Gov’t Economic Approaches Erroneous

EghtesadOnline: Some of the decisions made by the newly-formed government of President Hassan Rouhani suggest that the officials are intent on pursuing the trial-and-error approaches that bled the economy dry for nearly half a century.

News ID: ۷۴۳۷۳۵

11 September 2017

In an editorial published by the Persian daily Donya-e-Eqtesad on Sunday, eminent economist Mousa Ghaninejad added that social and political considerations are once again preferred over economic rationality.

According to Financial Tribune, a free translation of the piece follows:

Last week, the media broke the news of a ceremony at the Planning and Budget Organization in which a memorandum of understanding was signed to “boost rural employment through production of clothes in rural areas”. Apparently, the MoU is the third of its kind spearheaded by PBO, in cooperation with the Ministry of Industries, Mining and Trade, governors general offices, Agriculture Bank of Iran, Iran Small Industries and Industrial Parks Organization and Iran’s Clothing Association.

Previous MoUs, which date back to the first government of President Rouhani [Aug. 2013-17], were billed as “Streamlining Clothing Brands” to eliminate miscellaneous brands and “Establishment of Specialized Garment Industrial Towns”. All these are aimed at reviving the country’s clothing industry that, according to Industries Minister [Mohammad Shariatmadari], is on the verge of collapse due to the annual smuggling of $2.4 billion worth of apparel and $12 billion worth of imports via legal ports of entry where they are exempted from customs tariff.

Leave aside the rational arguments against the government’s direct involvement in reviving an industry; what’s the government’s responsibility after all? Wasn’t it to prepare a favorable business environment in the first place and appraise the tools and methods the government is planning to use to “reinvigorate” the garment industry?

Two Overused Solutions

History shows that the government has no more than two overused solutions at its disposal when it comes to such problems. The first is an administrative-imperative solution to physically block the inflow of counterfeit goods and the other is to offer subsidies to producers to support local production.

What is normally absent when it comes to the government’s decision-making process is its failure to resort to economic rationality. The government does not care about the fact that the root cause of smuggling is the relative low price of foreign products, thanks to the stabilized rate of foreign exchange, high costs of local production and low state productivity.

Iranian officials are heedless of key issues. On the one hand, they underline administrative supervision over illegal imports with the help of governors general of border provinces, and on the other, they talk of “extending loans with preferential interest rates by paying subsidies from the public budget”.

The head of PBO [Mohammad Baqer Nobakht] refers to the parliament’s green light for the government to borrow $1.5 billion from the National Development Fund of Iran for boosting employment in rural areas and says such resources will be used in the clothing industry initiatives as well.

The reasoning behind the establishment of NDFI seems to have been forgotten by the officials; its resources are being currently used like the government budget.

Statesmen of the new government have not learned from the lessons of the failed policies of the past half-century. They insist on adopting support/subsidy policies without considering the fact that such ineffective measures, as experience shows, lead to corruption and waste financial resources. They see the government like an alchemist that can turn every metal into gold whereas the exact opposite is the case.

Government interference is not the solution to the problem of Iran’s economy, because it itself is the problem. The government’s flawed agriculture and water management policies of the not-so-distant past, like providing water subsidies, gave rise to the water crisis today.

The newly-appointed head of Department of Environment [Isa Kalantari], who was the minister of agriculture for years, is once again asking for bigger budget to solve problems created during his own ministerial years.

Competition Council?!

The Competition Council, an institution founded by the government, has the responsibility to clear the hurdles in the way of [automotive] competition. But in actuality, what the council does is to set prices of products whose manufacturers enjoy monopoly. The question is why do the officials not try to change the monopolistic environment in the first place?

The latest masterpiece of the Competition Council is its plan to announce a pricing system for services offered by ride-hailing services like Snapp and Tap30.

Given the council’s well-known protective approach toward traditional enterprises like Tehran Taxi Organization, the new move is seen as another tactic to restrict the operations of ride-hailing services that have flourished immensely in recent months, thanks to their competitive pricing system.

Riding roughshod over one economic fact lies at the root of all the above moves by the government: price mechanism, or the manner in which the prices of goods or services [serving the vested interest of a group or groups] affect the supply and demand of goods and services.