If Elected, I Promise…

EghtesadOnline: Campaign promises such as doubling the country’s revenues without specifying a comprehensive plan can turn out to be dangerous or even destructive, reads an opinion piece by eminent Iranian economist Mousa Ghaninejad, published on Tehran Chamber of Commerce, Industries, Mines and Agriculture’s website.

News ID: ۷۷۵۷۰۵

24 April 2017

According to Financial Tribune, excerpts of the write-up are as follows:

Campaigning is synonymous with economic promise-mongering by candidates.  In countries with developed political institutions and stable partisan system, one cannot go overboard with unrealistic, populist promises because in the end, their party will be held responsible by people.

However, in the absence of such a system, candidates are not constrained by political costs of their sham populism. Their auctioneering for empty promises would create an unlevel playing field where the cards are stacked against the candidates with sensible promises.

The so-called “successful” demagogue rhetoric of former president, Mahmoud Ahmadinejad, has encouraged some political movements in the country to employ his populist promise-making approach to great effect and make pledges that will have adverse effects on the national economy, if implemented.

The main feature of such promises is the denial of principal concepts of economics, namely scarcity and opportunity cost.

Economics is the study of how people use scarce resources to satisfy unlimited wants. At the core of economics is the idea that our world is a place plagued with scarcity—that is, we do not have all the resources we want. As a result, we must make choices.

When we make a choice, that choice necessarily means that we have to give up something, which is called opportunity cost.

The opportunity cost is an effective way of understanding the real value of our choices in the light of benefits foregone by the decisions we make. It allows us to understand the real cost of our choices, according to the best possible alternative we have to sacrifice.

Opportunity costs are often ignored as we tend to concentrate on the benefits and direct costs of our decisions, without taking into account what we are giving up.

Ahmadinejad was a great fan of the phrase “It’s possible”, uttering it at the end of all his hollow promises. His course of action, though in stark contrast with the basics of economics, resonated with people wrestling with economic hardship and pitted them against economists and technocrats.

In a populist discourse, there is no talk of “scarcity” or “opportunity cost” so he holds out contrasting promises like you can earn money without working (the case of cash subsidy handouts) or buy home without saving for it (the controversial Mehr Housing project).

The handiworks of such an unscientific approach were the inflation rate of above 36%, the negative economic growth of 6.8% and the near-zero creation of jobs at the end of his tenure. Despite this, such populist promises are still in fashion and presidential candidates are expected to make them during their campaigns for the upcoming elections scheduled for May 19.

The promise of universal cash handouts is against the basic principles of justice. The government of President Hassan Rouhani has finally agreed that subsidies should be allocated to less-privileged strata, but there are candidates who champion the idea of large-scale universal payments of cash subsidies.

Job creation is an issue of greater complexity than employment in governmental offices or implementing regulatory policies over domestic production. A 25% rise in bureaucracy with the employment of 500,000 people during the two terms in office of Ahmadinejad sent public offices’ productivity plummeting.

Efficient employment is contingent on the growth in goods production and services. It won’t happen by decree or unreasonable protective policies. Employment should be created by economic entities, not administrative offices.

To this end, an environment conductive to business should be created and the safety of domestic and foreign investment needs to be guaranteed.

What the Rouhani government has done to significantly and permanently reduce the inflation rate and fluctuations in foreign currency rates are prerequisites of economic growth and employment.

The country needs to keep up the good job by employing deregulatory policies and improving business environment.

Giving promises such as doubling the country’s revenues without specifying a plan or ignoring the realities of the country’s economy can turn out to be dangerous or even destructive. The country has already been hit hard by high-sounding promises and grandiose schemes.