Q: Please explain about economic stages and developments in Iran. A: There are economic realities that cannot be ignored. We are facing a sustained inflation, which is nagging people. If we could not solve livelihood problems facing people, social crises will become progressively worse. Reconstructing people's purchasing power is the biggest challenge that should be addressed by the government. Our revolution sought to spread social justice and we must not forget this. I have divided post-revolution years to three eras in terms of people's livelihood. The first period started soon after the establishment of the revolutionary system and stabilization of the government in 1981 up to the end of war in 1988. During that period, average annual inflation rate stood at about 18.5 percent; that is price index increased by about 220 percent during that whole period and rose 3.2 times. The reason was an all-out war in the country. At some junctures, especially in 1986 our oil revenues hit a minimum and oil price fell below five dollars per barrel, so that total oil revenues in that year was only 5.678 billion dollars and total revenues for 1986-88 stood at only 21 billion dollars, while our defense expenses were not ordinary. In fact, if consumption in the country had not been controlled during that period through rationing the inflation rate would have been much higher. I remember that when I took charge of the Central Bank of Iran the late Dr. Nourbakhsh gave me a good advice. He said, "Due to budget deficit we are facing problems with money supply and I am keeping it at CCU. Furthermore, you must try to make the Central Bank independent again." With regard to money supply I told him that I would take it out of CCU. Up to that time 10 toman and 20 toman bank notes accounted for main circulating notes while based on calculations, the best combination was that of 50 toman, 100 toman and 200 toman notes. We changed combination of notes without increasing the money volume. On the other hand, developing a barter chamber for documents of the country's monetary centers and holding regular meetings with the managing directors of banks solved problems with money supply completely. We even managed to reduce ratio of circulating bank note and coins despite high budget shortage of the government and reduced it from 22 percent to 16-17 percent. During the second period that extended from 1989 to 1996, the average inflation rate was 24.7 percent and the price index increased from 14.52 percent to 85.26 percent. In fact, the general level of prices increased 5.8 times and the purchasing power of money decreased 83 percent. During the third period, that is from 1997 to 2002 the price index increased from 85.26 percent to 205.98 percent which indicated a 2.4 times hike in rial costs of the household compared to identical consumption in 1997. That is, during this period, purchasing power of the national currency was weakened about 59 percent. Of course, payments to the salaried had increased by about 100 percent, but expenses had risen 141 percent and in view of cumulative weakening of the purchasing power from previous years, we moved in the direction of marginalizing people's purchasing power and this was dangerous. Another index for comparing the said three periods is the situation of gross domestic product. During 1980-1988 the gross domestic product at the fixed price increased at an average annual rate of 0.9 percent from 27,000 billion rials to 28,796 billion rials. It should be noted that during this period, we were faring under war and economic sanctions and had difficulty in supplying many needed commodities. Our ships were even confiscated at the European ports. The credit documents opened by us were not accepted by the European banks and they said the credits should be confirmed. They did not accept our credit and this was the biggest pressure on the Islamic Republic of Iran which had increased risk of exporting goods to Iran. We managed to solve this problem in subsequent years and make them accept our credit documents. Anyway, although the 0.9-percent growth rate registered in those years is very low, it could be justified considering all conditions. Per capita income is a good index for comparison too. In 1981, our per capita income at the fixed price of 1990 was about 657,000 rials, which decreased to 555,000 rials in 1988. The main problem was excessive growth of population, which amounted to 3.5 percent per year. Anytime that the government wanted to do something about that problem, it faced strong opposition. In the years subsequent to 1989, the government paid serious attention to family planning and one of its biggest achievements was reducing population growth rate to 1.7 percent. This was only a job for a brave personality like Hashemi Rafsanjani. During 1989 to 1997, average economic growth rate stood at 5.9 percent which was acceptable. However, standard deviation for that period was high and despite considerable growth rate, we faced many fluctuations during that period. Average per capita production growth was 4.1 percent. But there were several major reasons for the weakening of the national currency during that period despite many international achievements. Firstly, investment programs, especially in the state sector were accompanied by too much pressure. Perhaps the government had better to leave such investments to the private sector. However, our private sector was still incipient at that time. Secondly, the volume of developmental projects in the country skyrocketed while our capacities were limited. The third point, which is most important, was incompatibility between monetary and forex policies and our economic system. We could have thwarted the untoward effects of the first two causes through adopting suitable monetary and forex policies. However, due to severe weakening of the national currency and unsuitable policies adopted for grating facilities, the inflation and falling purchasing power were made worse. When I took charge of the Central bank, the balance of facilities in the service sector was more than 52 percent of total facilities and we reduced it to 44 percent. On the opposite, more facilities were granted to production sector. During the next period, when banks were made to pay more facilities, this was discarded. In fact, both the forex price increased for producers and monetary policies were oriented toward granting facilities to commercial and service sectors. During 1998-2001, gross domestic product grew at an average annual rate of 4.6 percent and population growth was lowered to 1.6 percent; that is, 0.1 percent less and now we must decide about an optimal population growth rate. As a result of these two growth factors, per capita domestic production reached 2.9 percent, which was not appropriate given the inflation rate. Q: What was the situation of investments at that time? A: The private sector could not be expected to make considerable investments during the first period (1381-1388). However, the share of government in investments dropped from about 38.4 percent in 1381 to 29 percent in 1388, which indicated government's attention to private investments. Of course, we can argue that since the government was facing budget deficit its