Tyranny of numbers

More of the same (austerity) in Iran’s new budget for 2016/17

Posted in General, Macroeconomy by Djavad on January 23, 2016

For the third year in a row the government has proposed a tight budget, keeping spending constant in real terms.  I am not sure the macroeconomics I studied decades ago has much relevance to Iran’s current economy, but the Keynesian in me says, given the economy’s dire conditions, a bit of fiscal stimulation could not hurt.  The government still believes that inflation rather than bankruptcies and unemployment as the enemy number one.  But perhaps Rouhani’s economic team is banking on the lifting of sanctions to pull Iran out of recession and generate a modest 5% growth.  This seems to be also what the IMF expects.

Understanding the rial’s strength

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on January 18, 2016

Last month a headline (link in Persian) in Eghtesad News read: “Do not buy dollars, it will get cheaper”!  More surprising than the headline was who said it: Iran’s Central Bank Governor, Valliollah Seif.  As his critics were quick to point out, it was unwise for the one official whose economic predictions should be muted and very general — the US Fed’s statements about the future need expert decoding — to claim to know which way the exchange rate will move in the future (you can read here — in Persian — the CBI’s lengthy explanation for the controversial remarks).

Well, that future has arrived and the Governor’s prediction did not come true. If he was trying to stop the slide of the rial, he did not succeed, for as the “implementation day” for the Joint Comprehensive Plan of Action (JCPOA) approached and the prospects of the $30 billion return to the Iranian economy strengthened, the dollar actually gained in value and the rial weakened (see nominal rates in the chart below).  This not to suggest that Mr. Seif was actually mistaken about the course of the rial, only that his statement may not have reflected his own beliefs.  In any case it is foolish to trust the advice of a central banker about the exchange rate, even one that supplies more than half of the foreign currency, when he is trying to stabilize the exchange rate with little foreign exchange in his coffers.  The Economy Minister, Ali Tayyebnia, quoted in the same news item, was more philosophical in his advice to investors: “price determination is God’s work.”  His attempt at dispelling the notion that the Central Bank was manipulating the exchange rate, was contradicted by a former governor of CBI, also quoted in the same place, that the dollar would be stronger were it not for the government’s injection of dollars into the free market.


Khodadad Farmanfarmaian: a personal remembrance

Posted in General by Djavad on December 22, 2015

Khodadad Farmanfarmaian, the chief architect of Iran’s economic miracle in the 1960s, passed away in London on December 16, 2015 at the age of 87. He was one of the Shah’s few good men, and helped launch Iran’s “decade of economic miracle” in the 1960s, before 9% annual growth rates became commonplace in Asia. He held key positions before the revolution as the Governor of the Central Bank and the head of the Plan Organization. In 1973, he broke from the Shah, whom he described as having “no real understanding of economic development,” over the ill-advised and ill-fated upward revision of the Fifth Plan in 1974.

I did not know Farmanfarmaian closely, but I admired him as a professional economist and development practitioner. He set high standards for integrity in public service and should be a role model for economists who are interested in using public policy to improve the life of ordinary people in Iran. He also had a critical impact on my career and is the reason I became an economist.

I first met Farmanfarmaian in the summer of 1967 when I, a fresh high school graduate, competed for the prestigious Central Bank scholarship to study economics in England. From several hundred candidates who took the written exam, a select group of about 30, including myself, were invited for an interview. As the senior vice present of the Central Bank, Farmanfarmaian chaired the formidable committee of about a dozen members who interviewed and picked the seven lucky candidates. Among other things, the Bank was keen to choose those students who were most likely to return and serve the Bank (for twice the length of the scholarship). Parents of grantees would offer real estate property as collateral to ensure they would return.

During the interview, Farmanfarmaian, sitting at the head of a large oval table, surprised me with a question about marriage! Might I marry someone abroad and therefore not return to Iran? I tried to address his concern the best I could, mainly saying how cultural differences doomed marriage to “foreign women.” Farmanfarmaian let me finish my high-school-composition speech and then said, “I disagree! I am happily married to a `foreign woman!’” Caught off guard, I thought “There goes my education in England,” and decided to enroll at Tehran University to become an engineer.

