A group of economists wrote about Iran’s economic woes in an open letter published recently and suggested ways of improving the situation, Hossein Haqgou, an economist, prefaced his write-up for the Persian daily Shargh with this note. A translation of the text follows:
Institutional economists have warned about the government’s recent policy, the so-called “economic surgery”, the elimination of subsidized foreign currency and its consequences in their letter.
They believe the success of this policy depends on lending support to the financially-vulnerable people, ensuring sufficient oil and non-oil revenues and supplying foreign currency to control probable fluctuations; drawing up clear and efficient policies to stabilize macroeconomic conditions by controlling inflationary factors and the budget; having access to global markets, including that of essential goods, as well as allocating resources for financing, if necessary.
A few weeks ago, Masoud Nili, a free-market economist, also rebuked the government for the removal of subsidies and talked about the four main components of economic reforms, including “price liberalization”, “macroeconomic stability and inflation control”, “support for financially-vulnerable groups” and “low-cost access to global markets”.
Nili explained that the government’s price liberalization is a microeconomic decision, while economic stability is inflation control. In other words, governments allow prices to adjust but the average general level of prices is being controlled via a key tool, i.e. “liquidity growth”.
Despite their differences, the two groups of economists (institutional and free-market) agree on three out of four components of economic surgery, namely macroeconomic stability, support for the vulnerable and access to global markets by improving interaction with the world
The third component of economic reform is having an effective program to support low-income groups. The government should have a detailed plan to alleviate the pressure on the livelihoods of this group. The fourth component is that all the countries that have undertaken economic reforms have also provided very low-cost access to world markets.
Despite their differences, the two groups of economists (institutional and free-market) agree on three out of four components of economic surgery, namely macroeconomic stability, support for the vulnerable and access to global markets by improving interaction with the world.
The bone of contention is pricing. The signatories of the letter wrote that, “It is gullible to look for the causes of the crisis only in economic and financial factors such as the growing budget deficit”.
Nili, however, said abandoning command pricing is the centerpiece of economic reforms. The difference between these two views is rooted in their ideologies.
Ali Sarzaeem, an economic analyst, says, “Institutional economists believe that the main problem of the economy is not the pricing system; institutional arrangements from official institutions to the three branches of the government to the culture, norms and the value system are responsible”.
This is while, “according to the free-market economy thinking, the price mechanism plays a pivotal role; market is a system in which all transactions and exchanges take place, unless market mechanism proves to be incapable for certain reasons; only certain circumstances allow government intervention.”
Nili emphasized on “financial and monetary discipline” and said, “I believe the government needs to keep a tight grip on the budget; when money supply grows by 30 trillion rials a day, the rise in prices is inevitable. It means that within the next two years, you will have to raise prices again and this will go on and on. Free-market economists believe that the market should work competitively until the positive changes emerge at the micro and macro levels.”
Altogether, apart from differences in the two key currents of economic thought in the country, there are important and fundamental commonalities between them. The duo has reached a consensus on specific principles and can provide common strategies to the people and the government in the form of a charter or an economic plan.
The policymaker can reform its course of action by taking advantage of the views expressed by economists. Instead of employing a shortsighted, subjective view, it needs to apply real reforms. The first and most immediate reform, according to economic and political experts, is fixing the country’s foreign policies by resolving the Joint Comprehensive Plan of Action and putting diplomacy at the service of economic growth and development, changing the misconception regarding engagement with the world, promoting civil rights and building up social capital.
