Iran has been struggling with double-digit inflation for more than four decades, during which economists have tried everything they knew to contain inflation, but to no avail.
If we fail to identify the root of the problem, the solution would only compound the issue. For years, some economists prescribed medicine that was unrelated to the roots of inflation and failed to produce the desired result. Some people may ask how neighboring countries like Afghanistan register inflation rates lower than Iran’s, despite war and internal and external tensions and the fact that, unlike us, they don’t have oil. Morteza Afqeh, an economist and university professor, prefaced his write-up for the Persian monthly Ayandehnegar with this note. A translation of the text follows:
Inflation or the continuous increase in the general level of prices occurs when the supply-demand balance is disrupted and demand outweighs supply (production). Economics presents several reasons for the increase in demand compared to supply: inflation arising from demand pressure, inflation caused by the rise in production costs and inflation coming from the increase in money supply compared to the economic growth rate. As there are many causes of inflation in different times and countries, there are different ways to treat it.
One of the frequent mistakes committed over the past three decades is the prescription of wrong medicine by some economists who saw the root of inflation in the growth of money supply and therefore recommended that policymakers reduce money supply. Some points need to be mentioned here:
Although money supply can be the final link in the creation of inflation, it is the result of other factors. In fact, the rise in money supply stems from the government’s annual budget deficit that results from other factors:
Unnecessary budgetary sections: A significant number of budgetary sections do not have direct or indirect effects on national production and people’s wellbeing. Many of these sections have been imposed on the budget at the urging of political and religious groups and parliament members.
The inefficiency of administrative-executive system: One of the reasons behind high budget costs is the inefficiency of the government and the very low productivity of state managers and workforces. The employment of directors and senior officials as well as employees in many governmental institutions is not based on their qualifications, but on their political, religious and ideological affiliations or ethnic relations. As a result, you can see an inefficient system with low productivity in all aspects of governance and the goods and services that are produced by this system are very costly. In fact, they are a waste of resources and consequently result in budget deficit and increases money supply and inflation, and reduces people’s purchasing power, and finally the spread of poverty. In fact, people pay for the inefficiency of this structure through rising inflation.
As experts and policymakers blame inflation on the growth in money supply, many small- and medium-sized enterprises blame the decline in production (up to 50% of their production capacity) on the lack of capital. Therefore, it seems that over-emphasizing the reduction of money supply without seeing its roots would misguide policymakers, and so double-digit inflation would remain unsolvable. The fact is that when it comes to inflation, lack of production and supply is more to blame.
Far From Iran’s Realities
Economists who have focused on the demand side of the economy to solve the country’s inflation problem are following theories based on assumptions different from Iran’s realities.
Classical theories in economics are based on assumptions that exist in the societies of origin. In advanced countries, where most of the economic theories have been formed, the capacity to produce and supply goods and services is sufficient to meet the needs of the society. Under such circumstances, policies that give rise to demand lead to inflation, i.e., the inflation comes from the demand side and therefore theoretical recommendations are based on changing demand.
Copying the theories without regard for domestic assumptions has caused countless economic problems, especially inflation; that’s why the problem has remained unsolved for the past three decades.
Inflation in Iran stems from the inability to increase production and supply, and the high cost of production. As long as reforms to increase production and reduce its costs are not implemented, measures taken to affect the demand side would be short-lasting and temporary. The persistence of inflation in Iran is to blame on the wrong solutions prescribed by a group of economists. As long as policymakers fail to pay attention to production and supply, the country’s inflation problem will persist.
Temporarily, periods of decline in inflation were mainly due to the rise in oil revenues and not necessarily because of changing variables on the demand side. Reducing inflation via policies aimed at decreasing money supply would cause recession.
Poverty is the reason why inflation in some neighboring countries like Afghanistan is low. There is not much demand in the market to cause inflation when people do not have income. In other words, low inflation in these countries is not synonymous with a high level of welfare and purchasing power of the people; it is because of the widespread poverty.
The criteria for evaluating and comparing countries should be the level of their well-being. Low inflation rate can be a necessary condition for appropriate economic conditions and well-being; it is not a sufficient condition though. Therefore, turning a blind eye to the main root of economic problems leads to confusion and ambiguity for the people and costly prescriptions for the country.
