Events | Number 2, September 2003 | The Ugly Face of Inflation

The Ugly Face of Inflation

Dr M Jamsaz Consultant Economist at Chamber of Commerce

During the early years that followed the Islamic Revolution, the war with Iraq necessitated that the major
Iranian manufacturing entities be nationalized and run by a state that also found itself forced to ration many goods, foodstuffs in particular. All this resulted in inflation that was aggravated after the war because of rapid reconstruction. While the war was going on people accepted their fate without complaint, as their homeland was in danger.

But since the war ceased the nation has been expecting a remedy for economic shortcomings, particularly
inflation. However, so far all efforts made by the governments of both Hashemi Rafsanjani and Khatami have been in vain. The key reason for the present inflation is the control of the state over more than 80% of the country’s economy. As we all know, governments are inefficient businessmen, which means excessively high prices in a state-run manufacturing sector. The rapidity of the country’s process of reconstruction which followed the end of the war with Iraq, and which was implemented almost entirely at the hands of the state, resulted in staggering rates of inflation.

Political solutions won’t work Combating inflation would only be possible through economic strategies, and through measures that are designed on the basis of proper research carried out into the elements that give rise to this heavy burden that our nation has been bearing for the past 20 years or so.

Some of us may have forgotten that the nation had to bear far higher rates of inflation in the past than we are facing today. Remember the rates of 35.2% in 1994 and 49.4% in 1995? Inflation is far lower today, but
never has the government been under so much pressure from the nation than it is today! The present government has made many achievements, no doubt, and it would not be fair for the opposition to exert political pressure upon it through invoking the masses’ anger and sharpening their tongues, at a time when peace is needed. But this is a different story which does not concern us here.

Suffice it to say that economic measures must not be mixed up with political conflicts. Economic strategies must be free of political issues Generally speaking economic strategies must not involve political tendencies or measures. Economic decisions that are affected in any way by political intentions or tendencies cannot
offer long term solutions though they do seem at times to be effective remedies in the short or medium term.

Inflation: an economic tragedy Inflation not only undermines the economy of a nation but also severely damages social and moral values. As Ghandi has said, “Poverty is the worst form of violence.” Inflation brings poverty for the masses while a few lucky people or opportunists get grotesquely rich.

Inflation gives rise to poverty, poverty to frustration and frustration to despair and “despair is the mother of all evil.” This is within the country; abroad inflation stops the country from being competitive in the international market. This causes exports to decline – if the exchange rate remains fixed – which in turn rises inflation.
But if the exchange rate rises exports shall expand but imports will become increasingly difficult.

An undesirably large government, lack of balance between government expenditures and revenues, the high ratio of the state budget relative to GDP, and the high degree to which the economy is closed are among the major factors that raise inflation, force the economy away from international standards and withdraw it into an isolation which will inevitably disrupt it. A way out Inflation will not be curbed simply through orders and instructions issued by the various ministries; it resists all pressure and force. Curbing it needs delicate diplomacy and proper planning. No committee set up to deal with the issue of inflation, no commission, no
specialized team, no group of investigators…can do the trick without the right background being created beforehand.

To reduce inflation, i.e. to lower prices, we need strong competition among producers and manufacturers. This would only be possible if more services and products were offered by the private sector. In a country where eight large state-run industrial entities control 80% of the industrial added value, the government and its affiliated or owned companies must shrink in size to the minimum necessary. Free competition can only have a
meaning where there is a free economy, and free competition is, today, even more important than comparative advantage. One of the main reasons for inflation is usually a large cash flow and there is an enormous amount of cash in the Iranian banking system and in its financial market, which must be diverted to the production sector. Private companies must emerge in increasing numbers, and must absorb the surplus cash by investing it in manufacturing facilities of all types. The products that come to the market from such production units must
compete and become available in abundance. Then, instead of rapid growth of inflation there will be a high rate of growth of the economy.

Today, however, such manufacturing plants are run by the state and mostly comprise of very large entities.
According to a study carried out by a government agency, the production companies employing 50 to 200 persons are the weakest companies of this country, while in China, as in Japan before it, the strongest entities are/were of this range of size and the most effective elements of economic growth. Recently the government and the judiciary system of Iran have prepared a plan for the reduction of prices of many products and services that are provided by the government. At the same time, and in order to avoid a budget deficit, the government
will have to reduce some of its expenditures.

The Board of Directors of the Islamic Consultative Assembly or Majlis (Parliament) too has demanded that there be a 10% reduction in the budgets of the Majlis, the President’s Office and the Judiciary.

But these measures can only amount to a temporary solution: a definite remedy would be impossible so long
as the government controls the economy.