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October 2019, No. 92


Economy

Intervention Does Not Have Economic Logic


The level of intervention of public and state institutions which is high at the time of economic peace and stability goes up during the crisis period.


Head of Tehran Chamber of Commerce, Industries, Mines and Agriculture believes that the chronic disease of intervention of general and public institutions in Iran’s economy has been a barrier to the growth of private sector for decades, and this intervention has been further aggravated in times of crisis and economic turmoil resulting in leaving corporations out of action. Masoud Khansari, the TCCIMA Chairman, says that the establishment believes in and trusts the private sector and the private sector should be able to take advantage of this opportunity.

When the phenomenon of interference turns into a chronic disease it indicates its continuity and stability, and, of course, its escalation. General and public institutions that have been engaged in economic activity for decades, thanks to oil revenues and without any cost-benefit assessment, have created such a complicated and corrupt structure where the plot has been lost and it has become almost impossible to unknot the knot. Because disrupting the current lose-lose game in the country’s economy demands great courage; under the status quo, dealing with beneficiary groups - although they are not big are influential and powerful thanks to the rents and windfall profits they have received, is a breathtaking act. This small group profits from monopolies and rents that few people have access to.

Have the critical condition of the economy and the emergence of numerous problems caused by mismanagement and the sanctions contributed to an increase in these interventions?

It definitely has! Of course, interventions in the economy have always been there, but they increase and become more obvious at times of escalation of economic problems so that with the aim of protecting the people and the household from economic fluctuations, policies are adopted that are clear evidences of effective interference in the business environment. Numerous justifications are given for this intervention: justifications that are lacking in economic logic so that not just theoretical findings but empirical results also confirm this. The recent and most obvious example is setting an exchange rate of 42,000 rials (for one US dollar) in April last year after the jump in the price of foreign currencies after a long-run downturn, the result of which has been revealed to everyone; but we see this failed policy still goes on. The pricing of 42,000 rials for one USD and prohibition of any deal outside this price was an interventionist policy with adverse consequences for the country’s economy. Now, the policymaker himself acknowledges that the result of this low rate currency has not benefited the people. Failure to get this foreign currency to the people’s table is just one aspect of fact, and worse than that is the rent seeking in the economy and the widespread corruption that afflicted both the government and the private sector.

The level of intervention of public and state institutions which is high at the time of economic peace and stability goes up during the crisis period. While the public and state institutions are unable to improve the situation, they engage in more interventionist measures and inflict more harm on the economy. You can see, for example, how many units in the past year have reduced their production capacity or have been shut down because the interventions of other entities have left no space for their presence and activity.

You pointed out that interventions of various institutions in the economy have different forms and a wide range of interventions can be seen. Would you please elaborate with some examples?

The non-tariff constraints on foreign trade are a clear example of these interventions, the immediate effect of which is disruption in the market and its long-term impact is to reduce investment and eliminate the incentive for economic activists. It should be emphasized that most of the directives and circulars that are put in place to restrict foreign trade are in contradiction with upstream documents. In addition, its long-term effects are ignored and are adopted motivated by market regulation, but its ultimate function is market degradation. The ministries and their affiliated organizations are always adopting interventionist policies under the pretext of regulating the market. For example, a ministry which itself is the main consumer, also does the pricing, or instead of monitoring the quality it only focuses on quantity because numbers and figures are supposed to be used in its performance report.

The worst kind of intervention is pricing which economics and experience show that not only it does not have a positive effect on price control but practically leads to fraud and corruption. Meantime, punishment of corporations that would not give in to obligatory pricing also leads to a reduction in production capacity and even shutting down of businesses.

Firms that are producing at high costs under the influence of high inflation and high internal and external constraints are not able to give in to the government’s forceful pricing and continue to operate at a loss. Pricing is the most important signal in the economy for both the manufacturer and the consumer, and disruption in price signals would actually cause problem in production and affects economic growth. In addition, the price suppression is followed by canonical punishment. This approach as we know was included on the agenda of governments before the 1979 Revolution and has produced nothing except for the spread of distrust and disappointment in economic activists and the society. What was said above certainly do not mean that economic corruption should not be countered but dealing with the roots and causes instead of effects. If the monetary policies of the government generate inflation the growth of liquidity must be checked rather than going to war with the market with the weapon of suppression.

 

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  October 2019
No. 92