An economist's warning about the spread of poverty in Iran; It becomes more difficult to get out of the poverty trap

In the current state of Iran's economy, instead of addressing the roots of this economic challenge, the policy maker has turned to palliative and subsidy policies; Policies that not only don't take the burden off the shoulders of households, but have become the driving engine of subsequent inflations by intensifying budget imbalances.

Iran's economy has been stuck in the middle of interwoven crises and frequent shocks for years. Crises that can no longer be seen as just transient fluctuations or short-term consequences of temporary decisions, but today have turned into an erosion and structural process. On the one hand, the negative economic growth and the continuous melting of the economic cake have minimized the capacity to generate wealth and distribute income, and on the other hand, chronic inflation has neutralized the nominal income of households.

In the meantime, instead of addressing the roots of this economic challenge, the policy maker has turned to palliative and subsidy policies. Policies that not only don't take the burden off the shoulders of households, but have become the driving engine of subsequent inflations by intensifying budget imbalances. In the upcoming interview with Dawood Suri, an economist, we have examined the dimensions of the recent macro shocks, the mechanism of transferring poverty to future generations, and the challenges of policy making in the existing intellectual framework.

* The repeated shocks that have been inflicted on Iran's economy and people's livelihood over the past decade, and have now reached more acute stages such as war and economic blockade, what effect has it had on Iran's economy in a macro way?

We can easily see these effects and consequences by looking at a series of fundamental indicators that economists usually refer to to assess the health of the economy. Undoubtedly, "Economic growth" is the most important indicator that, along with "inflation", can show us the state of an economy and a clear picture of its coordinates. Macro statistics show that our economy is in a severe contraction. I think this year we experienced a very worrying economic growth of around 10% in the spring. When we go back to the trends of the past few years, we see that our economy has been involved in low or negative growth in the past years as well. These repeated and back-to-back negatives actually mean that the size and volume of our economy is continuously getting smaller and smaller.

When the economic pie gets smaller, the concrete meaning is that our economy is "producing" less. When production decreases, naturally, less "income" is created at the macro level, and as a result, a smaller share of income reaches the people. In addition to this sharp drop in income and production, we are facing the other side of the coin, which is the unbridled increase in prices. Very high inflations, numbers such as 90% or 120% (in some items and decimals) have become a permanent guest on people's tables today, and we see price jumps in different markets every month.

The economic meaning of this situation is that, on the one hand, people's real incomes are decreasing due to the decrease in economic growth and production, and on the other hand, due to high inflation, the purchasing power of these small incomes is also decreasing day by day. In simpler words, the amount of goods and services that people can buy every day with their fixed income decreases compared to the previous day, the previous week and the previous month. This intersection of decreasing incomes and increasing expenses has put an overwhelming pressure on the backbone of the household economy.

* If we want to focus directly on the household and the dimensions of poverty that they are experiencing, can we say that this poverty is being institutionalized and, in other words, becoming inherited? Will this poverty be passed on to the next generations, and will people find it harder to get out of this situation every day?

Yes, absolutely. In economic literature, we are faced with a concept called "poverty dynamics" or dynamic poverty. Also, a phenomenon called "poverty trap" is usually talked about. The poverty trap in simple language means that if a household falls into this trap for any reason and becomes poor, it is very likely to stay in it. It will be very difficult to get out of this quagmire, and the household needs effective and targeted external help to pull itself out of it.

The dynamics of poverty means that if a household does not currently have the ability to provide the minimum and basic needs for its daily life, it is forced to eliminate. What are the first victims of this removal? The family has to reduce the expenses of their children's education. He has to ignore the health of his children and even the head of the household. As a result, the quality of the food they consume will drop drastically and the quality of service they will receive will be very low.

These deprivations naturally cause that family to deliver children with lower abilities and skills to the society in the future; Children who have less "human capital", have not received proper education and skills, and do not have sufficient physical and mental health. The definite result of this process is that these children cannot be competitive and efficient people in the labor market in the future. As a result, they will not be able to earn enough money and they themselves will become poor people in adulthood. Then these poor people themselves raise another generation of poor children and this vicious cycle unfortunately continues. Poverty is a completely dynamic phenomenon and cannot be limited to a short period of life.

* In this situation that you described well, these days we hear a lot from officials and policy makers that their goal is to provide a minimum livelihood for the lower deciles. An approach that simply tries to keep the food basket full. What is your assessment of this view and approach to solving the economic problems of the society in crisis conditions?

This is exactly the reduction of the meaning of life. Saying that we want to provide you with minimum livelihoods may seem like a positive action. These minimum subsistences may enable people to merely survive, but to survive is not to "live." A person who is fed to survive cannot make a better life for himself in the future. These people will no longer have the necessary energy, motivation and facilities to become an active, dynamic and productive generation.

