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January 2020, No. 93


Economy

A Well That Has No Water
but Has Bread!


In recent years, economists have largely focused on monetary policy independence and ignored the importance of financial policy independence.


"Iranian politicians have sent the country’s expert apparatus to dig wells that it is unclear when will reach water. But because they make profits in digging more wells they simply do not care about water,” said Dr. Seyed Ahmad Mirmotahhari, former secretary general of the Tehran Stock Exchange, on finding the roots of the spread of contingency decision making in the Iranian economy. He also emphasized that contingency policy making in a recurring cycle leads to more rent and corruption and prevents the economy from suffering periodic crises. 

Do you agree that the Iranian economy is rapidly moving from rules to expediency and that policy making in Iran is more contingent than ever?

What you just mentioned has been one of the biggest policy making problems in Iran for at least the last four decades. First of all, the situation is the result of a long-term political equilibrium, and I think the policymakers’ contingency approach can be analyzed in this context. That is, the situation we are in is the result of the decision making and decision taking of a political structure that has decades of governance experience, and I think this structure has partially accepted the status quo. You want to criticize policy making in this structure, with the proposition that decisions are contingent and short-lived. Yes, the basis of contingency policy is defined in accordance with the rapid developments of the time, and from a theoretical point of view in this way of decision making, the goal is to obtain an effective management approach based on the recognition of the requirements.

But the point is that the status quo has been accepted and defended by countless stakeholders in politics and economics. In the meantime, what is needed to improve the status quo is the impossibility of continuing this situation, intergeneration advances and possibly external pressures. Since the 1979 Revolution, our politicians have faced many events and have made contingency decisions for each of them. To my generation who lived and worked in the war time (1980-1988), it is somewhat acceptable that decisions in terms of contingency were usually far from expert logic, but at present it is unacceptable for new generations to see decisions are made based on political and security considerations.

If we look a little optimistically at this issue, we can say that since most of our politicians are accustomed to the crisis, the way they resolve crises is also contingent and short-termed. Then the solution that comes to our minds is that if there is a revolution in the management of the country and managers take over who are clear of such characteristics then many problems will be solved. But that’s not the case, and the reality gives us another signal. I think our politicians would rather have a certain level of crisis, and we should always be at “this critical juncture”. It is as if some politicians are in favor of a crisis. If there is no crisis, the incompetence in policymaking and decision taking could not be concealed. If the crisis escalates, the administration will be hard-pressed, so it is in our politicians’ interest that there is a degree of crisis that is reminiscent of the current critical juncture, and that the society overlook the existing weaknesses. 

Would you recommend contingency management in the realm of economics?

In Iran we have nothing called policy making. So what should we call the mechanism in place in our country? In my opinion, what we have is a division of resources, not policy making or even resource allocation. In all these years, the government has only sought to influence the economy, not through policy making but by relying on the distribution of money. According to one of the Plan and Budget Organization’s chief, resource allocation is also based on favors. So we have no policy at all.

The next point is that the very mechanism we call policy making has always been subject to populism. So basically the same mechanism we have which is not resource allocation but resource sharing is also destructive. Third, we specialize in digging endless pits. Dozens of wells have been dumped into the Iranian economy that devour resources at a very large level, and it is unclear how much money will be spent on these wells.


The secret of economic stability and market order is in rational, transparent, and predictable policy making.


The next issue is the decision-making arrangements in the bureaucratic system that has very strange fluctuations. Let us also consider how economic decisions are made by economic systems in the country. What you will notice is an organization becoming the star in the sky of economic policies for a temporary period, that is, even the role and life of the organizations depend on contingency decisions. One day the Plan and Budget Organization (PBO) is the actor, and another day the Central Bank of Iran (CBI) and the Ministry of Finance and Economic Affairs appear like a comet for a moment and then disappear. However, macroeconomic performance arises from the interaction of a set of internal and external events and variables, subject to the long-term decisions of the various institutions that influence them.

