Critics Have No Viable Alternative

Reza Tahmasebi: Despite fundamental disagreement over long-term planning for Iran’s turbulent economy, he is pro-government policies towards non-inflationary exit from recession in the short-term. Saeed Laylaz levels criticism at the package for not focusing attention on real estate sector and neglecting automobile industry. Nevertheless he believes that there is no viable alternative for the package, according to him the package has come under criticism for political purposes. He is strongly opposed to the notion that eleventh administration is pursuing “economic structural adjustment” programs and policies in this era.

Translated by: Babak Nadery

The government’s economic stimulus package has drawn criticism. In a letter critics described it as “neo-classical” based on International Monetary Fund (IMF) programs or in other words “economic structural adjustment” in The Era of Reconstruction (Doran-e-Sazandegi). How much do you agree or disagree?

I totally disagree. In my assumption those words are political insults, in our political culture the word “liberal” is a political put-down to threaten rivals. The letter you mentioned is written for political purposes. As a matter of fact, economic policies in The Era of Reconstruction were not on the wrong track and had positive outcomes. It is not possible to compare Iran’s today economic situation with post-war era. Government’s stag-exit policies are different from structural adjustment programs. As proclaimed in the introductory part of the package, policy makers are seeking to stimulate economy in a non-inflationary manner. Iran’s current capabilities and potentials cannot compare with those of Mr. Hashemi’s tenure. If the country exploits its potentials, even without investments, 10% economic growth rate in 19 months won’t be out of reach. Let me put it in this way; 3% growth in this year and 6% growth in next year put us in our 2011 economic conditions. During Iran-Iraq war, Iran’s GDP plummeted by 25% (comparing to 1977). The second difference is the social structure of the country which is now far more fragile than post-war era. The middle class has no longer purchasing power of eight to ten years ago, 45% inflation has already strangled our economy and an unprecedented stagnation has spread throughout the country, the only period of time in which Iran suffered from such recession was between the years of 1958 and 1961, albeit with no inflation. I’d like to emphasize one more time that from historical, economic, social or even international point of view, it is absolutely impossible to compare today with 1989 to 1997.  At that time, our oil production and export capability was so limited, while, in spite of tough sanctions today we have $50 B to $60 B oil and $20 B non-oil exports. Our exports has increased tenfold just in the past two years. Even if we assume the impossible and say that value of US dollar has dropped by 50% our oil revenues are five times more than 1989 to 1993. There are major differences. We are familiar with the literature of conservative critics, we know that there are political purposes behind their words when call the policies of government “IMF programs” and even accuse us of espionage. We are glad that President Rouhani pursues the policy of free-market economy. The last person who claimed to be pro-social justice ended up with mismanagement which led to one of the worst organized corruptions in the history of the country. No one dares to talk about justice anymore!

Critics believe that adjustment programs lead to high inflation rate (50%), on the other hand, government policy makers argue that Mr. Hashemi turned his back on his adjustment policies due to their possible short-term negative impacts on the economy which led to an unfavorable outcome. Who do you side with?

Inflation is now 42 years old. We have applied structural adjustment programs once for only two or three years. So what is the cause of rampant inflation? Inflation is mainly rooted in the structure of Iran’s economy and government expenditures outweighing revenues which is caused by dependence on oil revenues. Inflation after Iran-Iraq war was ruthless, however the point is that country was struggling with sanctions and the Gulf War had already started. In the absence of private sector, government played the role of investor and high inflation acted as a tax system. The government had no other option to reconstruct Iran’s economy. Authorities were inexperienced and made mistakes but in my overall assessment Mr. Hashemi’s government was successful. During his first tenure Iran had a trade balance deficit of $22 B to $32 B which was followed by same trade balance surplus in the next four years and our foreign debts were cleared. 

Free-market economy is our only option it is not an ideological approach. Government and public sector’s domination causes corruption and low levels of productivity. Those who are pro-government intervention are pro corruption, discrimination and economic inequality. Free-market economy has two crucial requisites: Firstly, liberalization of the economy and shaping policies are done gradually and we need to steer clear of shocks. Secondly, liberalization is a comprehensive, long-term process. In early 90s government policies towards liberalization which have social and political consequences fueled controversy among influential groups, the same thing is happening today with political purposes and critics have no viable alternative.

Government’s economic stimulus package is based on gradual liberalization of the economy, in order to boost non-oil exports to act as catalyst; private sector participation is of crucial importance. There might be the same resistance to changes, is that right?

Sure. A positive shock in oil revenues has always had social and political impacts in our country. Such hike in petrodollars results in government reliance on money rather than nation.  This is when in my words “material takes precedence over thought”. Economic changes lead to political and social evolution. There is no doubt that with 2005 and 2006 positive shock in Iran’s oil revenues, social and political changes are inevitable. In 2011, $300 B petrodollars were injected to Iran’s economy which led to turbulence. Oil shock of 1974 to 1976 led to revolution and the shock of 2007 and 2008 led to election of a government with a totally different approach.  What are the consequences of the next shock? Imagine President Rouhani’s administration with such oil revenues, his interaction with private sector, tax payers and international community would be entirely different.

This happens in oil rich countries, politicians spend money, quoting Dr Nili; “They build bridges where there are no rivers”…

I have heard that in four trips to Chahar-Mahal province where previous government proposed more than 2000 projects. Governments buy loyalty and they have the same reaction to rising oil revenues.

Can we say that the difference between government’s package and adjustment programs is the focus of the package on “non-inflationary” exit from recession and both emphasize the importance of liberalization of the economy?

No. That is an ideological and theorized approach towards the economic stimulus package. The package addresses the roots of the current economic downturn, due to government intervention in the economy the situation has deteriorated. The package is a treatment after diagnosis. It does not have a fundamental weakness and there are no viable alternatives for its policies. However, in my assumption external factors (political, social and economic) are not predictable.

 I remember you saying that planning is the job of God and no one can predict the future, do you have the same idea with regard to this package?

One of the major positive points of this package is its short-term nature. Abdolmajid Majidi was one the most prominent Iranian economists. In his last years Mr. Majidi said: “In my assumption, long-term planning does not work with Iran’s economy due to external factors and uncertainty, one-year plans should replace Iran’s five-year development plans.” Government’s economic stimulus package is designed for the next 18 months and we must try our best to implement and executive its policies and strategies.

So you are pro-government policies in the package…

What I am saying is that critics must provide a viable alternative. It surely has strengths and weaknesses. Automobile industry has been ignored and adequate attention has not been paid to real estate sector, while these two sectors act as catalysts.

Policy makers and authorities might have been concerned that stimulating real estate sector would trigger inflation…

Provision of working capital is the key issue of Iran’s economy. Imagine a scenario of capital injection to manufacturing units which causes inflation. This stimulates demand, however, in three to five months the supply side of the economy would be stimulated and as a result inflation will be balanced out. Inflation is mainly rooted in long-term investments say a ten-year investment to build a dam. Provision of working capital neutralizes demand-side shock (inflation) in three to five months. Generally speaking, I am against fast move towards single-digit inflation.

Why?

It must be done step by step. Economists and policy makers would have to give serious consideration to relation between economic growth and inflation. They are co-related and no one seeks zero percent inflation. If the current inflation stands at 35% it could be reduced to 25%, 20%, 15% and eventually less than 10%. On the other hand, downward economic growth rate trend must be reversed (-6.6% to +7%) at the same time, then it should be maintained by investments. Retrospective study and regressive experience tell us that 15% to 20% inflation and 6% to7% economic growth rate is compatible with Iran’s economy.

Initially published in Tejarat-e-Farda weekly magazine