But I was wrong. Not only did I pass the examinations, I learned later that Farmanfarmaian had liked my interview. Two months later, when I failed to come up with the necessary collateral for the scholarship (we lived in government housing so my parents did not own any property) and given up on studying abroad once again, the personnel department of the Bank called to tell me that Farmanfarmaian directed them to let me go without the required collateral. I think he did this out of a belief that, as Mehdi Samii put it to me, Iran needed highly trained policy analysts that hailed from the middle class. Modern economics, then as now, was taught at the graduate level only in the West. Up to that point, only the children of the upper class could take advantage of such education, so the Bank subsidized it.

Early in November of 1967, nearly two months after school had started, I took off for London.

Years later, after the revolution, I had the good fortune of seeing Farmanfarmaian several times and became very fond of the man who played a key role in my becoming an economist. I was not always as grateful as I am now for his help. Early in my economics education, at the University of London, I hated the subject that the bank had forced on me (the decision to study economics was the Bank’s, but the decision to take the scholarship was mine!). Despite this, London was a fun place in the late 1960s, so the sacrifice of giving up engineering seemed well worth it. My thinking about economics changed radically half way through my PhD studies at Harvard, when I fell in love with the subject.

In the early 1980s, as part of my research on the pre-revolution credit crisis (the results of which were published in 1989), I travelled to Cambridge, MA to meet Farmanfarmaian for the first time since the 1967 interview. He was visiting Harvard at the time, having left Iran after the revolution. To get the appointment with him, I mentioned among my credentials the Central Bank scholarship, my Harvard PhD, and my job at Penn, so when I arrived at his apartment door at 1010 Memorial Drive he knew who I was. He opened the door, standing tall next to his wife, Joanna, brandishing a warm smile. While still at the doorway, he turned to his wife and said something that has stuck in my mind: “Everything I did in Iran has gone to naught; he is all that remains of my efforts!” His reference to me was, of course, to all Bank scholarship students. Years later in a conversation with me he mentioned the Central Bank scholarship program as one of the three accomplishments he was most proud (I forget what the other two were).

I should have corrected him right then, reminding him of his great work to promote economic development in Iran, but I think I was too much in awe of meeting him for the first time after the 1967 interview.  I am happy now that I did so later. Last summer, when I heard of his illness, I sent him an email with this paragraph:

“As you know, I have great admiration and utmost respect for you, not only as someone who influenced my life (and that of many other Bank [scholarship] students), but also as a role model for future Iranian economists.  Your professional integrity, great sense of purpose, and achievements are the standard by which we judge all policy makers that have come after you.  While you were in government, as brief as it was, you influenced the course of economic development and with it the lives of millions in Iran.”

Growing up in Neishabour in the 1960s I was a beneficiary of his vision. In his memoires he talks about the critical importance in the late 1950s of extending the availability of clean piped water to smaller urban areas. With the government coffers empty, he and his team at the Plan Organization came up with a creative plan to help local governments to finance the project. While in high school, I recall our streets being dug up to lay the pipes.

The scholarship program he set up with Mehdi Samii has had a lasting influence on the economics profession in Iran, producing such well known economists as Hashem Pesaran, Esfandiar Maasoumi and Firouz Gahvari, now all living in the United States. But that initiative pales in comparison with his contributions to building basic infrastructure, which became the backbone of the 1960s economic miracle.

Once, about 10 years ago, I reached out to Farmanfarmaian and Mehdi Samii to invite them to an event organized by the Central Bank students to honor them. Unfortunately, neither was able to attend (Samii was too sick to travel and Farmanfarmaian excused himself noting unforeseen travel). Some 40 former students gathered in London in August 2006 to hear a poignant speech by Hassanali Mehran, a former governor of the Central Bank himself, honoring the two visionary leaders who made economics education at the highest level accessible to the children of middle class families.

Despite his accomplishments, Farmanfarmaian was a modest man. In responding to this invitation, before he realized he could not make the celebratory event in any case, he tried to dissuade me from organizing it. His reason was revealing. He said that he was unable to attend evening events because after he left work at 6 pm, he usually went straight home to attend to his wife, Joanna, who was not well, the same “foreign wife” he had mentioned in my bank scholarship interview some 40 years earlier. He lamented the fact that at 75 he had to work full time to earn a living. He was still working at 87 when he fell ill several months ago.

Is the Tehran Stock Exchange a good barometer of Iran’s economy?

