By M.A. Saki

Iran’s big problem is economic policies: professor 

August 11, 2021 - 12:47

TEHRAN – A professor of economics believes that Iran’s main problem lies in economic policies although he says “sanctions have a terrible stranglehold on the Iranian economy.”

Hossein Askari, the Iran professor emeritus of international business and international affairs, tells the Tehran Times that “Iran needs more effective institutions, whose three pillars are more freedom, the rule of law and the sanctity of contracts.”

On high liquidity which has contributed to the inflation rate in Iran, the professor suggests that Iran must “put the brakes on money printing” and “use a rational rule for money creation.”

Askari, who taught at the George Washington University and served as special advisor to the Saudi finance minister, also says the only country that could resist U.S. sanctions against Iran is China.

Following is the text of the interview:

Question: What are the engines of economic development and growth?

Answer: “About 70 years ago, in considering growth and development, economic models were built around capital, labor and land. But economists, notably Robert Solow, discovered the importance of innovation and technology and so growth models incorporated the role of technology. These in turn stressed the importance of education and R&D. While all these elements were seen as the engines of growth, international trade in goods and services, which includes financial flows, also had a prominent role. Yes, countries had to generate savings or capital, to finance their investments but this and most other elements needed for growth, besides land and some types of labor could be imported and goods and services could be exported.

But around the 1980s, economists woke up to something that had been made obvious some 200 years earlier by Adam Smith. You need effective institutions. Let me explain. What if, there is no rule of law. Why would an entrepreneur invest his capital and work hard if the legal system did not protect him from unlawful confiscation of his business and assets? How could an entrepreneur pursue his dreams if there was no freedom? How could a business succeed if government regulations and policies stifled freedom and business development and growth? How could an economy thrive if corruption was rampant—you had to bribe officials for anything legal that you wanted to do? I could go on and on but the point should be clear, institutions, which includes even customs and trust, are at the foundation of economic development and growth.”

Iran cannot wait for economic reforms and a good start would be the rule of lawQ: The new Iranian government says its priority to counter-sanctions is to rely on domestic capacities and develop economic relations with neighbors. However, during the June presidential debates, Mohsen Mehr-Alizadeh, a candidate, countered the argument on putting too much emphasis on neighbors, saying technology and capital lie in countries outside the region. What is your opinion?

A: “As I have already said, you can import many of the ingredients that you need for growth and development if they are available to you. You can theoretically buy them with your saved foreign exchange, finance them by borrowing or have foreign investment. Iran would need to export to generate savings or foreign exchange. I don’t believe that there is a large market for Iranian exports in neighboring countries who could also pay. But again, you hit the sanctions trap. Iran is cut off from the international financial system and the dollar. Can Iran borrow at a cheap interest rate? I don’t believe so and even if it could sanctions would come into play. What about foreign direct investment in Iran?  Yes, outside the region there is much more capital and cutting-edge technology. But no serious investor would want to invest in Iran as it is today—an economy that is stagnant and unstable, little hope for a turnaround, and subject to sanctions that could snare an investor at any moment.

So yes, I agree that the region cannot give Iran what it needs but also Iran cannot get what it needs outside the region because of sanctions.

Having said all this, let me answer the first part of your question. Can Iran rely on its domestic capacity? I don’t believe so. It needs inputs and especially capital. Both are restricted by sanctions. If Iran had a stronger economy, maybe. But as it is, no.”

Q: What kind of economic diplomacy should Iran adopt in the region and beyond?

A: “There is not much that Iran can do. The Arabs do not trust Iran. They do what America tells them to do. So why would the United States, the country that has imposed the sanctions, now tell its Arab surrogates to bust the sanctions and help Iran! There is nothing to be gained from economic diplomacy with Arabs. A lot of talk and nothing will come of it. I can assure you of this.”

Q: Can the Eurasian Economic Union (EEU) serve as an avenue for Iran to counter U.S. sanctions?

Israel does not want close relations between the Persian Gulf Arabs and Iran. A: “Let me first explain how secondary or what some call extra-territoriality sanctions work. The U.S. basically tells all countries that if they don’t adhere to the U.S. sanctions on Iran and break them, then whoever breaks them, a foreign company or institution, or country, will not have access to the U.S. market. So countries or companies are not willing to risk losing access to the U.S. market and to the dollar.

So for me, the only country that could stand up to the U.S. is China. If they were willing, then many of the Eurasian countries might also follow China. China is the key. I would add that I think China should want to challenge the U.S. on its ability to impose sanctions at will sooner as opposed to later. Sanctions have become a potent weapon for the U.S. and China should try to defang U.S. sanctions as soon as it can.”

Q: What other option does Iran have to get around sanctions?

A: “Let me take up from where we just left off. The best option for Iran is to simply join the Chinese camp lock stock and barrel. The 20-year agreement signed with China is a first step. But Iran needs to do more. Try to convince China why such a total embrace and partnership would serve China’s interest to expand its influence from China to Pakistan, Afghanistan all of central Asia and the Middle East (West Asia) and in the process take American hegemony head on. If China stands up, the U.S. ability to use sanctions as a weapon will become ineffective. The second option for Iran is to double down on domestic reforms while adopting an austere economic model and building a stronger military in order to increase its bargaining power."

Q: What is your prescription for the Iranian economy?

A: “I said all I had to say in private to a senior member of the government over a few hours nearly 30 years ago. We discussed it in detail. His response was that reforms were risky. People had enough to eat. I said that if you wait, it will be even harder in the future. And here we are!

