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June 2020, No. 94


Economy

Implications of Economic
Insecurity in Iran Today


Economic insecurity in the economic literature differs from what is considered at the community level. Hussein Abbasi, a member of the US Department of Economics at the University of Maryland, emphasizes that if we confuse the boundaries of economic insecurity with economic concerns, then government policies and interventions will go astray. It is as if the government, by allocating foreign exchange (42,000 rials per USD) last year for travel, virtually donated cheap foreign travel to those who were not economically insecure. If the definition of economic insecurity extends to this gender of prosperity, then the group that is literally in economic insecurity will be neglected. Abbasi explains the concept of economic insecurity in the following interview.

 

If we specifically want to talk about the last two years of the Iranian economy, have the consequences of economic insecurity been more for the downstream groups?

Yes, when the economic situation is good, everyone will benefits, and when the situation is bad, everyone will lose. The problem is that if there is a rent, when the economic downturn is in place, a very small group may benefit enormously, making the nation very angry and they have the right to be. When there is a rent, this always happens. The root cause of these issues is either government control or the existence of double prices at some point in the economy.

At the point where the government controls and takes over the distribution of a resource, it is the source of the rent, and in bad circumstances, the rent goes to “cousins” and people are angry. In bad circumstances, people naturally have assets that can be used as risk cover, such as gold, home, venture capital, and so on. Those who do not have these assets fall into the trap of economic insecurity.

Unfortunately, in the last half century, governments in Iran have proven that they do not think directly about the distribution of income. Government policies are consumer welfare policies that the lower classes may use as bread subsidies and may only suffer losses, such as fuel and gas subsidies. Consequently, in bad circumstances, given that the government has no ambition to identify the group that really suffered from economic insecurity, policies may also be policies that do not cover the lower group.

The government goes ahead with the same trend and formula as “Dear Consumers! I will provide you welfare.” No matter how much the government was told that if you give 42,000 rials per USD for each commodity, it would not be possible to set the price at the same rate and we saw the result.

 

It seems that whenever the external threat to the economy of Iran and the country is affected, economic security is at stake. What is the origin of these threats: inside or outside?

In economic dimensions such as the Iranian economy, you cannot answer this question very explicitly. We are not a village to die of starvation if we are sieged. We are a big economy of 85 million. Of course the external threat will work and there is no doubt about it. Without connecting with the world, we are getting worse every day. But our deterioration may be at a negative 10 percent growth rate, maybe at zero or even positive one or two percent. There is a distinction between the two.

Without outside contact, you cannot have more than two percent economic growth. But when you have an external threat, the economic growth rate slips to zero or minus one percent; when you are in the wrong forex policy the growth rate is negative 9 percent. That is, considering any external threat, you must multiply the degree of economic imprudence to determine its outcome. If your degree of economic imprudence is low, the effect of the external threat is low, if the degree of economic imprudence is high; the effect of the external threat is high and people pay the costs.

Can we witness the presence of a ‘Kamal Darwish’ in the Iranian economy under the current circumstances?

That inflation is an economic issue is 100 percent true. Inflation was once unknown to economists, but its time in the world is now over. Among our economists at Iranian universities you can find at least 20 Kamal Darwishes under 40 years of age. But we take our Kamal Darwishes from the decision-making circle. We have no problem with shortage of Kamal Darwishes. The problem is with the politician who has put his hand in all areas.

Look what the President said in one of his recent remarks: “Economy is not books; some think economy is books.” With such a line of thinking at its highest level, no Kamal Darwish and even no Milton Friedman can do anything in Iran. For example, they made the bad economic decision about the foreign exchange rate and removed anyone who disagreed with them and then said they all agreed. Later, however, the media announced three opponents of the meeting, one of whom was Dr. Masoud Nili. You don’t find any Kamal Darwish like Dr. Nili who understands Iran’s economy.

Apart from Dr. Nili, you can find 20 Kamal Darwishes at Iranian universities, each of whom can perform better than the government’s economic team. The question is not the presence of a Kamal Darwish; it is about a politician who must understand that economics has principles and must be governed by these principles, and until that happens, Milton Friedman himself can do nothing for the Iranian economy.

 

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  June 2020
No. 94