The Forum for Partners in Iran's Marketplace

October 2022, No. 101


Populism and Rising Inflation!

Inflation is always and everywhere a monetary issue, which basically goes back to the wrong monetary and financial policies of governments.

We want to address some common mistakes and fallacies in economic policy. Fallacies that are abundantly repeated and promoted among policy makers and even some academics and media people. One of these fallacies, which ironically the then government was very interested in at the time, is that price liberalization causes inflation. What will be the results of insisting on such fallacies for Iranís economy?

This fallacy is not related to today or yesterday, but it has been repeated in our country in different forms for at least 50 years. It is interesting that the government officials and the designers of the countryís economic policies are not willing to look at the past and the results of the implementation of these policies. While if the past and history of such works are examined, it becomes clear that these methods have always brought harmful results. These methods were used before the revolution and during the abundant oil revenues. In the early 1350s oil revenues had increased, and in fact the government had become so-called rich and generous. At that time, some politicians and policy makers, in the implementation of Mohammad Reza Shahís recommendations, thinking that by relying only on these huge financial resources, the economic growth process can be given the desired acceleration, they started spending in all fields: from construction to the establishment of new industries and, of course, extensive imports: All types of goods from consumption to intermediate and capital goods. In this way, a lot of money was spent in the economy and huge amounts were injected into the society without the necessary infrastructure being prepared in advance.

As a result of these actions, the amount of liquidity in the country increased sharply, and the natural result was rampant inflation. At that time, economists and experts constantly warned the government that such behavior would lead to harmful results. However, the Shahís regime turned a deaf ear to these warnings. The Shah insisted that inflation is the same as extortion and inflation is caused because some people are abusing and intending to cause disruptions and... so at that time they started pricing goods and controlling prices. If now it is assumed that the executive arm has been mobilized to control the prices, at that time university students and young members of the Rastakhiz Party had come to the square and lost their lives. They insulted the tradesmen, sealed their shops. However, at that time, we saw that such directive policies not only did not reduce inflation, but also had a destructive effect on domestic production. After the revolution, we saw that this issue was repeated regularly.

If I want to name which governments have done this, all the governments are included: from Mr. Mousaviís government to Hashemi, Khatami, Ahmadinejad and Rouhani. Raisiís government has shown that it is more interested in such methods than his predecessors. It is interesting to know that none of these governments have been successful in controlling inflation and have always repeated the mistakes of the past. That is, by suppressing and controlling prices, they have reduced the motivation of producers to work and in this way they have damaged production, market and trade. 

It is true that the methods used by the government to reduce prices are not successful in practice, but apparently they are able to convince groups of people. Anyway, many people apparently welcome the government to go to the businesses and producers and hold them accountable. According to many of them, the government should deal with unfair people. What do you think?

Yes, it is true, these methods used by the government to control prices, although it is not possible to achieve its goals and prevent inflation, but it still affects a part of the public opinion because people who are angry about the high price, think If they punish some of the so-called high sellers, they will be punished and they will not increase the prices anymore. Or some people may think that the government, with its dealings with the business, is unfair to the high street sellers.

As long as this problem is not solved from the source, the problem of inflation will remain stable.

From this point of view, it can be said that the governmentís dealings with the market players may be effective on a part of the public opinion, but the fact is that such things the government does are not the solution to the problem of inflation, but are considered populist methods, which, although they may be temporarily pleasing to the uninformed strata society, but in practice it is ineffective and ultimately harmful. I emphasize that inflation can never be stopped by suppressing or so-called price control.

Inflation is always and everywhere a monetary issue, which basically goes back to the wrong monetary and financial policies of governments. Inflation means an increase in the general level of prices and has nothing to do with extortion of one or more businesses. In order to prevent inflation, the excessive and disproportionate increase in liquidity compared to the real growth of the economy should be curbed. The excessive increase in liquidity is rooted in the governmentís budget deficit and the existing imbalances in the banking system.

