Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable – Part Three
Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable. According to Iran Gate, in recent days, less than a week into the new year, media supporting the authoritarian current and even reformists have begun to praise the Supreme Leader of the Islamic Republic for the smart naming of the year 1402.
However, only a very few economists and experts are discussing why the project to control inflation is impractical in the current context of Iran’s economy. This context has created the best opportunity for those close to the regime to astonishingly use national capital as a source of sustenance.
In the previous two parts, four types of rent-seeking that make controlling inflation in Iran practically impossible were mentioned. In this part, two more types of rent-seeking that have gripped the country’s economy are discussed. Rent-seeking from obtaining permits or bureaucratic red tape is among the most important of these rents. However, rent from price fixing, which was somewhat covered in the sections on currency and energy price rents, may be the most important part of this issue. These two cases are discussed in detail below.
Bureaucracy: A Divine Gift for Rent-Seekers
In general, rentier states are accompanied by complex administrative structures and pointless, exhausting paperwork. In other words, when the government has resources and distributes them as rent, it expects at least some order in granting these facilities. Thus, such governments tend to complicate the bureaucracy and indulge in it excessively.
This action not only increases the government’s internal and ongoing costs but also creates an opportunity for some influential people to exploit. We’ve surely heard of individuals known as ‘fixers.’ These individuals are actually those influential figures who make the most of the government’s elaborate offices.
Interestingly, the process of obtaining a permit is a win-win transaction for rent-seekers and a lose-lose for national capital. Because both the fixer and the party seeking the permit end up with a rent that fundamentally shouldn’t benefit anyone.
However, when the process ends, the cost that remains for the country’s economy is far heavier and more destructive than the distribution of rent on a smaller scale. It should be noted that the government bears the cost of running a system that has become a rent distribution machine with tens of thousands of employees.
This means that not only is rent paid from the government’s and the people’s pockets, but the government also pays for maintaining the tools of rent distribution from the people’s pockets and national assets. These tools manifest in the form of ministries, government offices, and state banks, essentially serving as places to distribute resources among insiders.
As mentioned, running this rent distribution system costs the government. Paying this cost is not always possible for a government that is constantly in conflict with the world. Therefore, with the slightest tension in income generation, usually from oil, the government is forced to borrow, and once again, the issue of escalating inflation will arise. With these details, it can be said that the permit-centric paradigm has dominated the country’s economy and has monopolized most markets, from the import market of large industrial machinery to opening a small grocery store in a village.
Of course, the size of these rents is not comparable, but no one can pass through the bureaucratic hurdles without connections or acquaintances. Even if someone has no desire to comply with this system, they are forced to do so to get their work done, which also creates additional costs in the social domain.
Price Fixing or Squandering National Capital
As mentioned in the first part, the mechanism of setting prices by decree in the energy sector and the currency market has created extensive rent. However, this approach is not limited to these two areas and encompasses all markets.
For example, in the pricing of consumer goods conducted by the Ministry of Industry, Mines, and Trade, a large rent is given to those with more access to government goods. But what is the flow of these government goods, and why are they distributed?
The rent from setting product rates in monopolistic markets on one side and the government’s expectation of not increasing prices and adhering to the announced rates causes the government to owe the market. In other words, the government forces sellers to sell their goods cheaply, and this makes the supply side a creditor to the government. Therefore, the government is forced to bring its goods to the market and deliver them to the consumer at its desired price.
For example, if the price of chicken in the Tehran market is 100,000 tomans, the government starts distributing chicken meat at 50,000 tomans in the market. This price difference is precisely the rent that mainly benefits small-scale stakeholders and rent-seekers. Naturally, price setting often leads to excess demand and does not change the real price at all. As a result, this rent goes to those with more access to goods at government rates. In this system, whoever has more access to these resources will benefit more from its advantages. But the issue is that the scope of this government action is so extensive that it imposes a very heavy cost on the budget.
The series of articles on diagnosing the cancer of Iran’s economy has been exclusively written in Iran Gate. Other sections are available to you from the links below.
- Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable – Part One
- Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable – Part Two
- Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable – You are reading Part Three
- Diagnosing the Cancer of Iran’s Economy: Why Inflation in Iran is Uncontrollable – Part Four