One of the weakest aspects of Iran’s presidential election is fact checking for economic claims made by the candidates. For example, the other day candidate Gharazi seemed to imply that as Minister of Oil for the Rafsanjani government in the 1990s he was responsible for keeping the world price of oil high. He claimed that the world oil price dropped by about 50% when president Khatami replaced him by a reformer. It is a tall claim that a minister responsible for less than 5% of the world oil supply could have such a large influence on the global market.
Mr. Rezai made a similar exaggeration when he said the rial has lost two-thirds of its value since last year. True, in the free market for foreign exchange the rial fell by two-thirds last year, but prices have not tripled, as his remark implied. This is because imported goods account for only a proportion of consumer goods, and not all imports are bought with this rate.
But perhaps the prize for exaggeration goes to Mr. Aref, the reformist candidate, for claiming that 44% of Iranians are poor. If you assume that the 44% poverty rate also held for 2011, the last year for which Iran’s Statistical Center has released the raw data, it is easy to deduce the level of per capita expenditures (pce) that he has in mind as the poverty line. It is a whopping 61,500 rials per day (roughly $12 using the World Bank PPP rate of 5006 rials per USD for 2011). Unfortunately for Mr. Aref, the same poverty line implies a higher poverty rate for 2005 (47%), the last year of the reformist government in which he served as vice president.
Of course, these outcomes are not entirely the result of government policies, and Iran’s economy faces different challenges in 2011 than it did in 2005. But such cavalier use of data by politicians is not becoming for a country that claims to have reached a high level of scientific maturity and which wants to take its electoral process seriously.
The graph of the cumulative distribution functions of the pce for 2005 and 2011 also show that if we pick a lower poverty line, one more in line with international standards, of about $4, or 22,000 rials, we we notice a larger drop in poverty, from 7.1% to 4.3%. The cdf’s also show a decline in inequality. This is most likely the result of the cash transfer program administered under the Ahmadinejad government. Whether or not this was the best way to help the poor is another matter. I have been critical of his liberal import policy that hurt the Iranian economy during these very years, but that criticism is based on the poor losing jobs, not cash. I happen to believe that giving the poor work is much superior to giving them cash, but then that is a debate for another time.
The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months. The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%. This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year. This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future. (more…)
What is described as the second phase of Iran’s Targeted Subsidy Program appears to be on its way to implementation after the parliament approved to increase the size of the program to 660 trillion rials (about $54 billion using the official exchange rate), denying the government its request for a much larger program (1,350 trillion or $100 billion). The compromise allows the government to increase prices of subsidized goods and at the same time raise the monthly payment of cash to families by an as yet undetermined amount. Some reports suggested that the current cash rebate of 450,000 rials per person per month could increase by as much as one third for the remainder of this year, which ends on March 20, 2013. The timing of the second phase is unknown but there is no doubt that it will happen. Getting the parliament to authorize the second phase means that the subsidy reform program has passed a crucial test, all the more because the economy is under stress from the effects of past inflation, sanctions, and general macroeconomic mismanagement. The critics who wanted to stop the program on its tracks have had a field day in pinning various failures onto the reform program. For the time being they seem content with having slashed its extravagant proposed budget. (more…)
My post by the same title a year ago that featured a graph developed by Branko Milanovic was the second most visited post on this blog last year (after one on Iran’s energy subsidies), receiving 912 views. So when I learned last week that he has been working on an update of his analysis of the world distribution of income, I requested an updated graph. Branko was the keynote speaker at an Economic Research Forum conference that I attended in Cairo, where he was introduced as “Mr. Inequality”. His new results show that Iran’s position in the world distribution of income improved between 2005 and 2008, something that should surprise no one since during this period Iran was the recipient of about $200 billion worth of transfer from the rest of the world as oil income. (more…)