Posted in Employment, General, Macroeconomy by Djavad on October 10, 2015

The Tehran Stock Exchange (TSE) has been in the news lately, not because its 22-month downward slide has ended but because four cabinet members highlighted its plight in a letter to President Rouhani.  The letter was written on September 9 but came to light last week.  The brouhaha that followed, however, was not about the TSE and what its poor performance means for the economy, which appears to be heading for a double-dip recession.  Attention has instead focused on division within Rouhani’s coalition government and what it means for the future of his austerity program.  I wrote about these issues for Al Monitor last week; here I’d like to take a closer look at the performance of the TSE — how badly it has done, and why. (more…)

Will Rouhani complete the reform of subsidies?

Posted in General, Inequality, Poverty, Subsidy reform by Djavad on September 9, 2015

In principle, the answer to this question should be yes.  Rouhani’s administration professes to be pro-market and is eager to shift resources from wasteful consumption to economic growth.  What better way to remove energy subsidies and use the proceeds to fund the cash-starved development budget?

That is in principle; in practice there are two problems.  First, the subsidy reform law within which the Rouhani government must operate is  the legacy program of the Ahmadinejad administration, which it has endlessly criticized and is loath to emulate.  So they have condemned the subsidy reform program without carefully examining its pros and cons.    In particular, they fail to understand the serious adverse consequences of subsidy reform on the lives of the poor, and the need to protect them, for example, by offering them cash transfers as compensation.

Which brings me to the second problem.  Rouhani’s economic team has condemned the cash transfer program using such unfortunate language as “fostering beggars.”  They must infuriate millions who depend on the transfers to make ends meet at a time that prices for energy and bread are rising and they unable to replace the lost purchasing power with higher wages.  The strong negative view of cash transfers in the current government is likely to prevent it from fully implementing a reform which is good for the economy, the government’s own budget and the environment.

Since coming to power, Rouhani has raised bread and energy prices (by roughly 50%) without increasing the amount of cash transfers (now worth less $15 per person per month).  The highest price increase has been for gasoline, from about 4800 rials for the average liter (counting liters sold at 4,000 and 7,000 rials) to 10,000 rials per liter (about 30 US cents), still half the US price and one fifth of the average price in Europe.

Oddly, in the last installment of the adjustment, in May 2015, it was the lower price that was raised (from 7,000 to 19,000 rials per liter) while the higher marginal price remained unchanged.  In the name of price unification, richer consumers were allowed to continue to get gasoline at half the price in Iraq and Afghanistan and one-sixth in Turkey, while the smaller users were asked to pay more.  I cannot understand the urgency to unify the price of gasoline when the smart card introduced by Ahmadinejad (a clue?) enabled  sensible price discrimination favoring smaller (and most likely poorer) consumers.

In this week’s Persian weekly Tejarat Farda (issue #145) Mohammad Mostafavi-Dehzooei and I argue (link in Persian) that removing all the remaining subsidies without increasing the amount of cash transfers is highly impractical.  We also argue that with proper targeting of cash transfers to the poor the amount of compensation needed to prevent poverty from increasing is reasonably small leaving some money for  government revenues.  It is true that cash transfers were too generous at the start of the subsidy reform program in 2011. This was a costly mistake that bankrupted the Ahmadinejad government, fueled inflation, and undermined the whole program (as I have argued before).  But now the transfers are worth only one-third of what they were before and therefore no longer too generous.

The main remaining problem with the cash transfer program is that it is paid evenly to the rich and the poor.  That Iranian parliament has mandated the government to stop paying the rich (easier said than done).  The government claims to have already dropped 2 million undeserving individuals from its roster.  This is good news but as the government goes down the very murky distribution of wealth the number of deserving people who are dropped by mistake will rise exponentially.  Surely not a wise thing for the government to be doing in the the month before the crucial  parliamentary elections this February.  In the end, lack of proper targeting of cash transfers is a poor argument for continuing to distribute energy subsidies in a highly unequal way.

Given the stagnant economy and large gaps in Iran’s social protection, I believe that raising energy prices further should be coupled with increase in cash transfers.  To seriously consider doing so, policy makers must first stop calling cash transfers beggar fostering.  To pay people a small share of their hydrocarbon wealth in cash instead of cheap energy (or bread) so they can decide how to spend it is a reasonable proposition no matter how unreasonable was the person who thought of it first.

