Iranian economist says foreign competition key to growth
Author: Behdad Bordbar Posted March 11, 2014
Saeed Laylaz is an Iranian economist who has paid a big price for expressing his views about the direction of the country. A former adviser to Reformist Mohammad Khatami’s administration, Laylaz became a vocal critic of President Mahmoud Ahmadinejad’s economic policies and spent time in jail in the 2009 post-election crackdown. He was also the editor-in-chief of the periodical Sarmayeh, which was shut down by the government in 2009.
With a new president and a new economic team, for the first time in eight years Laylaz finds himself in the position of supporting the Iranian administrations’ economic policies.
In an exclusive Al-Monitor interview by phone on March 2, Laylaz, who currently teaches at Shahid Beheshti University in Tehran, discussed how Hassan Rouhani's economic policies can prevent the return of another Ahmadinejad-style populism and how to decrease the Revolutionary Guard's economic influence. He also argues that Rouhani should aim for a smaller administration because during Ahmadinejad’s presidency the administration’s expenditure was increased sevenfold.
Excerpts of the interview follow:
Al-Monitor: In developed countries there are political factions that focus on social justice including issues such as equal distribution of wealth and universal health care. In Iran there is a void where these organizations should be and someone like former [President] Mahmoud Ahmadinejad can use this void to represent these things. Do you think we need political factions that can realistically pursue these demands and lessen the danger of populism re-emerging?
Laylaz: There are two types of factions in the West; business oriented parties such as the Republican Party in the United States and distribution oriented parties such as the Democratic Party. We have the same thing in Iran. Although the structure of power in Iran is ambiguous, these types of factions exist in Iran as well. I differentiate them from populism. Populism is a danger in the West as well. An example is the danger that Jean-Marie Le Pen, and not the Socialist Party, poses in France.
In Iran we have institutionalism that is a very strong school of thought. The Islamic Iran Participation Front (Mosharekate) has some institutionalist characteristics. The Executives of Construction Party (Kaargozaaraan) is closer in thought to the business oriented governments. What is dangerous is the emergence of populism which tends to emerge under special circumstances. A stable society with little economic ups and downs is immune to populism. If President Hassan Rouhani’s administration fails to address the public demands in the next 18 to 24 months, then the danger of populism increases. When dissatisfaction is paired with an increase in oil revenue, there is a chance that someone like Ahmadinejad comes to power. If there is no increase in oil revenue, then Putin-style totalitarianism will emerge; a type of totalitarianism that seeks to control society by putting pressure on citizens.
Al-Monitor: The foreign policy approach of this administration is clear. Rouhani wants to create stability by reaching an agreement regarding the nuclear issue and reducing sanctions. The question is, however, will the economic policies of his administration satisfy public demands?
Laylaz: The nuclear policies of the administration are in accordance with the idea of economic improvement. When this administration took over, inflation was at 45% and we had negative economic growth of 6%. This was unprecedented in the history of Iran. The combination of high inflation and negative economic growth rarely happens anywhere. The administration was faced with a terrible and unprecedented stagflation. I believe that when Rouhani came to office, the society was about to experience a social and economical collapse. The inflation was putting so much pressure on the working class. I am saying this based on official statistics. Obviously, economic problems cannot be solved overnight. The main problem was that there were no investments during Ahmadinejad’s time in office. If we want to revive the economy, we need to first improve productivity and then increase the investment rate; both indexes, however, were negative. There were no short-term solutions but the administration needed one. Therefore, Rouhani’s administration decided to focus on the nuclear negotiations and so far it appears that it has been the right decision. With the advance in the negotiations, the exchange rate for the dollar dropped by 20%, meaning that it dropped from 3,700 toman to 3,000 toman (per dollar). More important, the administration succeeded in returning stability and predictability to the market. During six months time, inflation dropped from 45% to 27%. Back in the summer and spring of 2013, we had 5% to 6% inflation in the food sector. Now, however, it has dropped to 1%.
Al-Monitor: During the election campaigns, Rouhani made fun of Ahmadinejad by saying that his [Ahmadinejad’s] administration has created jobs but only for the Chinese workers! However, during the past few weeks, the administration has started a new program that consists of distributing subsidies in the form of goods among low-income families. These goods were not domestically produced. Rice from India and chicken from Ukraine were distributed among people. What I am asking is, couldn’t the administration purchase domestic products?