In this case, sometimes the role of the PBO is highlighted, but we have seen that based on a contingent decision an organization that was in charge of planning in Iranian economy for decades and had expert experience, was shut down completely and after a pause it was authorized to resume operation but with a multitude of difficulties and recourse to the contingency management the organization is driven to the sideline and its role is diminished and becomes so quiet as if it did not exist.

But the forex story at once highlights the role of the CBI, and we see monetary policies become a priority, with hasty decisions and insistence on specific views and contingency decisions in this area squeeze the national economy so hard that makes it hard to move based on regulations. We have to wait and see if the CBI will follow the same line as the PBO or not. But what are the consequences of these contingency decisions?

First of all, it seems that this will weaken the specialized structures and the next problem is the defective political cycles. These two faults are enough to disrupt and render ineffective macroeconomic programs and reduce the effectiveness of anti-inflation and anti-fiscal monetary policies.

In the Iranian economy, recourse to contingency management has long been a principle. In this type of decision making, there is no holistic view of all the problems and predicaments, and every manager in his position just wants to make his own decisions. Decisions that are not necessarily consistent with other developments in other sectors and subdivisions. Like a group of musicians who are supposed to conduct an orchestra, but they don’t have the coordination of a street music band.

Let me give you an example of economics; most of you must have been following the gasoline related news and developments. You can see the same dissonance in the music band here. The well dug for fuel price is one of those endless pits that only swallows resources and has several negative effects on the economy. Part of the decision-making system raises the excuse of social consequences of fuel policy and closes the way for a sound policy making. The other part puts forward political excuses.

The government, fearful of implications of new pricing, prefers fuel rationing. In the meantime, the problem of the economy is not solved and the problems remain in place. Consider the problems of the banking system as it grows bigger, but no one has the will to solve it. Issues related to water, the environment, recession, negative economic growth, and dozens of other big and small problems need policy making ​​but nobody cares. As a result, the small problems in the Iranian economy grow larger and persist because of the negligence of policy structure. 

In your opinion, how has the diminished role of experts in policy making and ignoring the results of expert work in decision making exacerbated this dilemma?

Our structure works in such a way that healthy and specialized executives cannot survive. A healthy manager in our bureaucracy cannot survive. When the bureaucracy is depleted of healthy people and professionals, unhealthy people take responsibility for the political rent and the result is the catastrophe we see today. The corrupt political director has not come to the government to unravel the problems or formulate policies for the elevation of the country. He has come to collect enough wealth before he steps down.

The output of decisions in such a structure would certainly generate more corruption itself. The root of corruption must be sought in faulty and misguided policy making. The biggest drawback of contingency management and decision making is the severe weakening of expert structures. When it comes to organizations that rely on expert views, they offer some form of regularity and timing. But if they are an impediment to immediate decision-making, bypassing those views, insisting on rash decisions and specific opinions and neglecting legal packages will be the outcome. For example, if the inefficiency of anti-inflation and anti-fiscal monetary and fiscal policies is the result of a contingency decision, it can lead to lower levels of revenues and deepen recession by reducing investment. 

In your opinion, which area of ​​the economy is the most dangerous type of contingency management in the Iranian economy, and where is it more urgent to stop?

The secret of economic stability and market order is in rational, transparent, and predictable policy making. The expectation of a stable fiscal policy is that it will continue in the long run. There is no need to intervene in the pattern of income and expenditure.

So when the budget base is adjusted to short-term goals, virtually the basics of budgeting, such as spending and revenue, are unpredictable. As far as the oil income is concerned we know that these revenues are not permanent; the oil price is fluctuating and is determined in world markets.

In such circumstances, fiscal policy plays a decisive role, and if the theorists’ views are to be heeded, the country’s ability to adhere to the requirements of fiscal policy is stable, so the area of ​​influence is largely program and budget. In recent years, economists have largely focused on monetary policy independence and ignored the importance of financial policy independence. Budgetary policymaker independence seems to precede monetary policymaker independence because it is much easier for the politician to influence the PBO than the CBI. The origin of many of our problems today, including budget deficits, is inaccurate fiscal policies. To overcome the challenges of Iran’s economy, we need an independent, expert, and robust PBO to create financial sustainability.

 

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  January 2020
No. 93