Tyranny of numbers

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.

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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.

CPI_ExchRate
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…)

Iran’s proposed budget for 2015/2016: tight fiscal policy to continue

Posted in General, Macroeconomy by Djavad on December 14, 2014

Rouhani’s budget for the current year (1393 =2014/2015) was a tight one, and for good reason because he inherited a macroeconomy in a shambles with a high rate of inflation.  Despite the contractionary budget, this year the economy appears to be squeezing a small positive growth rate (4.6% in the first quarter).  If Rouhani’s promise of a robust economic recovery is to turn from hope into reality, the just released Budget Bill for 1394 (2015/2016) has few indications. (more…)

Inequality of income in Iran after subsidy reform: the view from the Palma ratio

Posted in General, Inequality by Djavad on November 29, 2014

A while back a friend asked me if the Palma ratio — the ratio of the incomes of the top 10% to the bottom 40% — is a good indicator of inequality in Iran.  I waited until I had the data for 1392 (2013/2014) to answer his question.  In the meantime, I came across a banner headline in the economics newspaper, Taadol, which read something to this effect: “Subsidy reform deepens inequality.”  The claim itself was nothing new, but the reported Gini indices were: I had not seen anyone report Gini coefficients as high as 0.53 for the post-revolution Iran, and it turns out that they do not exist.

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The global sources of Iran’s inflation

Posted in General, Inflation, Macroeconomy by Djavad on November 9, 2014

The recent welcome slowdown of inflation in Iran, like its devastating acceleration four years ago, has something to do with global influences that are well beyond Iran’s control.  The credit in the current slowdown in inflation goes in large part to Rouhani’s economic team but what Iran’s economy minister, Mr. Tayyebnia, has called a “miracle”, has earthly reasons that are not even under the control of Iranian policy makers. Not realizing these influences can be misleading.    (more…)

Iran’s economic recovery: the view from employment data

Posted in Employment, General, Sanctions, Unemployment by Djavad on October 20, 2014

In my last post I examined if the quarterly growth in the GDP using data released by the Central Bank of Iran (CBI) that indicated a robust economic recovery during spring 2014.  As promised, I will now review the most recent employment figures released by the Statistical Center of Iran (SCI). (more…)

New GDP data in Iran: is recovery underway?

Posted in General, Macroeconomy by Djavad on October 10, 2014

In its recent quarterly Economic Trends, the Central Bank of Iran reported that the economy grew by 4.6% last spring (which corresponds to the first quarter of the Iranian year 1393 and the second quarter of 2014).  What appears to be straightforward reporting of macroeconomic facts has caused much controversy in the Iranian media.  Controversy is part and parcel of economic data in Iran, so nothing is new there, but in this case the facts themselves are not as straightforward as one might think.  Mr. Rouhani and his economic team insist that the numbers are a firm sign that the recession has ended, while the opposition dismisses the news as bogus.

(more…)

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