January 2012, No. 62

Economy

State Economy the Cause of High Inflation

Another claim raised by some officials and decision makers in the country is that the economic theories do not have much room for application in our country and thus prepare the ground to decide as they wish.

An important question the Iranian economy has always been facing is that why the average rate of inflation in our country does not drop! According to available statistics, between 1959 and 1973, the average rate of economic growth in Iran was double digit and the average rate of inflation was single digit. But from 1974 onwards the average rate of economic growth has been single digit and the average rate of inflation double digit.

Dr. Masoud Nili, Senior Economist

Inflation in our country has followed a "periodic behavior". That is to say that we have had times when the inflation rate has dropped to even 9 percent but its average has been 18 percent without any tendency to go down. Why is it so? One possible answer to this question is that out statesmen have basically not shown much sensitivity to the question of inflation and have not considered it to be an important phenomenon.

But the reality is something else. Our politicians have in fact always paid attention to the question of inflation. I remember in 1988 and under the wartime (1980-88) government, when presenting the macro goals of the First Development Plan, we reported on the three main variables of the macro economy, namely economic growth, inflation, and unemployment and forecast the average economic growth at 8.1 percent and average inflation rate at 14 percent during the implementation of the plan.

But the statesmen did not show much sensitivity to the 8.1 percent growth rate while in fact the figure was eye catching. Of course, it is just rational to expect realization of higher growth rates after the war. Nevertheless, all the attention was focused on the inflation rate. Later on too when the macro plan was submitted to the government, again the sensitivity was placed on the inflation rate although our expert view was that a high inflation rate was just normal after the war. The officials however were insisting that the inflation rate should be single digit. In this way, according to the goals of the 4^th Development Plan, the inflation rate has been forecast at 9.9 percent which shows our statesmen's desire to have single digit inflation at any cost. Therefore, the theory of statesmen's indifferent towards the inflation rate is not acceptable.

Another claim raised by some officials and decision makers in the country is that the economic theories do not have much room for application in our country and thus prepare the ground to decide as they wish. But the question here is whether we are a different nation! All the world countries have successfully checked their inflation by using standard macro economic tools. What about us? Have we applied the same tools and failed, or the truth is something else?

Let's take a quick glance at the disadvantageous features of our economy: We have an economy with a huge administrative organization; the concessions the government grants to the people raises costs and reduces revenues; because of the state economy the government issues orders to the banks and requires them to carry out certain jobs;  due to the industries being state owned the supply sector is bare; production costs are high due to the monopoly caused by the support for foreign markets;  warehouses are stocked due to instability in macro economic policies; the financial market is very inefficient due to inappropriate banking interest rates and the banks being under state control. Despite all these, the officials are still eager to reduce the inflation rate!

The blame should not be put on macro economic theories. The problem is elsewhere and the answer is simple: The relevant authorities are simply wide of the mark. There is in fact no logical relationship between the 'normative' part of the economy and its 'positive' part. It is so surprising that whenever an issue becomes more important in our decision making system the scientific approach towards that issue loses its significance.

For instance, how many times has the Economic Council discussed inflation as a very important issue? Most of the debates and decision makings revolve around the inflationary impacts.

Another issue is social justice on realization of which, in the opinion of many pundits, our identity depends. How many times have they discussed the definition of social justice and the mechanisms to fulfill it? This is under conditions that we notice very good issues on which extensive research has been done. Thus, we see sometimes the answer to difficult questions is very simple.