Iran is best known as an exporter of terror and mayhem around the Middle East, but its leaders also provide a great example of how not to run an economy. Consider the country’s decades-long dalliance with industrial policy.
The Islamic Republic is big on economic self-sufficiency. The 1979 revolution led by Ayatollah Ruhollah Khomeini was based on a rejection of Western ideals, including globalization. One goal is to grow all its food domestically. Agriculture “must be the basis of everything,” Khomeini said. The problem is, water is the basis of agriculture, and Iran is running out of it.
The country of 90 million people has a mostly arid climate and not much comparative advantage in large-scale farming. The government has tried to create that advantage with fertilizer subsidies and promises to buy crops. It offers loans on favorable terms for farmers. It has nearly doubled the amount of irrigated land since 1979.
The policies created millions of agriculture jobs, and farms produce crops they couldn’t absent government support. Yet skeptics of Iranian central planning have long predicted that this collection of policies would inevitably lead to water shortages.
In a functioning market, where water has a price, the Iranians and the Soviets before them would have been alerted to their water shortages ahead of time. The price of water would rise, encouraging farmers to develop more water-efficient methods, grow different crops or find another line of work. Free trade would allow them to make up the difference by purchasing crops from other countries better suited to grow them. But markets were subordinated to ideology, which meant the farming had to occur no matter what. It was in the national interest, the politicians said.
The result has been predictable. Reservoirs around Tehran are at dangerously low levels. Water rationing is in effect. Iran’s president has even said the country’s capital city will need to move. And the government still cannot abide a market price for water.
Industrial-policy advocates like to point to a few apparent success stories, mostly in East Asia, when making the case for more government involvement in the direction of the economy. But those are the exceptions. The rule, even in East Asia (see: Japanese aircraft or Chinese semiconductors), is that industrial policies either fail or succeed at such a large cost that they do more harm than good.
Elevating domestic production to a guiding principle of economic policy doesn’t always drain the water supply, but it does always come with side effects that planners don’t expect. If international trade makes countries worse off and industrial policy makes them better off, Iran should be rich by now.
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