share of investments had decreased. However, if we pay attention to 1383 and 1384 which marked the acme of oil revenues, we would see that the government's share did not increase 32 percent and the government was determined to promote private sector's investments. Average share of the government in capital formation between 1981-88 was only 34 percent. During 1989-97, share of the government in capital formation decreased from 29 percent to 36.7 percent. Even in 1993 it reached 48 percent. The figures show that the share of the private sector in the said period was not added in absolute terms so that we could attribute reduction of its share to a rise in the absolute value of investments. Of course, it was a period of reconstruction for the country and development of infrastructures was pursued seriously. For example, during the first period four dams were built in the country, while more than 70 dams were built during 1989-1997. Anyway, average share of the government in annual capital formation was 37 percent, which decreased to 34 percent during 1997-2001 (it hit 21.7 percent in 2002). The figures show that share of the private sector in investments was rising again. Q: What you said makes one think that despite the efforts made during the war and reconstruction period, serious attention had not been paid to expert views. For years, they said that the Iranian economy needed surgery and adjustment policies aimed at that goal. Can't our economists find a cure for the ailing economy? A: The phrase that 'economy needs surgery' is a generality and not an accurate diagnosis. Are all surgeons unanimous in this regard and has the affected organ been identified with precision? Where that surgery should be carried out? Unfortunately, economic authorities committed a big mistake at a certain juncture. Despite remarkable international achievement during 1981-88 and 1989-97, they devaluated the national currency. Devaluation of the national currency is a powerful tool, but should be used on suitable grounds. When our economy is totally state-run, such a devaluation would mean budget deficit. The first step should be improving structure and increasing productivity. The investment return in our economy is less that investment in countries with a medium economy. Productivity of production factors in our country is less than the neighboring countries. Under such circumstances, what would foreign investment mean, but becoming more indebted? Q: It seems that expert views does not play a great role in government's decision-making. What is the reason? A: One of the problems with an economic system based on rents is that thinking is not valued appropriately. Management, politics and economics and intertwined and cannot be considered separately. When we talk about political development, we cannot be indifferent to economic development and vice versa. It seems that we cannot attract thoughts. We need maturity in terms of management and politics. To attain that maturity, we need attention to the elite. The government tries to support education, but raising the elite is a job for parties. As long as out political system is not base on party activities, we will have problems. You just look at the controversy regarding the upcoming elections. Neither executive boards are to blame, nor supervisory boards or the Guardian Council. The main problem is with the procedure. In London, they use electoral cards. Each district elects its own MPs and there are three parties, two of which are main parties and one is marginal. In each district, three candidates are introduced by the said parties and if a candidate wishes to stand independently, they should pass through hard screening procedure. The electoral cards are sent to people's homes one week before the elections. The cards carry the names of three candidates. All you have to do is to tick the name of your favorite candidate. The returns would be made public half an hour after the end of voting. Here we expect people with low education to elect 30 people out of 1,000. It is clear that everybody would ask other people to write names for them. I believe that we lack a culture for attention to the elite and the few elites will be easily discouraged due to our behavior. In an economy based on rents, since earning revenues and productivity are not the result of balanced competition, those taking advantage of rents do not pay attention to thoughtful people. Such an economic system will damage production too, because it is not based on science and technology and, thus would be incapable of international competition. When there is talk about joining the international economy, a rent-based economy not capable of international competition would be at loss. If we compare investment return in our country with country X over a 20 year period, we would see that when we have created 5 million jobs they would have created 220 million jobs. In fact the return of investment in our country would be 2.5 percent and this would mean wastage of resources. An economy based on rents would lead to unequal distribution too and would deepen the class division. Q: You are against devaluation of the national currency, while it is a classic principle and money devaluation will increase exports and reduce imports. Even Iranian exporters complain about the fixed rate of dollar's parity and say it hampers exports. A: I believe that devaluation of the national currency will not boost our non-oil exports. The money devaluation is a theory related to foreign trade structure. However, since we never tried to improve the structure of the foreign trade, but tried to make up for budget deficit, we never studied the foreign trade accurately. In 1995, the government suddenly implemented the economic stability program and asked for forex certificates. Non-oil exports at that year were announced at 4.8 billion dollars, but the private sector was facing problems because they could not give forex certificates and they had announced a higher figure for their exports. Despite devaluation of the national currency which increased dollar's parity from 7 tomans to 300-400 tomans, exports failed to rise. During that time a renowned international periodical put the value of Iran exports at 2.2 billion dollars. Our exports face low demand and since productivity in the country is low, devaluation of the national currency is used to make up for that low productivity. It is generally believed that the price should only be used as a tool for a commodity international demand for which is high. The main problem with our approach was that we started with the effect and not the cause. The major advocates of economic adjustment policy in the world are two people. First, Mohsen Khan from Pakistan who came to Iran and told us that stabilization was more appropriate for the Iranian economy than adjustment. The other advocate who switched from presidency of the International Monetary Bank's department for economic studies in 1992 to head the Central Bank of Israel focused on the economic stabilization in that country. I believe that we face serious problems for identifying the reasons of structural economic problems. As put by Imam Ali (AS), "Correct diagnosis is half the treatment." (Hamshahri daily, Feb. 7, 2004)