Tyranny of numbers

Distributing the oil wealth? Don’t hold your breath

Posted in General by Djavad on May 20, 2009

Presidential candidates in Iran are racing to promise giving people back their oil money.  According to the BBC Persian, Mr. Ahmadinejad plans to even include Iranians living abroad (like me).  Holding my breath, I reached for a calculator.

I wanted to know quickly how large my check would be if he were elected?  I started with the most optimistic scenario in which he gives it all away (optimistic for me because the Blacksburg municipality collects my trash, polices the streets and educates my children, not so optimistic for those who depend on government services in Iran).  I figured that next year the net profits of our oil industry should be about $35 billion (I am giving $10 billion back to the oil industry to keep its good work going).  That would make my share about $500 next year, or about $1.35 per day.  Darn, that will not go very far in paying private tuition for two college kids.   The problem is not with my calculator, it is with using  numbers where one should not because they spoil the moment.  

Perhaps this looks small to me because I live in the US, but then I thought that it might not be so impressive for those living in Iran either, at least according to the poverty lines that have been tossed about.   According to one such poverty line — 8,000,000 rials per month for the average family of 4.5–the oil check would come to less than 25 percent of the poverty line (calculator: monthly oil check=500 *4.5* 10000/12 = 1,870,000 rials). So it should not be all that hot a proposal for the average Iranian either, especially if they were to count in the lack of all government services which would ensue if all the oil money was given away.

Perhaps the idea is to finance all government expenditures, the whole $100 billion of it, by taxation. This would more than double the tax revenues that must be collected.  Maybe the right (left?) political pitch should be that rich should pay all the taxes and that way they will get to do their share for the country and all.  That might work well politically but not too weel in practice since collecting taxes in a country with no history or culture of paying taxes is not easy at all.  

In 2007, income taxes accounted for only 13.5% of all tax revenues; nearly half came from corporations and a quarter from import duties. To increase the total tax revenues by 100%, corporate taxes would have to more than double.  How would that be collected?  Remember the 3.5% sales tax proposal that closed the Tehran bazaar?  Forget about income taxes. There would be “tea parties“, Iranian style, all over Iran.  Increasing corporate taxes is a dumb idea when they are supposed to expand and create jobs for young people.

And what about jobs? How would distributing the oil wealth help with that?  Ask any parents whose not-so-young unemployed son lives with them (they are easy to find since in 2007 about 44% of all youth aged 25-29 lived with their parents) about the value of getting their oil money if it means taxing businesses who might give their son a start on his future.  Now, it would be a brave Iranian politician who would pose this question.  Or, should I say one who faced an informed electorate?

14 Responses

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  1. K. Afroozeh said, on May 22, 2009 at 10:09 pm

    @ Mr. Ghandi and Mr./Ms. M,
    That would be 1.5M to 2.5M Rials my friends; or 150K to 250K Tomans if you prefer! Sorry for the inconvenience, I thought that was obvious.

    I was basically talking about the mindset of people who are bought-off with these kind of promises.

    Although I partially agree with Mr. Hosseini about the cutbacks, I don’t think that the *full* impact will be felt by lower class, as they don’t consume much energy and it’s carriers; Theoretically, they will have the freedom to spend that money on food and health care, which heavily suffer governmental spending. I wouldn’t count on absolute decrease in quality of services for two reasons:
    1. The public service quality is at it’s feet even right now
    2. The direct spending by people will actually increase the quality in some sectors, as people will increase their demands

    The handout, even with decreased real value, still looks like a stimulus promise for the lower class electorate.

    I’d like to make clear that I too think that the outcome of such decision at best isn’t clear (More looks like disastrous to me), but there are still some valid points to argue by the adventurous.

  2. m said, on May 22, 2009 at 4:34 pm

    “Also, untrained women work for about 1.5K to 2.5K rials per month in Iran for a full time job.”

    I guess the person who wrote that sentence has never lived or even visited a small village in iran in the last 10 years.

  3. K. Afroozeh said, on May 21, 2009 at 4:04 pm

    I guess you’ve been abroad for a long time 🙂

    Well thought post, but you forgot the human factor:

    Many people (Both in urban and rural areas) have two or more jobs. Also, untrained women work for about 1.5K to 2.5K rials per month in Iran for a full time job. So, being paid about 1.9K/month will liberate many of these women from their hard and half paid jobs, giving them more time to spend with the kids. Also, a man can give up one of his jobs. As little money as it is, it will significantly increase the quality of living for many lower class Iranians.

