An Open Letter from 61 Iranian Economists Issues Stark Warning
Editor’s Note: This open letter co-signed by 61 Iranian economists was widely published in Iranian media outlets on June 10, 2022. The letter spurred significant debate and even controversy, with at least one economist claiming they were included as a signatory without foreknowledge of the letter’s content. The letter has been translated here in full in its original form given its insightful diagnosis of the economic challenges facing Iran.
Honorable People of Iran, Dear Compatriots,
Greetings,
When the 13th government took office, electoral rivals were ousted from the country's electoral institutions, bringing apparently uniform governance to the political landscape. In this climate, some analysts predicted, optimistically or naively, an accelerated resolution of the nuclear dispute with the West, as well as the formation of a government backed with maximum support of those holding political power, the military, and the official media in combating corruption, restoring the general business climate, and achieving macroeconomic stability. This was especially the case given that Mr. Raisi's views, programs, and promises as a presidential candidate foretold the formation of an inclusive government that would effectively use the country's vast knowledge and managerial experience. They were reported to have prepared and would implement a 7,000-page reform program with the support of dozens of research institutes and faculties of economics to address critical issues such as inflation, unemployment, and the closure of businesses.
Without tying the nation's livelihood and economy to nuclear negotiations, Mr. Raisi had promised the country would experience 5 percent economic growth, produce one million new jobs and one million new housing units annually, and to rapidly eradicate absolute poverty. He envisaged that the inflation rate would be reduced by 50 percent and then to single digits. Iran's non-oil exports would increase from $35 billion in 2021 to $70 billion in 2022, and the country's total foreign exchange needs would be met using non-oil exports.
In the meantime, many economic and political experts and intellectuals cautioned with foresight and compassion that such promises would not be realisable unless an early agreement was reached in the Vienna talks—after lengthy and exhausting two-year negotiations. Despite under-utilised human and physical capacities, a large number of unfinished projects, and billions of dollars of blocked foreign exchange resources, some of these promises could be fulfilled in the event of a nuclear deal and the FATF's approval, as well as the end of the COVID-19 epidemic; however, their entire fulfilment was also contingent on having good and developmental governance and a well-thought-out plan.
It is unfortunate, however, that since the beginning of April 2022, social unrest and public concern for livelihood and the viability of businesses have reached an explosive stage with the rise in disappointing news reports from the nuclear talks and numerous policy shocks to the country's economy, including the labor and the goods and services markets, followed by the elimination of the preferential exchange rate for essential goods. In the first few months of the year, the inflation and exchange rates have both reached new highs. Official policymakers have referred to the induction of multiple shocks and the escalation of macroeconomic instability as "economic surgery and reform" and "tough decisions for the economy" without considering the far-reaching repercussions of those decisions, the beginning and end, the scope, framework, and depth of this surgery, and its next steps or consequences for the general public. The prerequisites and instruments of economic surgery, such as the structure and function of governance, the attainment of an adequate level of public trust and appreciation, and the establishment of economic stability, were largely disregarded. Despite unofficial restrictions on independent media, numerous experts, economic and social experts, managers, and business owners have issued numerous warnings about the dire consequences of foreign policy inaction and recent ill-considered and erroneous policies over the past few months.
Hereby, the signatories of this letter, a group of economists of the country, convey our scientific analysis, apprehensions, advisories, and some strategies to help amend policies and alleviate the concerns of the dear people of Iran, purely out of a sense of national and social responsibility and moral and professional commitment to the people.
An Overview of the Government's Economic Surgery Policy
After the parliament agreed to eliminate the preferential exchange rate (USD1 = 4,200 tomans), the government's "economic reform" program began on May 9, 2022, with the Presidential TV address. These amendments led to the elimination of the preferential exchange rate for dairy products, animal and poultry feeds, eggs, oil, and certain medicines and medical devices. These items are referred to as essentials in the household basket. Before this decision, pasta, cakes, bulk bread, and confectionery products were taken off the list of items eligible for a preferential exchange rate upon eliminating the subsidy on industrial flour in April.
