Subsidies should have been provided for only first three or four deciles

Kamran Moayad Dadkhah is among few world-famous Iranian economists. He is a professor at the School of Economy in North Eastern University, Boston, Massachusetts, US. This school specializes in econometrics, macro-economy, international economy, and the economy of the Middle East. Dadkhah has rarely participated in an interview with an Iranian journal. Shargh conducted an online interview with this economist about Iran’s economic status and its outlook.

In your opinion, what was the biggest economic mistake made by President Ahmadinejad? His three consecutive actions caused a disaster in Iran’s economy. First, he ignored rationalism, a symbolic instance of which was to dissolve the Management and Planning Organization of Iran. Second, he followed the populistic policies that led to failure in many countries, especially in Latin America. Apart from all devastating outcomes, these policies infused corruption. Once led by Hugo Chávez and now led by Nicolás Maduro who has been following such policies, Venezuela is considered the most corrupt country, except for Haiti, in Latin America. It is ranked 160 out of 175 countries. In 2005, Iran was ranked 88 out of 158 countries in terms of the corrupt index. According a 2013 report, Iran was ranked 144 out of 175 countries. This policy is mainly characterized by the unchecked increase in liquidity, which has resulted in a 40% inflation. Due to economic insecurity and sanctions, economic development has been stalled, and there is now a high rate of unemployment. Referred to as the major economic surgery, another action taken by the previous administration was the implementation of targeted subsidies, which has now faced the new administration with serious problems. What are the causes of this failure? There is no doubt that indirect subsidies must be terminated. Take the gas subsidy into account. It has further polluted the air and led to gas smuggling into the neighboring countries. The mistake made by the previous administration was to suddenly increase prices and publish money to pay all social classes, whether poor or rich, direct subsidies without having an organized plan. This action contradicts the purpose. Direct subsidies should only have been provided for the first three or four income deciles in a limited period of time. Another problem was about the manufacturers. As the cost of energy surged, the cost of production increased, so the manufacturers need a little time to adapt to the new conditions. In addition, keeping the foreign currency exchange rate was a kind of subsidy provided by the state for foreign manufacturers in previous decades so that Chinese and Indian products could easily find their way into Iran’s market. At the same time, manufacturers have been dependent on foreign companies the inexpensive foreign currency exchange for spare parts and machinery. It is still necessary to formulate a strategy for letting manufacturers pass through the transition period. A few experts compare the economic actions taken by the previous administration with the mistakes made in the 1970s when the unplanned injection of money into the country caused inflation and reduced the national denomination value. What is your reflection? Although there are some similarities, the two eras are totally different. From 1973 to 1979, the petroleum revenues increased substantially. At the same time, liquidity increased annually by 36% on average. As a result, the average inflation rate in those six years was slightly above 14%. However, it should be noted that the petroleum revenues within the eight years of Ahmadinejad’s administration were equal in the purchase power to Iran’s petroleum revenues of sixty years from 1919 to 1978. The inflation within the 1973–1979 was not accompanied by economic recession and unemployment. In fact, there were so many job opportunities that attracted foreign workers to Iran. A reason was that many resources were allocated to investment. After all, shouldn’t a lesson be learned from the past? If depositing the petroleum earnings into the bank and publishing money caused a disaster in the 1970s, why would a sane mind make the same mistake? In fact, the state should distinguish between foreign currency revenues and rial revenues. Which one do you think had a more prominent role in the deterioration of Iran’s economy: sanctions, economic rents, or mismanagement? The most devastating factor was mismanagement. Unfortunately, some people have presented a bunch of nonsense as economic analyses and policies out of personal interests or ignorance. As a result, many decisions were not based on the public or national interests but based on the economic rents dedicated to specific people. Petroleum sanctions exacerbated the situation and worsened economic complications. In other words, mismanagement and sanctions contributed to 70% and 30% of problems, respectively. According to the economic statistics, what positive actions do you think the new administration should take into account to free the country from recession? How long does it take the state to improve the economic conditions? In the first place, sanctions should be lifted. As long as sanctions are in effect, any attempts at improving Iran’s economy will be obstructed or can be made at a high cost, so the Geneva Agreement should be taken seriously in order to see sanctions lifted as soon as possible. If sanctions are lifted, Iran’s economy should join the global economy. For this purpose, what policies should be adopted? Encouraging foreign investment, especially in the petroleum industry (fortunately, the Minister of Petroleum has the same plan), freeing the foreign currency exchange rate and establishing the foreign currency stock market, planning to join Iran to the WTO, encouraging exports, and casting aside the self-sufficiency plan. In addition, real privatization should be executed, and the capital security should be guaranteed. As investment and employment increase, the state will be able to control liquidity and inhibit inflation with effective plans. If these plans are implemented willfully to make people feel the positive effects, conditions will improve quickly. Perhaps, Iran’s economy will boom in the next one to two years. Some people think that the new diplomacy framework will help Iran’s economy flourish in the future. Do you approve of this point of view? This is a correct idea, and the public optimism is a good resource for the economic policies of the state. Things go well in an optimistic atmosphere, but it should be noted that the necessary condition for economic development is provided when sanctions are lifted through successful diplomacy. The sufficient condition is to formulate and adopt rationalistic policies, which I have mentioned earlier. Rationalism should quickly be implemented willfully through the public support. What underlying actions should be taken to make Iran’s economy transparent? The first step is the real privatization, whereas the second step is for the state to stop intervening in the market, set prices, and determine salaries. Given the dependence of Iran’s budget on petroleum revenues, do you think it is wise to reduce this dependence and increase tax-based revenues? Do you believe that the petroleum revenues belong to people who should be given the right to spend this wealth as they please? The petroleum money belongs the people of Iran, but it is like a paternal or maternal inheritance and should not be used to cover the current expenses. It should be kept in a reserves fund and be spent only on investment. The affairs of this fund should be managed very accurately and transparently. Earnings should be added to this fund, but the current expenses of the state should be covered through taxation. Given the taxation history in Iran and the fact that the state has long been dependent on the petroleum revenues, this policy requires a long-term plan to both publicize the statement-based culture for paying taxes and monitor the affairs of the state for accountability to the public. Do you agree with paying subsidies in cash? All states are now states of welfare. It means they have welfare plans, a major part of which is to pay subsidies directly. However, there are many problems. Even in development countries in North America and Europe, welfare payments have been sources of abuse. In particular, direct subsidies have exacerbated severe unemployment. Do you suggest an alternative to the efficiency of subsidy payment? The welfare subsidy should only be provided for those who are unable to cover their expenses due to physical or intellectual complications. In other cases, (such as the first three deciles), subsidies should be paid directly based on statements under the condition that work is sought. The state should also formulate a plan to investigate why these people have insufficient income. For instance, they should be provided certain opportunities through training plans to earn further incomes. However, this is a multifaceted problem, which I have already discussed and don’t want to take your time further. What is the outlook of Iran’s economy? Iran has many economic capacities and potentials. This country is rich in natural resources. It has very good people and a perfect geographical situation. Everyone should agree to live by their own efforts and incomes. Nonsense claims such as “my share of the petroleum” should be put aside. If economic policies are formulation through rationalism, Iran will soon be among one of the 20 top economic powers in the world. Why do we not see Iranian economists shine worldwide? This is not just about the knowledge of economy. We do not have many famous scientists in mathematics, physics, chemistry, and other fields, either. If someone has managed to make a name for himself or herself, he or she has been outside Iran. The analysis of this problem requires another chance, but have the necessary facilities and motivations be provided for Iranians?

Leave a Comment

Your email address will not be published. Required fields are marked *