Getting the facts right on Iran’s economic growth

Posted in General, Inflation, Macroeconomy by Djavad on July 31, 2015

A post on Iran’s GDP may seem very wonkish, but it is actually very relevant to two important political debates. One is the current debate in the US about Iran’s economic prospects and the other is the never ending debate in Iran about the economic cost of the Islamic Revolution of 1979.  Neither seem to be well informed with the facts. (more…)

Reporting of economic data in Iran: an old rivalry resurfaces

Posted in General, Inflation, Unemployment by Djavad on June 16, 2015

It is a good sign that people in Iran are paying increasing attention to the accuracy of government data.  Before this they used to dismiss all data, especially inflation, as propaganda (see my previous posts on inflation here and here).  The fact that an announcement about which government agency is authorized to release economic statistics became news last week is a sign that more people take such data seriously, as they should.


Ahmadinejad’s oil windfall: how large was it really?

Posted in General, Macroeconomy by Djavad on May 24, 2015

You have probably read or heard very knowledgeable people talk about the $800 billion of oil revenues earned by the Ahmadinejad administration (for example, Iran’s Economy minister quoted in the Guardian here and Robin Wright speaking on NPR’s Diane Rehm show here), and that this is more than all the revenues earned from oil in the preceding 100 years.  Well, don’t believe them!  Repeating things frequently makes them sound more true but does not make them so.  Yes, the oil windfall of 2005-2012 was larger than all the revenues earned in the preceding century, but this is not true in terms of real dollars and therefore not really true. (more…)

Iran’s economy after the Lausanne accord

Posted in General by Djavad on April 16, 2015

This week I published this oped in the UAE newspaper, The National.  Referring to Rouhani’s famous refrain that as the centrifuges turn so should the wheels of the economy, I asked if “he can take much of the turning to production lines rather than shopping malls.”  I would like to expand on that question here.

The answer depends on the extent to which any easing of sanction will help stimulate production instead of consumption.  Everyone expects a huge inflow of foreign exchange as a result of the release of Iran’s frozen funds abroad — some $100 billion according to reports, though none with a reliable source.  This is about the highest Iran has earned in oil revenues in any one year.  Adding oil exports of about $50 billion, we are talking major stimulus.

Or at least these are the expectations that have kept the dollar steady at the 33000 rial mark for the past several months as optimistic news from the nuclear talks has been trickling in.

But the current value of the dollar in Tehran is at least 25% below what it should be given that Iran’s higher inflation has outpaced that of its trading partners by a factor of 5 in the last dozen years.  The graph below shows how much faster Iran’s prices have risen relative to prices in US and OECD (5.7 times in the last 12 years) and that the exchange rate adjustments have failed to keep up with the difference.  As a result Iranian goods are about 37% more expensive relative to foreign goods than they were 12 years ago.  Assuming that the exchange rate unification in 2002 put the rial at its correct value relative to the US dollar that year, the rial should be trading at 45532 rials per USD now, not 33000 rials.

Notes: All price indices are normalized to 100 in 2002.  US and OECD CPI are virtually the same.  The exchange rate (ER) is rials per dollar normalized to 100 in 2002.

So why are so many Iranians expecting the dollar to become even cheaper?  Is their priority to make weekend trips to Dubai and Istanbul as cheap as it was before the sanctions?  How is the economy going to create 3 million news jobs for the country’s unemployed youth?

Iran’s middle class, about 45% of the population, meets all the criteria defined by its international counterpart except one — productivity.   All over the world the value of a country’s currency has close relation to its citizen’s productivity.  Not in Iran.  Instead it depends on productivity in other countries, who buy Iran’s oil.  The more productive they become the more they are willing to pay for imported oil and the richer are the people in oil exporting countries.

Cheap dollar — sustained by high oil prices — is one important reason behind Iran’s continuing economic malaise, and, unfortunately, the ailment gets worse precisely when its citizens think they are doing well.

Rouhani’s challenge is to get the middle class, who are among his more steadfast supporters, to take the high road to prosperity, to strive for higher productivity rather than quick benefits from the likely inflow of cash; look for jobs for their young instead of furniture for their living rooms.

More on Iran’s proposed budget for 2015/2016: a peak into Rouhani’s priorities

Posted in Education, General by Djavad on December 18, 2014

This is a short followup note to my previous post which compared the proposed budget for next year with the budget bill for the current one.  I was looking for a table that included the numbers for basic expenditure items that would reveal the budget priorities for next year and could not find one in English, so I decided to post one here.  Then I found an excuse to grumble about lack of attention to long term development priorities, such as education, which have been eclipsed by all the talk about inflation as enemy number one and the poor climate for business as the enemy number two.    (more…)


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