The money supply was growing at an extreme pace and the rate of economic growth was falling, but despite these concerning economic facts, banks (both public and private) were still forced by former president Mahmoud Ahmadinejad’s administration to use their resources to prop up the so-called ‘quick return’ projects, that is industrial and construction projects.
Economists know this situation as stagflation. Suppose that it could be prevented by avoiding the negative supply shock and controlling the amount of high-powered money injected into economic system. In addition, correcting some of the monetary policies such as resetting the banking reserve requirements would be helpful in this case.
The problem is that final decisions have to be made by engineers, as was the case during Ahmadinejad’s administration, which was mostly composed of engineers. To them, the explained situation is a mathematical sum of stagnation and inflation! They believe that by reducing the inflation rate and pushing the economy to growth they will be able to exit this situation.
Of course, an economic system managed by engineers is not always as bad as you might imagine. Engineers are cautious and aware of the malfunctions within the economic system. For example, they would react to extreme increases in tomato or onion prices in consumers’ market!
Of course their reaction is unique; they manage to reduce the price of tomato by spending the country’s national treasury resources on subsidizing the tomato and onion market. Engineers find it a good solution to simply buy at higher prices from the farmers and sell cheaper via semi-governmental distribution channels.
But of course, this article is not meant to be taken personally! Rather it is trying to investigate the continuous malfunction within the Iranian economic system. The problem starts right at universities. At universities engineers learn how to maximize their skills in technical thinking. They work with the laws of physics!
It’s not always easy to convince an engineer to predict a crisis based on qualitative measures, whereas economists, or managers of the economic systems, have to develop their conceptual understanding of different economic trends.
Economists need to predict the trends of macroeconomic and microeconomic systems and act based on their analysis and most of the times based on their insight over the available qualitative and quantitative data.
An economist would never wait for the crisis to happen. Because an economic crisis may have serious social/political consequences, it is too risky for administrations to let the inflation rate go up to 50% or the local currency lose more than 60% of its value within months. That is why decision making in economic systems must be based on predictions and scientific calculations of the future trends in macro/microeconomics.
Fortunately, most changes in economic systems happen at intervals, which gives us enough time to make the right decision to help stop a simple change from turning into a crisis.
The Rouhani administration needs to see the stagflation problem in its entirety before it can come up with a solution. Recently a government official said: “What matters most in the current economic situation is that recession is coming to an end and the economy has started to grow”.
Considering the principles of economics, over the past four years, the country’s economy has not been struggling with recession or inflation separately, rather it has been grappling with stagflation. Trying to escape recession or inflation singly would not solve the problem. What government faces today is stagflation, and policies to solve this problem are different from those that work with inflation or recession separately.
Economic conditions have been similar for decades. Surprisingly, Iranians have got used to it. They have successfully learned how to live in an inflationary economic environment. But the administrations have not been able to end the galloping inflation!