Laylaz: No, during the first six months of this year, agriculture has had a negative value-added growth rate for the first time in 15 years. Even last year, with the negative economic growth, agriculture did not experience a negative growth in value added. Supporting domestic production was not possible while the administration was trying to find a quick solution for the crisis. More important, the administration had no choice but to import these items. Since exchanging money was quite difficult because of the sanctions, the administration had to import goods from India in exchange for the oil that it had already sold to that country. This is what we inherited from the previous administration. But if we are to be fair, we should look at the budget for the year 2014. It is one of the best and most realistic budgets of the past 15 years and has three times increased the rate of government investment. It is still not enough but it is a good start. You must have noticed that with the new legislation regarding the subsidy reform, about 17 billion toman, equivalent to $6 billion, have been allocated to public health and industrial sectors. During Ahmadinejad’s presidency, the administration would distribute the allocated budget for public health and industry development in the form of cash subsidies. The economic policies of this new administration are completely different, and I am therefore quite positive about the future of Iran’s economy. The only potential danger is the administration’s inability to act quick enough to satisfy people.
Al-Monitor: Since we are talking about people’s demands, I need to ask you about minimum wage. In the previous years, the increase in minimum wage has always been incompatible with the rate of inflation and therefore the living conditions of the working class have deteriorated. How is this administration planning to address this problem?
Laylaz: Yes, this is a challenge for this new administration. If they increase the wages pass a certain point, it might create an economic depression and weaken domestic production, which would eventually increase the rate of unemployment. If they don’t increase the minimum wage, then people’s demand has been left unanswered and more importantly, there would not be enough demand for goods. According to the formula known as periodic crisis in capital, which was introduced by Karl Marx for the first time, capitalists or the governments lower workers’ wages so much that they lose their purchasing power. This is exactly what has happened in the auto industry of Iran. The purchasing power of 40% to 50% of the Iranian citizens has been reduced to the subsistence level, and they no longer have money to spend on items such as cars. This is yet another dangerous problem that his administration has inherited and needs to solve wisely.
Al-Monitor: Previously you had mentioned that attracting foreign investment (FDI) is not important. Can you elaborate on that?
Laylaz: I am not opposed to foreign investments. What I mentioned was that the management, technology and access to international markets that come alongside foreign investment are the important elements. The assets themselves are the least important part, since we don’t have any shortage of that inside Iran.
Al-Monitor: Countries such as Egypt and Turkey that do need foreign investments, in areas such as tourism for example, try to keep their societies stable and prevent crisis. Don’t you think that foreign investment would have the same result in Iran and would encourage the governed to prevent crisis and create more stability?
Laylaz: I support foreign investment but if someone says that our problem is the lack of foreign investment, then they do not understand Iran’s economy. During a period of seven years, $700 billion entered Iran but all was wasted in the absence of productivity. Absence of technology and the lack of proper management is the reason for this low productivity. Did the contractors in Asaluyeh lack for money? Was their problem in anyway related to shortage of assets? The problem was that our domestic technology was not capable of conducting these projects in a way to reach a suitable level of productivity. What we need in foreign investment is access to management, technology and global marketing.
Al-Monitor: The Revolutionary Guard [Sepah] controls a large number of industrial projects. Taking these projects away from Sepah requires an iron will. Is Rouhani ready to confront Sepah?
Laylaz: We do not need to take such radical measures, and it will not be within the abilities of this administration to pursue such a goal. Competition is possible even in the current situation. We can let Sepah keep all the projects that it is already controlling and give the rest to either the foreign investors or the private sector and allow them to compete with Sepah. Sepah does not have any inherent inability to run these projects; their problem is lack of competition. It is the system that determines efficiency.
The CEO of Daimler Chrysler is an employee just as the CEO of Iran Khodro is. They are both working for a salary but since Daimler Chrysler is a private company the shareholders are constantly pressuring the CEO for more productivity. In Iran, however, they ask for loyalty and not productivity. This is the main economic issue that distinguishes Iran from other countries. We cannot solve our problems overnight. However, if there is competition, productivity will increase. I believe that opening up the economy is more important than privatizing it. The government should allow the state banks to compete with each other.
Al-Monitor: Numerous influential figures are involved in the management of these companies. They can influence the administration or the parliament and prevent this idea from being realized. For example, during former President Mohammad Khatami’s presidency, a few projects were given to private companies from Turkey but Sepah interfered. Do you think the same possibility exists now?
Laylaz: If the situation returns to the way it was during Khatami’s presidency, then the same thing will happen. If oil prices reach $200 a barrel and Iran can produce 1 million barrels a day, then they will put away Rouhani and will go after someone like Ahmadinejad who will give all the projects to Sepah. We will only have efficiency when there is a need for it.
Why has loyalty replaced efficiency in Iran? The explanation is the budget surplus. Now that the government is facing problems, Sepah is willing to be more efficient. Sepah is not the problem, the economic system is. Because of the budget surplus, caused by oil revenues, efficiency has been sacrificed. It is the same everywhere in the world. Margaret Thatcher came to power after England came close to an economic collapse. The unions might moan and cry but the economy needs an “Iron Lady.”
Read More: http://www.al-monitor.com/pulse/originals/2014/03/iran-economy-reformists.html