Iran's economy has fallen from the situation in which it was classified as one of the countries with upper middle income, to a situation where the main and daily concern of the people is to provide the minimum subsistence level. Today, livelihood is the concern of all sections of the society, and even the government has set the ceiling of its goals only on providing the minimum livelihood of the people. Such a trend shows that the process followed in our macro policies was not a correct process. If we are going to settle for the same level of livelihood in the future, our economy will never have the capacity to grow and create value.

* Is it possible to conclude that with this gradual erosion, the power and resilience of households to deal with new economic shocks has ended, and in case of new shocks, the society will be more vulnerable than before?

Obviously it is. As I mentioned before, the combination of high inflation along with the decrease in incomes and the drop in economic growth is actually the worst economic disaster that a society can suffer. We clearly see today that, on the one hand, incomes are under severe pressure, and on the other hand, prices are increasing at a high pace.

These two factors work exactly like the two edges of a pair of scissors. These scissors are cutting the vital and economic arteries of households. When there are no savings, when income barely covers basic expenses, the household has no leverage left. Obviously, such a structure will not accept and withstand more shocks and new inflationary or recessionary shocks, and each new shock can throw more deciles below the absolute poverty line.

* Despite these pressures, governments have always tried to continue their support policies. For years, plans such as cash subsidy and recently electronic goods have been implemented to reduce the inflation pressure. Why these policies have not been able to open a knot in people's livelihood?

The main problem of our support policies is that we have repeated the plans that were implemented before in this economy and did not have a favorable and sustainable result. Policies such as subsidies and subsidies have been implemented for years, but the main issue and the missing link in all these years is the answer to this key question: where are the financial resources of these policies supposed to come from?

No government in the world can give money to people forever without creating wealth. We cannot manage the economy of a country of 80 million with only subsidy, charity and support policies. The continuation of such an approach, in which production is ignored and only focused on the distribution of resources, will eventually bring our economy closer to failed patterns.

While we must pay attention, the needs of people in a modern society are not limited to a few limited basic goods such as oil, chicken or rice. Households are faced with a thousand and one other items, with heavy costs of housing, health, education, transportation and clothing, none of which are included in the government's support basket. You cannot simply increase the amount of support on paper without concrete financial support and expect the problem of livelihood to be solved in a real and sustainable way. In order to continue the support policies in the second half of the year or in the coming years, the government must find the necessary real resources, and this issue shows that the non-inflation financing method is one of the main challenges of these policies.

Even if we assume that the government increases the amount of goods, if this increase is not proportional to the inflation in the economy, it cannot necessarily respond to the current conditions. When the government resorts to the resources of the central bank to cover the deficit of these subsidies, this itself is inflationary. Therefore, simply increasing the amount of support, regardless of the continuous growth of prices and the daily decrease in purchasing power of households, does not necessarily mean solving the problem and is only a temporary housing. Supportive policy, without creating sustainable resources, can never replace the production and growth of the economy. The long-term way to provide the country's financial resources is to strengthen competitive production and export development, and any support policy should be carefully measured with production capacity, real financial resources, and its monetary effects.

* What is your suggestion and solution to overcome this crisis, in a way that both in the short term the society can overcome the current high pressure conditions and in the long term the transfer of poverty to future generations is prevented?

The honest answer is that I do not see any serious and sustainable solution within the framework of the existing system of thought and the current decision-making structure. We have to admit that there is a big limitation; The intellectual system that governs the administration of the country and the economy has its own coordinates and priorities, which do not have a positive outcome or perspective in this specific framework. Maybe the policy makers themselves know, know or there are those beside them who think they have a solution, but as an economist, I really can't think of anything that can be done and fundamentally solve the problem in this intellectual framework; Doing something that will really help the poor to get out of the poverty trap.

The goods they pay today, the subsidies they give, and the temporary support they apply, in my opinion, none of them are effective in the long term, and after a few months, their effect will be neutralized due to inflation. In my opinion, solving the problem of Iran's economy has passed the technocratic stage and purely economic policies. The situation must be resolved from a political and macro perspective. With the existing conditions and with this command, it is not possible to direct the economy of a society towards development. Managing the economy of a country requires a "change" in the intellectual framework.

In the existing framework, politically, intellectually and administratively, I do not see a clear way to solve the problem of economy and livelihood. If the policy path continues with the same thinking and approach, not only there will be no development, but it may even be possible to maintain this reduced level of livelihood. I emphasize that within this framework, there is no sustainable way out of the impasse.