High Inflation, Low Growth
What brought the growing trend of the economy in the 60s to an impasse
was disorder in financial and monetary policies along with exercising
heavy bureaucracy and creating market repressive organizations, which
altogether made the business atmosphere turbulent and insecure.
Iranís economy for more than four decades has been affected by a chronic
disease the symptoms of which are manifested in the form of high inflation
and low growth rate in the long run. By taking a glance at the process of
these two variables over the past four decades, it will become clear that
the two elements in the course of time have recorded severe and
unpredictable fluctuations. Total productivity in the national economy
during the said period has become depleted.
In some years when the growth rate was high, it was mainly due to the rising
level of an exogenous factor called oil revenues. If we compare the
situation of the recent four decades with the golden ages of Iranís economy
in the 60s (before the Islamic Revolution), when the inflation rate reached
an average rate of below 4 percent and the economic growth rate was above 10
percent and the change pace was relatively stable with no turbulence, we
will better understand the dimensions of the chronic disease that has
affected our economy.
Had that evolutionary trend continued, today Iranís economic power would
have been naturally higher than those of South Korea, Turkey and many other
similar countries. Indeed, how that experience became possible and why it
did not continue? What was the disease that affected an economy which was
proudly taking its right and safe course and made it crippled gradually? To
provide an answer to this question that would cover all its dimensions is
not possible in this limited space, but a few key and meaningful points can
be cited which could perhaps shed further light on the issue.
Important features of that golden era differentiate it from the subsequent
decades in Iranís economy some of which are mentioned here. The 60s started
with the regulated fiscal and monetary policies of the government for
inflation control and those policies continued up to the beginning of the
Fifth Development Plan, in early years of 1970s. Credit policies were such
that liquidity growth in this period was in harmony with the economic growth
and as a result, the general level of prices did not suffer severe
In addition, in the wake of the adoption of the law encouraging foreign
investment in the late 50s and the opening of the business atmosphere,
capital and advanced technology began entering the country unprecedentedly
in the 60s. The open business atmosphere and lack of market suppressive
institutions provided the possibility for accelerated market growth of the
private sector with the help and cooperation of foreign enterprises and
Of course, heavy industries such as steel, auto manufacturing and
petrochemicals with the government investment and foreign technology in late
60s further accelerated the economic growth. However, the main engine of the
economic growth of the country was a brisk and agile private sector, which
was quickly developing thanks to its successful operation in trade, services
and processing industries.
What befell the growing Iranian economy like a nightmare and disrupted its
balanced progress was the huge and irrational increase in the costs of the
Fifth Development Plan by the government in 1973, which was tripled as
compared to the Fourth Plan. Unfortunately, this unjustified and illusory
ambition which was inspired by the unexpected success of the previous two
development plans coincided with an unprecedented increase in governmentís
oil revenues after the adoption of the Fifth Plan. As a result, a new
illusion was developed as though the financial bottleneck as the most
important obstacle in the way of accelerating growth had been removed and
implementation of any project from then on would be possible! In this way,
the Fifth Plan was revised and its credits were doubled and the annual
economic growth was projected at more than 25%!
The injection of a massive volume of liquidity into the society in a short
period of time which was mainly done by the government caused disorder and
confusion in the harmonized movement of the national economy.
Infrastructural bottlenecks generated a massive wastage of the resources.
The general level of commodity prices started to increase and in order to
check the trend, the government on the one hand created market suppressive
institutions such as Price Monitoring Center and, on the other hand,
switched on the pipes for low cost imports by relying on the petrodollars.
The result of these policies was weakening of the private sector against the
public sector which was getting fatter every day.
Since that time, the government cast its shadow on the national economy from
two directions and pushed the emerging and growing private sector into the
margin; one measure was through direct involvement of all kinds of economic
and entrepreneurial activities which made it harder for the private sector;
the other was through comprehensive and crippling interventions in all
markets by creating wide and long bureaucracy which was very costly and
deterrent for the private sector.
Unfortunately, the vicious legacy remaining from the overall government
control of the economy in mid 70s, continued after the (1979) Islamic
Revolution; of course the exception was that the abundance of oil revenues
did not repeat up to mid-2000s. The result of this hurtful legacy has been
continued and irregular monetary and fiscal policies, two-digit inflation
rate, and weak economic growth rate.
Various governments have time and again tried what has already been tried in
order to restore sustainable economic prosperity to the country with the
lever of supportive policies but to no avail. Granting all types of
subsidies to producers and consumers, introducing high tariffs to support
domestic production, distribution of financial resources to inefficient and
loser enterprises have been repeated for four decades with the only result
being waste of resources.
Hasnít the time arrived to try things that have not been tried over those
four decades? What brought the growing trend of the economy in the 60s to an
impasse was disorder in financial and monetary policies along with
exercising heavy bureaucracy and creating market repressive organizations,
which altogether made the business atmosphere turbulent and insecure.
Liberalization of the business atmosphere through suspension of investment
deterrent permits and elimination of interventionist agencies in the market
is the only production boosting policy, which has no financial cost. Is
there anyone to take this cost-free solution seriously and try it once?