by economic experts is that a free market economy, wherein the prices of goods and services are set freely by the forces of supply and demand without intervention by government, entails support for highly competitive markets and private ownership of productive enterprises. Hence in line with the same argument, lack of a genuine business environment and stringent rules and regulations imposed by the government results in lack of enthusiasm for investment in productive activities.

Najafimanesh points out that imposing price ceilings on products could lead to reduction in the products’ quality and variation due to reduced competition in the market. It could also lead to the creation of black market for the goods, he added.

  What is the Solution?

Critics of market regulation argue that the government should divert its attention to creating a secure economic environment in order to draw foreign investments in productive sectors, while maintaining a supervisory role in the market to protect the manufacturers against market fluctuations. “Why impose additional barriers for manufacturers in an economy that has already suffered so much from being eliminated from the global trade market,” they ask.

The policies of ‘resistance economy’ introduced by Leader of Iran’s Islamic Revolution AyatollahSeyyed Ali Khamenei and propagated by President Rouhani and his administration aim to boost foreign investment and promote domestic production, in a bid to make the Iranian economy resistant to external economic shocks in the long term, including western sanctions and global financial crises.

There is a need to reform the domestic financial market in order to reduce vulnerability to global crises while establishing a self-sufficient system of capital flow. But, economic experts argue that regulatory interventions by the Competition Council are not in line with the objectives of the resistance economy and must be stopped to allow the private sector in Iran to achieve self-sufficiency.