Growth or Inflation?
1) High inflation rates are more worrisome for Iranians than a low economic growth rate
I submit that for our people (i.e. Iranians) high inflation rate is more important than a low economic growth. There is evidence to support this claim:
• People in their daily lives complain a great deal about inflation, but they rarely voice their grievance about a low economic rate of growth.
• The discussion over inflation was one of the central issues in the June presidential election. Candidates relied on the importance of inflation and its tangible effects on people’s lives to attack their opponents.
• In the current debate on subsidies reform, the most serious concern of the parliament is the inflationary effect of removing subsidies from energy costs.
• On the other hand, the rate of economic growth has never been subject to such attention and sensitivity. The rate of economic growth between March and September of 2008 was relatively low (2.3% based on indices published by the Central Bank). The overall rate of economic growth for the fiscal year of March 21, 2008- March 20, 2009, and the current year (March 21, 2009-March 20, 2010) has never been reported (although we are almost at the end of the latter fiscal year. Such delay in announcing the rate of growth has been unprecedented). However, none of these indicators and missing data has been raised as an issue in society.
2) Is economic growth rate really more important than inflation?
Perhaps putting the above question in this manner is misleading and meaningless. A better question would be “whether relative importance accorded to inflation in our society is more than what it should be?” The answer to this question is yes.
The reasons for this claim are discussed below:
• A few percentage points of difference in two countries’ rate of economic growth makes a significant difference in their income. For example, consider two countries “A” and “B” that have equal income in a certain year. If country “A” has an economic growth rate of 2%, “B” has 4%, after 20 years, the income of “B” will be 1.5 times that of country “A”.
If the rate of economic growth for “B” is 6%, its income will be twice that of “A” in 18 years. If the rate for “B” is 8%, its income will be twice that of “A” after only 12 years.
The following figure illustrates this point:
After brief consideration, it can be concluded that the real cost of inflation is not that clear. For instance, if all the prices (including the wages) grow at exactly the same level, the economic condition of people will neither improve nor deteriorate (it is as though the monetary unit has changed).
• Another example involves the case where the inflation is precisely predictable. In such a case, nobody will incur damage as a result of a foreseen rise in the prices. Therefore, the costs resulting from inflation is not incurred by the sheer rise in the prices, but the costs are caused by the related effects of a disproportionate and unforeseen rise in prices. These costs are in fact redistribution of wealth from one group to another. In other words, only a portion of society is harmed by this redistribution, while the other portion benefits from it. For example, the employees are harmed by the disproportionate rise in the price while the employer benefits. Also, the lender profits from such change and the borrower is disadvantaged.
3) Why is inflation more important for our people?
• Labour forces on wages compose a significant section of our society. Their wages, based on labour laws, increase a certain percentage annually. This increase is independent from rate of economic growth and is not inflation adjusted. As a result, the rate of economic growth is not considered relevant for this group, and the only macroeconomic indicator that impacts their purchase power is the inflation rate. In other words, the labour force sees no direct benefit from economic growth. As a result, inflation is considered more important for employees and the labour force, and since they have a more prominent voice in the media and may have the largest say in the election, their concern is picked up by politicians and measures to fight inflation is amplified in political campaigns.
4) If the rate of economic growth was more important to our people than inflation, would that translate into improved economic growth?
This question cannot be precisely answered. However, here are a few statements that would help analyze the question:
• The relative importance of the inflation rate has not helped control it. Therefore, we can argue that if the rate of economic growth was important, it would not necessarily result in the improvement of economic growth.
• Inflation can be limitedly controlled by adjusting wages and interest rates to inflation. However, such measures can have a detrimental impact on the economy. For example, the government can face enormous deficit which in turn causes greater inflation in the future.
•If economic growth finds a certain level of importance amongst people, it can be advantageous since people would vote for politicians who adopt and promote policies directed at improving economic growth.
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