January 2012, No. 62

Economy

Trust in Private Sector
Three Economists Comment on Production, Currency Rate and Trade
	We are now an oil rich country, but we do not possess a major private corporation in the petrochemical field because oil prices are controlled and price control is tantamount to 'no entry' sign for the private sector.

Advisor to Tehran's Chamber of Commerce, and former economy minister has stated that under the status quo, the country's production is under pressure, adding that the only way to come out of the inflationary stagnation is changing technology within the framework of liberalization of prices.

Davood Danesh Jaafari, speaking at a specialized paned dubbed "targeted subsidies and production" which was held on the sidelines of the Exports Conference in Tehran, said: "I can decisively say that the plan for targeted subsidies was not merely aimed at reforming the distribution system; because in that case easier mechanisms could be applied. In the same manner they (the government) approved to allocate two percent of oil revenues to deprived provinces, they could have allocated some percentage to the deprived people as well."

Dr. Danesh Jaafari: Instead of new subsidies, change the technology

Danesh Jaafari who served in the top position at the Economy Ministry in the 9^th government, further remarked that when there is subsidy economic system in the country, the private sector could not grow. "We are now an oil rich country, but we do not possess a major private corporation in the petrochemical field because oil prices are controlled and price control is tantamount to 'no entry' sign for the private sector."

Danesh Jaafari who is teaches economics at university said one of the topics in economy for defeating the rival is to reduce prices. For example, he said, when Coca Cola decided to become present in Brazil it noticed that prices at two factories in that country were low and therefore lowered its prices as such it could pave the way for the two rivals to leave the scene of competition. He said presence of the government in subsidies sectors would bring about the same development. It is for this reason that the private sector is present in industries and services but it is absent in the area of oil as prices are controlled and for this reason the private sector has not been strongly present there.

Danesh Jaafari, a faculty member of Allameh Tabatabi University, stressed that targeted subsidies plan was aimed at strengthening production and added that in the theoretical dimension of economy when producers' input becomes more expensive, the general price level would increase and as a result production would reduce. "With the implementation of targeted subsidies plan, we face a drop in production, which means stagnation, unemployment and increase in general price level while this was not the aim of the plan."

Arguing about the way out of this condition, he said if under the status quo the government decides to pay subsidies in order to increase production this would backfire; therefore there is no question about new subsidies, but there should be a plan to increase production and supply level even more than before implementation of the economic reform plan.

He stressed that the way out of the present impasse is to change production technology. He also noted that there are power stations in the country with the efficiency of 32, 38 and even 50 percent while at present there are also power stations with the efficiency of 85 percent which are capable of generating more electricity by consuming fuel oil. Under the status quo, he further remarked, the question is that unemployment has increased and prices have gone up out of which production should be salvaged and we should come out of the stagflation rapidly which would be possible by equipping producers with technology means. He pointed to the change in behavior of consumers simultaneously with the implementation of targeted subsidies plan and said since then consumers are after commodities which consume less energy. Producers, he added, should also behave the same but this measure demands new investments.

Pointing to anti-Iran economic sanctions, the former economy minister said: "If we intend to resist the sanctions we should strengthen domestic production. With a weak production sanctions could not be welcomed." 

Mousa Ghaninejad, a visiting professor at Sharif University of Technology and advisor to Tehran Chamber of Commerce, was among other experts in the meeting who said: "Whenever the government speaks of import management and support, you should be cautious and frightened!"

Dr. Ghaninejad: Multiple currency rates among biggest risks threatening national trade

Ghaninejad believed that the government should unify the currency rate at any cost as the multiple rates for foreign exchange is the biggest risk threatening national economy and trade.

Speaking at the conference on "Targeted Subsidies and Trade by Looking at Import Management", he explained that studies on the relationship between the government and economy show that the private sector demands should be negative rather than positive. "That is to say you should not tell the government what to do; you should tell them what not to do!"

He said generally speaking the government is not compatible with the economy and has always been recognized as a political institution. Therefore, the private sector should pay attention to this point and not politicize the situation. He then pointed to import management and said the government, through the three tariff control, non-tariff control and setting currency rates would manage imports. He also cited "control of smuggling" as another mechanism to manage imports.

Ghaninejad referred to tariff control as a discriminatory method and said setting tariffs for blocking import of goods is discrimination in imports. Non-tariff methods also prevent import of some commodities which is not acceptable by the present trade regime in the world. He called tariff and non-tariff management of import as hindrances blocking Iran's membership in World trade Organization and said Iran's membership in WTO would prevent implementation of many sanctions.

Ghaninejad pointed to import management as a piece of the puzzle in Iran's isolation and noted that this control method is not the language of the day in the world. "By resorting to this method we have isolated ourselves and are incurring heavy costs."

He also termed multiple foreign exchange parity rates a trade risk and said the highest demand of the private sector should be that foreign exchange rate should be uniformed, that is to say hard currency should be traded at one rate in the market and should not have titles such as reference, official or preferential rates.

He said justification of the Central Bank of Iran for multiple currency rates is that unlimited currency would be put at the disposal of importers whereas the 12% reduction in the value and 24% in the weight of imports show that imports have become more expensive.

Stressing that multiple currency rate is to the detriment of producers and importers, the economist said this does not mean the government is distributing concessions; the concessions in fact belong to the government and its subsidiaries. He said the pressure which results in increase the parity rate of the US dollar is due to the increase in liquidity whereas the economic and not administrative solution to ease such pressure is a rise in the interest rates of bank deposits.

Addressing economic activists, Ghaninejad said: "Do not demand the government to allocate facilities to you in order to improve technology, instead ask the government to receive less tax in return for updating the equipment and this, on the basis of economic science, means that demands of the private sector from the government should be negative rather than positive."

Worrying Statistics about Exports

Also speaking at the same conference, head of Tehran Chamber of Commerce referred to some statistics in the field of proportion of exports to imports and underlined the need for government's greater attention to the production sector. He in fact questioned optimism of the industries, mines and trade over growth of exports.

Dr. Al-e Es'haq: Exports statistics are worrying

According to Yahya Al-e Es'haq in the year 2010 the ratio of industrial exports to imports was 96% in India, 110% in Malaysia, 132% in Turkey, 165% in China, 172% in South Korea, and 34% in Iran. Meanwhile, in 2010 the total world exports amounted to 148 trillion dollars in which the US, Germany and China held a share of 28%.

The official said: "With regard to those figures and our distance from those countries we need to work hard and over a long period of time in order to achieve optimal success."

He further stressed that the statesmen should have trust in the private sector and refrain from shutting other windows towards economic activities.