The government's policy, dubbed "economic surgery,” was rushed into effect without the administrative arrangements necessary to compensate producers and consumers. This may be a transient solution to the pressing budget deficit problem in the face of sanctions and the global food price crisis; it cannot be an economic reform program, however.
The government and parliament have removed the preferential exchange rate of basic goods and introduced it as the beginning of economic surgery. This decision is made while the annual budget contains thousands of billions in tomans for unneeded, nebulous, and removable expenditures, the permanent or temporary omission of which poses no threat to the government's primary missions or the people's general livelihood. Furthermore, this high-risk policy was implemented in the world's most alarming food security circumstances (amid the risk of global hunger and poverty). To date, there is no information on the financial nature of this policy, its resources, expenditures, or the degree of its imbalance. Even for the first time in recent decades, information tables on the sources and expenditures of explicit subsidies (Table 14 of the General Government Budget) and other sections of the Budget Law have not been published, making it impossible to evaluate or comment on them.
Our admonition to government officials is that the country's situation is extremely precarious, and insisting on eliminating subsidies during this miserable time will exhaust the public's patience and turn them against the ruling system and government. This confrontation can be very costly for both sides of the aisle. Reasonably, after the nation's economy and global food markets have returned to normal, macroeconomic stability has been established, and social tensions have been diminished, economic measures such as the unification of exchange rates, reforms in the four markets of the economy, and the organization of consumer subsidies can be implemented, all based on a prudent plan. Likewise, consideration must be given to the support of vulnerable groups in this scenario. At the macroeconomic level, the successful implementation of economic reforms requires certain unavoidable prerequisites, including the following:
Oil and non-oil export revenues, sufficient and reassuring reserves, and the availability of foreign exchange to manage potential fluctuations
Development of vivid and effective policies to stabilise the macroeconomy by regulating inflationary financial and budgetary factors
Low-cost access to global markets, including the market for basic goods and services, and, if necessary, low-cost financing sources and methods
If policymakers insist on continuing this unfortunate and risky practice, the government and the media should take full responsibility, explicitly and courageously, for the policies implemented and all their social and political consequences. Importantly, they should also avoid attributing failures to past pitfalls or the pressures and suggestions of economists outside the government. Nor should they label these suggestions as sabotage against the government and aggressively rebuff the criticisms of experts and those concerned with the national economy. This form and process of policymaking is at odds with, at least, the scientific approaches and indices of Iranian economists.
A Depiction of the Trends of Macroeconomic Indicators and the Outlook for Iran's Development
Development requires a "strong society–strong state" wherein the empowered state lays the foundation (in the form of public and regulatory goods) for the community's empowerment. An empowered society also requires a government that can pave the way for development through development-oriented governance and facilitative policymaking to ensure higher prosperity, employment, comprehensive social justice, security, and tranquility.
According to global comparative reports, indicators of the public business environment, quality of governance, perceptions of corruption, economic competitiveness, property rights, and other factors that lay the groundwork for long-term and inclusive growth and development, are on the decline placing Iran near the bottom of global rankings. Iran, for instance, was ranked 150 out of 180 nations in the most recent survey regarding anti-corruption efforts, and ranked 127 out of approximately 200 countries on the good governance index. In recent years, the social trust index, a measure of social capital that had risen to nearly 70 percent after the Islamic Revolution in 1981 (1360), has plummeted to the very concerning level of approximately 20 percent. The marriage-to-divorce ratio has decreased from 14 percent at the start of the revolution to around 3 percent today.
Due to poor governance, we have been unable to capitalise on the golden opportunities presented by the country's vast human and creative capital, oil revenues, and demographic window so as to achieve rapid economic growth. Oil exports have brought the country over 1.3 trillion dollars since the Revolution began. During this time, the country entered a demographic window in which the population's age structure was more conducive than ever to rapid economic growth. During this period, the country's per capita income has increased by less than 1 percent. Our country is on the verge of a long-term crisis due to the sharp decline in social capital, the inevitable outflows and large-scale layoffs of human capital, the spread of corruption, and the destruction of natural resources and the environment.
