Why Rouhani should think beyond price controls to contain inflation
In Iran, the Rouhani administration’s tendency to turn to price controls to stave off inflation carries major long-term costs in exchange for only short-term benefits.
Turbulent fluctuations in the value of the Iranian currency on the open market in 2018 led to the establishment of the Supreme Economic Coordination Council. Economic pundits at the time were of the opinion that this new body — bringing together the heads of the three branches of power — would prepare the ground for major and broad long-awaited economic reforms, as this entity was deemed to foster the convergence of uniform policymaking among the country's three branches of power to save the downbeat economy from tanking deeper. Nonetheless, it opted to grant more regulatory and supervisory authority to an old state agency called the Consumers and Producers Protection Organization (CPPO).
Historically, Iranian governments have been reluctant to fix the ailing domestic economic system. Instead, they have been more keen on adopting conventional impractical tools to curb liquidity growth, e.g., by intervening directly in the markets, albeit in the process ruining market economy efficiency.
An analysis in the leading economic daily Donya-e Eqtesad this past November argued that a surge in supervisory roles of the CPPO and relevant bodies in Iran has burgeoned in parallel with rising inflationary pressures over different time periods in the last 50 years on the back of loose monetary policies. This denotes that the average peak-up in consumer price indices has been the byproduct of liquidity and not inflation, as mistakenly assumed by many ordinary Iranians. In plain words, the policymakers have attempted but in vain to root out the problem at a microeconomic level at a considerable cost and energy in lieu of trying to reform monetary, financial and currency policies. This is while macroeconomic imbalances are thought to be the major culprits behind structural inflation over the past half-century in the country.
Seeking policies such as unjust price adjustments, mounting market regulations and prosecution of firms apparently violating price caps — particularly in areas that are not related to public goods — are doomed to fail. Such measures have had immense devastating repercussions over Iranian enterprises, the private sector in particular, in the previous episodes of strict state oversight. This time around stands to be no exception. Currently, this has immensely disturbed the functions of market mechanism and led to the misallocation of scarce resources and diversion in economic activity.