Let me briefly repeat some of what I said in one sentence. Iran needs more effective institutions, whose three pillars are more freedom, the rule of law and the sanctity of contracts.

Q: Can you elaborate on reformation and institution building in countries such as Iran?

A: “The late Douglass North argued that the key to the performance of high performing economies is their low transaction costs, which in turn is the result of the institutional structure that they had developed over a period of decades. Transaction costs are an impediment to economic and social progress and prosperity. They arise because accessing information is costly and because parties to an exchange hold information asymmetrically. It can be argued that the collectivity of institutions provides society with the social capability to establish a stable order by reducing uncertainties or ambiguities that the members of society face.

Saudi Kingdom and the UAE wrongly believe Iran wants to overthrow their family rule. Needed changes in the institutional structure may be difficult because although formal rules can be changed by fiat, social norms may be less flexible and their enforcement characteristics respond much more slowly to policies to change them. Thus while establishing effective institutions is a must, it is not something that can be achieved overnight, some changes take decades and longer. Although acknowledging that improvement in economic performance may be slow to develop because of cultural factors and path-dependency, North nevertheless envisioned an ideal political-economic institutional structure that, in his view, has great potential for achieving good economic performance and societal well-being. Such an ideal institutional framework would have:

Institutions that protect individual rights, the individual person, property, speech, social/political participation and create incentives for the members of society and organizations to engage in productive activities.

High levels of trust and trustworthiness.

Rule of law and a government, which is credibly committed to a set of political rules and enforcement that protects individuals, organizations, and exchange relationships.

Contracts and contract enforcement.

A stable structure of exchange relationships in economic and political markets and an effective price system that leads to low transaction costs in production, exchange, and distribution.

Governance rules at all levels.

An effective, independent, and impartial legal system.

Iran has a long way to go. But it must start at some point. It cannot wait. A good start would be the rule of law and an independent judiciary, upholding the sanctity of contracts and more freedoms to give investors more confidence.”

Q: How can Iran redress sharp fall in oil incomes?

A: “There is not much that Iran can do. But better domestic economic policies can at least compensate a little for lower oil prices and oil revenues.”

Q: Do you consider reliance on oil money advisable even if oil sanctions on Iran are lifted?

A: “There are a number of things I have to say. Oil is a depletable resource and also a resource that may become less valuable because of climate issues. Natural gas will be more valuable over time because it is more eco-friendly. Oil and gas are a part of a country’s capital. As it is depleted, oil revenues must be used, invested, to compensate for the depletion of oil. Sadly, most countries use oil revenues differently. They use it to finance consumption. They act as if oil revenues will last forever. They won’t and they don’t. But as a result, they don’t save enough for investment and the government does not develop alternative sources of revenue through taxes. So oil can be a blessing if the revenues are managed well or a curse if they are not.”

Q: What policies should Iran’s central bank adopt in view of the fact that one of the chief problems haunting the Iranian economy is high liquidity?

A: “First, put the brakes on money printing. Use a rational rule for money creation. And create a new Rial, whereby the new Rial is equal to something like 50,000 old Rials.”

Q: In your view how long will it take for Iran to return to the pre-Trump sanctions which has led to a sharp fall in value of national currency even if the current nuclear deal talks bear fruit?

A: “You need a prophet to answer this question and a prophet I am not! It depends on government policies, on the Iranian people and international developments, including the status of sanctions. My guess is no better than that of a man or woman on the streets of Tehran.”

Q: In view of the climate change and consequent droughts there is also no good prospect in agricultural development. How can this be addressed?

A: “I agree, the prospect for agriculture, especially in southern Iran, look very ominous. Unfortunately, northern Iran does not seem to have so much excess water that could be piped south. I think the only thing the government can do is to develop desalinated water (using natural gas or solar) for human use and for high value agricultural products in hydroponic agriculture. In open air agriculture, much of the water would evaporate before it soaks into the ground and the value of the water, its shadow price, would be higher than the agricultural output.”

The U.S. has more to gain if Iran and the Persian Gulf Arabs are at each other’s throats. Q: President Ebrahim Raisi has said Iran will extend hand of friendship to countries on the southern shores of the Persian Gulf. However Saudi Arabia has not so far responded warmly to Iran’s diplomatic overtures?

A: “It will take years, probably more than a decade, to build two-way trust between Iran and its Persian Gulf Arab neighbors. The problem countries are Saudi Arabia and the UAE. They believe, of course wrongly, that the clerics in Iran want to overthrow their family rule. To convince them otherwise will take years of trust building. I tried, at the behest of the governments of Iran and Saudi Arabia, for a few months and I managed to get the two sides together but later it fell apart. You need a permanent cadre of people trusted by both sides who devote their time to bridge the gap and build trust. But countries in the region, especially Israel, does not want close relations between the Persian Gulf Arabs and Iran. I also believe that the United States feels the same. That it has more to gain if Iran and the Persian Gulf Arabs are at each other’s throats.”

Q: Is there anything further you would like to add about Iran’s economic situation?

A: “For years, I have said, yes sanctions have a terrible stranglehold on the Iranian economy, especially after 2008 but Iran’s bigger problem has been its economic policies. I still believe that if Iran had adopted sound policies after the Iran-Iraq War it could have weathered sanctions much better. So now it is much tougher but it is better to start a turnaround now than later.”

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