Iran's average GDP growth from 1980 to 2018 was approximately 1.6 percent, whereas China, India, Turkey, Malaysia, UAE, and Pakistan averaged between 4 percent and 10 percent during the same period. This meagre growth has occurred despite the fact that, nearly 50 years ago, Iran's economic growth prospects were considered superior to or on par with those of these nations. Due to sluggish economic growth, Iran's share of the global economy has decreased from 1 percent to approximately half a percent over the same period.
In the last decade, Iran's economy experienced the deepest stagflation in 70 years due to oppressive and unprecedented sanctions and the COVID-19 pandemic. The economy was marked by an average growth rate close to zero, an average inflation rate of above 20 percent, a negative and declining rate of gross fixed capital formation—even less than the compensation for depreciation over the past three years—and even more worrisome, an annual financial capital outflow of 10 to 20 billion dollars, depending on optimistic or pessimistic estimates. In the last ten years, the productivity rate of production parameters has been declining in a concerning manner, and the exchange rate has experienced a 30-fold increase (3000 percent). Although the national unemployment rate is still below 10 percent, it exceeds 15 percent in low-income (often border) provinces. In the last four decades, the average inflation rate has been 20 percent, and in the last three years, it has surpassed 35 percent. The misery index is approximately 50 percent, and inflation in 2021 was greater than 40 percent. Iran's imports have decreased from $70 billion in 2011 to approximately $35 billion in 2021 due to the implementation of sanctions and the reduction of oil export revenues.
These deteriorations have resulted in unequal income distribution and the spread of poverty across society. The Iranian Statistics Center has reported that Iran's average Gini coefficient between 2011 and 2018 was 0.408. This metric indicates that Iran is one of the most unequal societies in the Middle East, itself one of the most unequal regions on a global scale, during the relevant period. According to the report, during the same years, 1 percent of Iran's population, comprising the wealthiest strata of society, had an average of 16.3 percent of the country's total income, which is equivalent to 40 percent of the income of the poorest strata. Official reports suggest that the social and prospective outlooks of housing, education, and health inequality are far more unfortunate and worrisome. The Ministry of Cooperatives, Labor, and Social Welfare's report notes that the poverty rate increased from 22 percent in 2017 to 32 percent in 2019 due to the sharp increase in the poverty line basket price between 2018 and 2019. This means that in 2019, 32 percent of the country's population, 26.5 million people, are living below the poverty line, and sadly, estimates indicate that it has extended to nearly 40 percent of Iranian households in 2021. In the last decade, with an economic growth rate close to zero and a population growth of about 13 percent, the average Iranian has become 13 percent poorer. However, inflation and inequality mechanisms such as ineffective redistribution policies and corruption have placed the majority of the burden of poverty on low- and middle-income deciles, low-wage earners, and those employed in the economy's informal sector.
The macroeconomic developments of the past decade, i.e., the period of unprecedented intensification of economic, financial, commercial, and technological sanctions, have had the most significant impact on the living conditions of households and the increase in the poverty rate. Looking into macroeconomic variables has two major implications for Iranians' living conditions: first, a decline in welfare and worsening living conditions across the board for all Iranian households, and second, a more severe decline in welfare in low-income groups (1). Although the legal minimum wage for 2022 increased by 57 percent, the same wage, which fails to account for a large proportion of informal workers, is about $4.7 a day and $1.57 for a family of three. It falls below the international poverty threshold of $2 per day. In addition, many large firms, which are confronted with rapidly rising costs and declining demand, have adjusted their labor force, meaning that workers have been the primary losers of this policy due to their decreased share of national income.
