Why Force is Never an Appropriate Economic Solution

Authorities use force to temporarily suppress protests and stop prices from rising. But, in the end, reality is going to catch up with them. Both the duration and the intensity of protests will grow, and inflation will return with a vengeance.

Among the reports leaking out of Iran despite the internet blockade is news of the rising prices of food items, shortages of certain goods and long lines for bread. At the time of publishing it is not possible to verify such reports, but considering the unusual situation and the inevitable disruptions in the transportation service, these might be isolated incidents, and there is no real indication that a new crisis has been added to the previous one. Nevertheless, there can be no doubt that the food situation in Iran is fragile and any slight blow to its shaky structure can trigger a crisis.

The increase in gas prices, of course, is a hard blow that affects all prices, including those of food items. Both experience and analysis show that a sudden and steep increase in fuel prices will be followed by an inflationary wave. In some ways what is happening today is similar to what happened 12 years ago [Persian link]. On June 27, 2007, the price of a liter of gas that cost 80 tomans (9 cents at the time) was increased to 100 tomans (11 cents) with ration coupons and to 400 tomans (43 cents) without coupons.

As the figures published by the Statistical Center of Iran for that period show, the rate of inflation during the preceding nine months was between 15 to 16 percentage points. But three months after gas prices were increased, inflation picked up speed. A year later, in June 2008, inflation exceeded 25 percent and by the end of the summer it had reached to around 30 percent.

In 2007 officials confidently assured protesters that the government would prevent prices from rising and that “nothing would become more expensive” — exactly the same promises they are making now. But preventing inflation by fiat can last no more than a few months and somewhere along the line prices will escape control.

The fact is that increasing the price of gas directly affects the prices of services and goods, including food. If we consider transportation on its own and assume that the fuel cost for trucks and vans will grow twofold, there is no doubt that the prices for the end-consumer will go up as well. The fact that an increase in gas prices impacts not only the cost of transportation but the cost of almost everything in the production process as a whole.

The result is that the government can keep the prices down by force for a few weeks or a few months, but then inflation will emerge more force. This is what happened to gasoline.

Between 2014 and November 15, 2019, the price of gas remained at 1,000 tomans while, according to the Statistical Center of Iran, inflation rose by at least 2.2 times. If during these years the price of gas had risen with the rate of inflation, it would now cost around 2,200 tomans per liter — lower than the median of prices for rationed and unrationed prices announced on November 15, based on the average consumption volume.

The average monthly rate of inflation from 2014 to the present has been 1.3 percent. If the price of gas had gone up by 1.3 percent every month since then, it would not only not be as expensive as it is now, it would not have had the inflationary impact on other goods and service. Nor would it have created such a shock — and such high levels of  money would not have been squandered as subsidies, with the rich as the main beneficiaries.

But experience has shown that Iranian governments, both before and after the revolution, have not believed in the laws of the economy. Instead, they have believed that they can defeat inflation, and reality, by force. Force can destroy what remains of a sound economic structure but it cannot solve Iran’s economic, social and political crises.

Related Coverage:

Iranian Officials Contradict Each Other on Gas Prices and Inflation, November 19, 2019

Who Decided to Raise the Price of Gas in Iran and Why?, November 18, 2019

Is Gasoline Really Cheap in Iran?, November 17, 2019

Who Benefits From the Rise in Gas Prices — The Rich, the Poor or the Regime?, November 16, 2019

Iranians Protest After “Sad but Necessary” Decision to Raise Gas Prices, November 15, 2019