Economics Lesson from Mahmoud Ahmadinejad

Besides Mr Kim Jong Il of North Korea, another leader that has always amazed me is Iran’s Mahmoud Ahmadinejad. His habit of taking potshots at the Western countries, particularly US has never failed to get media attention, at times taking the entire cover page of established newspapers. His latest one during UN conference on racism sparked massive walkouts and shouts of shame by the participants to the extent that Mr Ban Ki Moon had to publicly comment that Mr Ahmadinejad had misused the UN conference to further his own agenda.

Just when the world has started to put the ugly episode behind, Mr Ahmadinejad made an interesting comment on economics. In brief, the content is he has no knowledge of economics and is quite proud of it. As if to provide compelling evidence, the media reminded the readers of his insistence for interest rates to be kept low to help the poor despite warnings that it may result in high inflation.

In view of the upcoming Iranian Presidential election, we know it is politically not a good comment. By giving this single comment, he had effectively portrayed himself as the cause of Iran’s deteriorating economy and that will inadvertently reduce rather than boost his chances of being re-elected.

From the viewpoint of an economics student however, the evidence given is a very good example of the consequence of not exercising balance when crafting economic policies. For a while, I have been trying to find a real but simple example to stress the importance of balance in policy-making. That search ended this morning when I read an Economist article on Mr Ahmadinejad.

Here, the two opposing forces are interest rate and inflation rate. A low interest rate means lower cost of borrowing but the increased spending is likely to increase inflation rate which is not a good thing because it will increase the price of goods. A high interest rate means higher cost of borrowing but the reduced spending is likely to decrease inflation rate which will keep price of goods in check. The trick is to find a particular interest rate that allows for healthy borrowing but at the same time, does not increase the price of goods drastically.

In Iran’s case, the insistence of Mr Ahmadinejad to keep interest rate low so that his supporters remain happy has resulted in high inflation and will ironically make it harder for his supporters to purchase their daily necessities and continue smiling.

I am sure Mr Ahmadinejad regrets making the comment and is probably trying to find out why none of his aides reminded him to watch his mouth. Regardless I thought the comment is timely, at least for the Iranian people whom I believe deserve more than another term of firebrand rhetoric.