The constant increase in the exchange rate and its inescapable effects on the volume of liquidity, on the one hand, and the reduction of revenue sources and the unorthodox and rapid growth of government expenditures, on the other, have resulted in enormous budget deficits, which are the primary cause of accelerating inflation. The escalating exchange rate-inflation spiral has placed the nation at risk of triple-digit, runaway inflation. Widespread corruption and the collapse of social capital, intensified rent-seeking ties, particularly in foreign trade and financial markets, the sharp decline in investment over the past two decades, and high inflation have cast a shadow over the future of Iran's economy and led to an inevitable, damaging, and irreparable outflow of financial and intellectual capital to other nations.
In recent years, as a result of the rise in the exchange rate and the cancerous growth of the budget deficit, the government has been forced to raise the price of energy carriers on occasion and eliminated the preferential exchange rate for the import of basic commodities this year. Experience has demonstrated, however, that the effects of such policies are extremely short-lived due to pervasive corruption, the collapse of social capital, the increase in the exchange rate, and the budget's ailing structure. Indeed, the budget deficit reoccurs shortly after and at a more considerable scale. Direct subsidies have not helped to offset the decline in public purchasing power and have not prevented the decline in people's livelihoods. Moreover, the government's monetary and fiscal policies have exacerbated the widening divergence.
In summary, the economic situation in Iran is very concerning, based on an abundance of evidence, and there seems to be no prospect of improvement or departure from this current state. Indeed, the downward trend of institutional performance indices (such as quality of governance, general business environment, corruption, economic competitiveness, and innovation), as well as other key parameters such as the outflow of financial and human capitals and the declining rate of economic investments over the past few years, is a substantially more ominous sign for the Iranian economy in future.
Honourble and patient people of Iran,
Dear Iranians,
Regrettably, the indicators and evidence presented above are not simply numbers on a page; they tell a heartbreaking story of hopelessness, the absence of a bright horizon, a lack of a favourable environment for production and business enterprises, a steady decline in people's purchasing power, growing poverty, and shrinking livelihoods. The obvious outcome of long-term exposure to such high inflation and a steadily rising exchange rate is a sense of social powerlessness and gradual decline. Inequality and income and asset gaps resulting from inflation, corruption, or dysfunctional fiscal and monetary policies, have turned trust and coexistence between the winners and losers of this bitter game into hatred and resentment, causing social capital to be shattered and destroyed. On the other hand, in the current state of the country, where economic and social policies are shrouded in secrecy, any criticism of the government is interpreted as part of a malicious plot against the governing system, making it difficult for experts or academic circles to raise such issues openly. Even more difficult is persuading the rulers and policymakers to accept that the Iranian people's suffering is now due to their long-term ineptitude and mismanagement.
It would be too naive to attribute this disorderliness solely to economic and financial factors such as large and growing budget deficits. Our economic and social problems—including the destruction of natural and environmental resources, systematic corruption, the destruction of social capital, the massive migration of human and innovative capital, the outflow of financial capital, the budget deficit and even the sanctions—are in a more general analysis, the product of poor governance and disregard for the scientific foundations of public policy.
If only our policymakers could foresee that now is not the time for a tug-of-war and coercive measures on national and global scales.
If only the esteemed President knew that economic policy is not the venue for an apprenticeship, trial and error, hasty decisions, or unthoughtful manipulations of prices and mediating factors. In fact, having the trust and the psychological and social support of society, having a stable environment based on international cooperation and coexistence, and having a strong bureaucracy equipped with modern knowledge and technology, are some necessary requirements for reforms or, in their own words, "economic surgery."