As long as this problem is not solved from the source, the problem of inflation will remain stable. Of course, economists have repeatedly pointed out these issues to the governments, but they have not heard from the governments so far. Every time the officials act as if these issues are new and there is no previous experience or history in this regard. Itís as if they came from Mars or another country and they donít know about the history and results of these repeated policies in our country. 

Another common fallacy we often hear from officials, especially government officials of the time, is that liquidity should be directed towards production. Sometimes the decision-making system deals with the issue of liquidity in such a way that it is as if the unbridled growth of liquidity is not so much criticized and it is only necessary to think of ways to guide it. Please explain what the implications of such an approach are?

As mentioned earlier, the problem of inflation in our country, like any other country, is caused by an excessive increase in liquidity, which in turn is rooted in the state of the budget and the imbalance in the banking system. Since the governmentís budget is in deficit and is unable or unwilling to provide the resources needed for its expenses from non-inflationary methods such as debt securities, it has to resort to the resources of the Central Bank or, so to speak, print money.

On the other hand, due to the wrong monetary policies of the government, the banking system transfers its deficit and imbalance to the Central Bank, which has no other meaning than increasing the monetary base and, as a result, increasing liquidity. In fact, the problem of deficits in Iran is solved through the banking system and by creating money. Now the Iranian decision-makers are playing the trumpet from its broad head. Currently, we see that the companies are all criticizing as to why in a situation where there is so much liquidity in the society, they are still facing a lack of working capital and liquidity?

Some decision makers do not want to accept that the creation of liquidity is the result of wrong policies, policies that show the officials have always looked for easy solutions to solve the complex problems. The easiest solution to compensate for the budget deficit is to print money. This is the way that decision makers in Iran have always preferred it to any other solution. Then they explain and justify that liquidity should be directed. While I emphasize that the main problem is the excessive increase in liquidity and talking about its direction is pointless. In other words, increasing liquidity is the problem, not the solution, because the inflation created in this way makes everyone, including producers, need more money. Excessive liquidity is like a foundering flood that covers and destroys everywhere. The inflation we have been facing in recent years has been the result of the governmentsí wrong monetary and financial policies. The chronic inflation of Iranís economy is never related to the high prices of a certain group or trade. Instead of correcting their wrong policies and solving the inflation problem, governments have often projected and blamed others.

I remind you that when Ebrahim Raisi was a presidential candidate, he went on provincial trips. During those trips, the question was usually raised as to why companies in debt and on the brink of bankruptcy were not being injected with money, when if they were re-lent, their problems would be solved. Later, we observed that when he became president, he implemented the same policies.

In fact, bankrupt companies that were professional debtors were re-lent. Do you think production will start as a result of these policies? No, the result of such policies is once again an increase in liquidity. If these firms were efficient they would not essentially become big debtors. Finally, these debtors take the money, buy land, currency, and housing and disrupt other markets. Unfortunately, in this government, there is a set of wrong views that the officials have been implementing since the beginning of his tenure. Now we see the result of those views in the current economic situation. It is regrettable to say that until the wrong policies are corrected, it will be the same soup and the same bowl, and we will be forced to repeat the past issues and failed experiences.

I am asking you about the role of academics, media and social experts. In many cases, we see that these people beat the drum of these fallacies together with the government. Many politicians in our country tend towards populism. They draw the image of a snake and deceive people. We have seen many times that they say, for example, that rents have increased due to the unfairness of landlords. This is despite the fact that inflation means an increase in the general level of prices and it is natural that following the increase in the price of all kinds of goods and services, the price of house rent will also increase.

As you mentioned, these fallacies of politicians are sometimes raised by some social experts and members of the press. Issues are introduced as if some businesses and guilds in the society were to blame for inflation. For example, lessors, businesses and owners of some companies, etc., while everyone, even the lessor, loses from inflation .However , people have no choice but to sell their goods and assets according to the market and other prices. These fallacies are raised by some so-called social experts or academics in a situation where the control of inflation by the government should become a public demand. Otherwise, we will continue to be condemned to repeat the previous failed experiences.


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