A recent article on Tehran Bureau’s website portrayed urban Iran as “a sea of poverty”. This stark description was based on the calculations made by three Iranian researchers that showed as many as 55% of urban Iranians were below a poverty line set at 58,035 rials per person per day (more on the methodology of the paper later). For an unpublished study that was relegated to the poster sessions of a conference in Tehran it has been hugely successful, getting quoted in dozens of Persian and English language websites. The reason is not the study’s novelty of techniques or approach, which is standard, but is its extravagant claim about Iran’s poverty rate, which appeals to those who think the news portends political change. Although I have seen even higher claims of poverty rates for Iran (as high as 90%), those did not make it to the prestigious TB, which is part of the PBS/Frontline website. So I decided to write a reply to set the record straight. (more…)
This oped of mine on Iran’s subsidy reform appeared on the Brookings website on Thursday. Suzanne Maloney of Brookings also wrote a nice piece on the same program, viewing it as a possible solution to Iran’s economic problems, which is a fresh approach instead of the more usual view that we have come to expect from commentators in Iran and the West — as the harbinger of economic ruin. I think the program’s initial success to raise prices at one go without mass protests is noteworthy, and perhaps a model for other Middle Eastern countries to follow, but its overall success depends on two things: (a) whether consumers will use the cash rebate to pay their energy bills and buy local goods and services, like health and education, or spend it on luxuries imported from China, like LCD televisions; and (b) whether producers can manage to stay afloat, by hook or crook, without shutting down or laying off many workers, long enough for the economy to adjust to the new price levels. Both of these depend on complimentary economic policies that the government will introduce in the next few months to improve the business climate in Iran. As usual, reform of the markets for labor, credit and foreign exchange are at the top of the list for action.
Branko Milanovic is a leading authority on the global distribution of income. His influential 2005 book, Worlds Apart provided the most comprehensive account of how global inequality has evolved over time. He has just completed the sequel (The Haves and the Have-Nots, Basic Books, forthcoming), which updates his earlier analysis using survey data on income and expenditures from 119 countries for 2005. He finds that despite rapid economic growth in China and India, two very large and poor countries, in recent years global inequality has remained constant and very high (Gini index = 0.80). I asked him to help me understand where Iran was located in the global distribution of income, and he produced this amazing graph. (more…)
The Fifth Five-Year Plan of the Islamic Republic of Iran (1389-93, 2010–14), still under review by the parliament, has a clear goal for reducing inequality in five years– a Gini index of 0.35 for income. This is a substantial reduction from the high level of inequality that has plagued Iran in recent years. The law for targeting of subsidies, which was passed last January but is still in limbo, is the main instrument for reaching this target. It aims to raise prices of energy products to world prices during the plan period and redistribute half of the proceeds to lower income households. How radical would the redistribution have to be for the government to reach its inequality goal? (more…)
This week the bill to target subsidies, intended mainly to reduce subsidies for energy products, left Iran’s parliament (majlis) for the Guardian Council. The Council has the last word on matters legislative, and may well decide to kill the bill because the government does not want to implement it with the modifications added by the parliament. President Ahmadinejad, known more for its populist inclinations than pro-market sentiments, has taken an unlikely position to reform Iran’s $60 billion subsidy program (more than 15% of national income) on energy, food, and a few other items. But the dispute over who should control the revenues saved from the bill’s implementation (the subsidy fund, for short) threatens to derail this historic effort to wean Iranians off cheap energy. If the bill survives the Guardian Council, it is sure to die in implementation. Raising prices for basic commodities in the highly charged post-election political atmosphere of Iran is difficult enough, an unwillingness government is not likely to forge ahead with doing so. (more…)
At long last and after decades of talking about doing something about the subsidies, there is a bill before Iran’s majlis to target (but not remove) subsidies. I could not locate the bill itself but my impression is that it only addresses energy subsidies and not other subsidies such as food and medicine. So far only 5 of the bill’s 14 articles have been passed, but the government already has the mandate to raise prices on energy products over the next five years. The bill has been criticized from both the Right and the Left, which leads me to think it must be a move in the right direction. (more…)