Dear compatriots,
Based on a review of global experiences and the scientific analysis of national experts and signatories of this letter, the first step to escape this dilemma is to fundamentally alter the nation's foreign strategies and policies, and the second is to alter the manner in which the country is governed. Two long leaps should be taken to solve Iran's complex economic and social issues and compensate for its stagnation in global economic competition:
Fundamental reforms in foreign policy by adopting a policy of peaceful coexistence and dignified cooperation with the countries in the region and especially neighbouring countries, as well as balanced and active interaction with major economic powers; also, paying attention to the minimum demands of the honourable people of Iran to improve the living conditions of Iranian people and to promote Iran's position globally. Without restoring the JCPOA and removing FATF-imposed restrictions on the Iranian banking sector, it is pointless to address macroeconomic stability policy and low-cost access to global markets.
Without an improvement in the quality of governance, economic surgery or reform will result in pervasive corruption, irreparable poverty and inequality, and deteriorating social and political stability. The prerequisites for effective governance and vital reforms are as follows:
Improving the quality of governance, the absolute and unequivocal rule of law at all levels, and government accountability for its decisions and public demands
Minimising political and economic corruption by applying maximum transparency mechanisms to the processes and outcomes of all policies, decisions, allotments, and appointments
Establishing an impartial, wholesome, accessible, affordable, and dependable judicial system for all social groups
Accepting and assisting in the creation of a space for dialogue, criticism, and oversight for scientific associations, universities, civic institutions, specialised and professional inclusive organisations, and independent media, and committing to the rules and goals of such a cause in practice
Possessing a robust and accountable executive and bureaucratic system with convenient and trustworthy databases
Possessing updated and potent information and communication technologies to implement targeted support and subsidy programs, carry out specific payments for specific target groups, and purchase specific goods and services from specific centres at specific times
Establishing and expanding the coverage of the welfare and social security system and efficient health insurance through equitable and efficient taxation (not by doubling the financial pressure on the critical sources of pension funds)
Fostering a competitive environment for the private sector's entrepreneurs and business owners while avoiding government monopolies or security conditions in the marketplace
Conceiving and implementing a production-focused incentive system that encourages the manufacturing sector and restricts destructive and unproductive activities
For policymakers and government officials to address the current turmoil, some clear implementation plans are also proposed:
It is incumbent upon the President and his principal colleagues to report on economic policies and programs, as well as their resources and expenditures, unambiguously and vividly, to seek consultation and advice from knowledgeable and specialised individuals, and to courageously take responsibility for their decisions.
A report on the sources and expenditures of the newly established subsidy, the number of households covered by it, and this year's budget imbalance should be publicised officially and transparently. A program of maximum financial discipline should be formulated, published, and implemented, including a revision of the 2022 budget based on public interests rather than the interests of specific groups. More specifically, the government should eliminate budget lines involving rents and overt and covert support for specific groups and centres, the removal of which has no harm to the essential activities of the government in exercising its sovereignty and public welfare provision.
A preferential exchange rate should be provided for the import of basic commodities, particularly wheat (until global food security concerns are resolved) and medicine (until compensatory mechanisms in the social security system are established), and any decisions or policies that involve price shocks upsetting the balance for vulnerable groups should be avoided.
In certain instances, cash subsidies intended to offset the negative effects of pricing policies are ineffective. It is imperative to build on up-to-date information and new information technologies, as well as close collaboration between the banking system and the goods distribution system, to allocate the payment subsidy in an entirely purposeful way for purchasing basic goods and ensuring food security in pre-specified purchase terminals.
The government monopoly on importing basic goods should be reformed into an effective competition. Accordingly, in addition to state-owned companies, all known and authorised traders should be permitted to purchase and import the basic goods required by the country from international markets in any quantity using export currency so as to maintain a sufficient level of strategic stocks of goods.
Concluding Remarks
To put it bluntly, successful price reforms necessitate broad government accountability, citizen participation in decision-making, the application of elite knowledge, and extensive communication with the rest of the world based on global standards.
Ultimately, while emphasising the motivation of the signatories of this letter to assist in resolving the current turmoil for the benefit of the people, we request that expert criticism be given due consideration.
With the people are God's hands.
Tomorrow, when the vestibule of truth becometh revealed,
Ashamed the way-farer, who, illusory work, made.