    There’s a reason why the Oil money has been the main campaign promise in every election in Iran, in the past 50 years.

    • روزبه حسینی said, on May 21, 2009 at 8:18 pm

      “So, being paid about 1.9K/month will liberate many of these women from their hard and half paid jobs, giving them more time to spend with the kids”

      NO it will not necsseasirly! For at least two reasons:
      1- Once this money is paid, subsidies are gone. Gasoline, Milk, Bread and all other goods and services that are heavily subsidized will be sold at market prices (they better, right? that’s one of the main ideas behind such policy). There is good reason to believe that there would be a jump in the overall price level. So this positive income effect form a downfall will go away by a negative income effect from rising prices (well at least partially!). So the family has 1.9k/month more in hand (per person) but the basic grocery items are also more expensive. Those women will keep their jobs.

      2- Removing subsidies and meddling of government in the market for goods and services will change the relative prices (including real wages of unskilled labor). It is not at all clear what would that do to the incentives of unskilled women labor in participating in the job market.

      To me the issue is not the magnetite of per person share. The issue is that, even if the magnitudes are large, the ultimate effect on welfare is not clear (because of the reaction of overall level of prices and relative prices).

    • dsalehi said, on May 21, 2009 at 10:26 pm

      You raise a good point about empowering women by paying them directly, rather than their husband. Though I disagree with your assumption that the money these women will receive will not cause cutbacks elsewhere, such as paying the teachers of her kids. I agree with Roozbeh that rising prices (or taxes) would take back the handout. In the long run, there is no logic in government paying cash to people if it is taxing at the same time.

    • Hojat said, on May 22, 2009 at 11:05 am

      1.5K to 2.5K rials per month in Iran for a full time job????!!! What is this? I am confused.

      • dsalehi said, on May 22, 2009 at 3:50 pm

        Hojat, I would not be surprised to find salaries below the minimum wage because minimum wage laws are difficult to enforce in the informal sector, where many less educated women work, such is household services.

  4. Mostafa Beshkar said, on May 21, 2009 at 1:18 pm

    Very interesting and to the point. I have also written on this issue on my blog:

  5. dsalehi said, on May 20, 2009 at 6:16 pm

    Thanks. I am not a macro economist, but it is not rocket science that the rial is highly overvalued, and barring an unexpected return of higher oil prices, there will be huge pressure for devaluation. I wrote something to this effect in a Brookings post (http://www.brookings.edu/opinions/2009/0406_iran_salehi_isfahani.aspx)

    The reason they keep the exchange rate low is to keep inflation down and because in Iran importers are more powerful than exporters. Predictions are for experts (in Iran’s macroeconomics) and fools, of which I am (hopefully) neither! But since you insist, I will hazard a guess: if oil prices did not increase, and the rial was allowed to float, we could easily see dollar rise to 12000-15000 rials.

  6. a said, on May 20, 2009 at 4:18 pm

    Also 8,000,000 rials is average for Tehran (where I know that the cost of rent and education is much higher than other parts of Iran). I am not saying that is a good policy, it is a bad one, but I can understand why an ordinary person will vote for such a proposal (as many did for Karoubi’s $50/month proposal in the last election.)

    • dsalehi said, on May 20, 2009 at 6:07 pm

      That is right, this line was for Tehran. So, the check could be as high as 50% of the poverty line for outside Tehran, which is not going to making anyone rich.

  7. a said, on May 20, 2009 at 4:10 pm

    Nice post.

    ps: It seems to me there is a miscalculation, since 1$ is 10,000 rials not 1000, that is the number should have one more zero.

    • dsalehi said, on May 20, 2009 at 6:05 pm

      Thanks. You are right. I corrected the mistake.

  8. Ali said, on May 20, 2009 at 11:50 am

    It was very well orchestrated topic.
    I am wondering, if you can also touch the exchange rate Rials / Dollar. Why the government insists to keep the exchange rate down, and how we can define the actual ratio. Also what would be realistic prediction of the future ratio?


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