The List of Signatories of the Statement of Economists Addressed to the Honourable People of Iran
1. Ebrahimi Taghi, Ferdowsi University of Mashhad
2. Arbab Hamidreza, Allameh Tabataba’i University
3. Asgharpour Hossein, University of Tabriz
4. Afghah Morteza, Chamran University of Ahwaz
5. Akbari Nematollah, University of Isfahan
6. Elahi Naser, Mofid University
7. Emamverdi Ghodratollah, Azad University of Tehran
8. Amin Ismaili Hamid, Jihad Daneshgahi Institution
9. Amini Minoo, Payam Noor University, Tehran Branch
10. Olad Mahmud, Urban Economics
11. Ahangari Abdolmajid, Chamran University of Ahwaz
12. Bagheri Mojtaba, Mofid University
13. Bakhshi Lotfali, Allameh Tabataba’i University
14. Behboodi Davoud, University of Tabriz
15. Beheshti Mohammadbagher, University of Tabriz
16. Pazooki Mehdi , Planning Organization
17. Pishbin Jahanmir, Chamran University of Ahwaz
18. Tahsili Hasan, Ferdowsi University of Mashhad
19. Takieh Mehdi, Allameh Tabataba’i University
20. Chinichian Morteza, Allameh Tabataba’i University
21. Hosseini Seyed Mohammad, Research Institute of Islamic Sciences and Culture
22. Khatayi Mahmud, Allameh Tabataba’i University
23. Khodaparast Mehdi, Ferdowsi University of Mashhad
24. Khalili Tehrani Abdolamir, Shahid Beheshti University
25. Dadgar Yadollah, Shahid Beheshti University
26. Delangizan Sohrab, Razi University
27. Dahmardeh Nazar, University of Sistan and Baluchestan
28. Dehkordi Parvaneh, Payam Noor University, Tehran Branch
29. Rahdari Morad, Payam Noor University, Tehran Branch
30. Satarifar Mahommad, Allameh Tabataba’i University
31. Sahabi Bahram, Tarbiat Modares University
32. Shajari Hushang, University of Esfahan
33. Sharif Mostafa, Allameh Tabataba’i University
34. Sharifzadegan Mohammad Hossein, Shahid Beheshti University
35. Sadeghi Tehrani Ali, Allameh Tabatabai University
36. Sadeghi Saqdel Hossein, Tarbiat Modares University
37. Taheri Abdollah, Allameh Tabataba’i University
38. Asi Reza, Allameh Tabataba’i University
39. Ebadi Jafar, University of Tehran
40. Azizi Ahmad, Former Deputy of Currencies of the Central Bank and University Lecturer
41. Asari Arani Abbas, Tarbiat Modares University
42. Isazadeh Saeed, Bu Ali University
43. Firoozan Tohid, Kharazmi University
44. Ghanbari Hasanali, Shahid Beheshti University
45. Ghanbari Ali, Tarbiat Modares University
46. Karimi Zahra, Mazandaran University
47. Kia Al-Husseini Seyed Ziaoddin, Mofid University
48. Lashkari Mohammad, Payam Noor University, Mashhad Branch
49. Mohammadzadeh Parviz, University of Tabriz
50. Maziki Ali, Allameh Tabataba’i University
51. Mostafavi Mehdi, Ferdowsi University of Mashhad
52. Mostafavi Montazeri Sayyed Hassan, Tarbiat Modares University
53. Monsef Abdolali, Payam Noor University, Tehran Branch
54. Musaei Meysam, University of Tehran
55. Mousavi Mirhossein, Al-Zahra University
56. Mousavi Habib, Azad University of Arak
57. Mirzaei Hujjatullah, Allameh Tabataba’i University
58. Mehdikhani Alireza, Azad University of Arak
59. Hadi Zanouz Behrouz, Allameh Tabataba’i University
60. Varhami Vida, Shahid Beheshti University
61. Yusefi Muhammad Raza, Mofid University
