Tyranny of numbers

Signs of the economy slowing–anyone in charge?

Posted in Employment, General, Macroeconomy by Djavad on August 30, 2009

The recently published unemployment data for spring 2009 (1388) indicate that economic slowdown continued in the second quarter of 2009.  Without the national accounts data for 1387, due any day, it is difficult to be certain about the severity of the current economic slump, but unemployment and inflation data and  the continuing political crisis in Tehran are reasons to be concerned about the economy. 

Last spring unemployment registered 11.1 percent, which is lower than the winter (1387) unemployment rate of 12.5% but quite a bit higher than where it stood last spring (9.6%). Assuming that the size of the labor force has remained constant, this means that compared to last spring an additional 360,000 people joined the ranks of the unemployed in spring 2009.

The much lower inflation numbers for Tir 1388 (Jule/July 2009) released by the Central Bank are ordinarily good economic news but this time it may be further evidence of slowdown. During the month of Tir the CPI rose by only 0.1 percent, which is an annual inflation rate of 1.2 percent without seasonal adjustment.  (Some prices, such as fruit and vegetables, are still rising fast, probably because of supply constraints, and as much fruit as Iranians eat average expenditures on fruits and vegetables are less than 10 percent of household expenditures).   So the tight credit policy of the Central Bank for the past year or so has succeeded in containing inflation but at the cost of rising unemployment.  Has the Central Bank  pushed too hard on the brakes?

The crucial GDP figures for 1387 (2008/09) which can answer this question are yet to be released by the Central Bank. There is little doubt that economic growth in 1387 will be lower than the robust 6.9% for 1386, but how much lower we do not know.   Whatever growth was in 1387, it will probably be still lower in 1388 (2009).    The expansionary credit policies of the ninth government (quick returns projects) may not have been expansionary after all if the Central Bank cut credit to the public banks faster than they could lend to small and medium borrowers.

The cost of lower growth –recession?–in terms of lost output and lost jobs–especially for the young–is huge.  To get a rough idea, consider the record of recent growth of output and employment. Between 1996 and 2006 the economy grew at a respectable  rate of 5.4% per year, enabling it to add on average about 590,000 new jobs each year–an employment growth of about 3.5%.  However, because the labor force (15-64 age group) was growing at a whopping 4.1% rate per year, these rates of growth of output and employment proved insufficient and unemployment climbed from 8.9% to 13.0% (census numbers).  During the preceding five years, 1991-96, when the economy grew at a slower rate of 3.8% per year, employment grew at 2.2% per year with half as many jobs (295,000) created each year.  Lower growth of the labor force (2.1% per year) allowed the unemployment rate to decline from 13.8% to 8.9%.

Based on these figures, roughly speaking the loss of one percentage point in growth, in addition to the loss of about $3 billion dollars in output, will result in about 100,000 fewer new jobs.  So, if growth comes to a halt this year or the next, the loss to the nation in one year would be about $15 billion in terms of output and half a million jobs.  Compared to charges of massive corruption, these losses are larger and not just based on rumors.  Nevertheless they fail to stir the same degree of indignation and popular outcry that corruption seems to cause.

As the past record in Iran and other developing countries makes abundantly clear, economic growth is essential for job creation and poverty reduction.  But, unfortunately economic and political discourse in Iran is primarily focused on issues related to corruption and redistribution.   Lacking an effective political advocacy group, growth rarely commands the high ground in national debates that it deserves.   The government is supposed to be the advocate for growth, so growth is in real danger when the government is all focused on redistribution.  Don’t get me wrong, I am just as concerned about a fair distribution of income as the next guy.  I believe that championing equity and eliminating poverty are the proper concerns for a government.  After all, a more equal distribution is important and necessary for long run growth.  But, as we all know,  the fight over the cake can make it smaller but never bigger.

What can President Ahmadinejad do? Very little for the moment because it is busy just getting its cabinet in place.  This week, the majlis will have a chance to hear the new ministers responsible for the economy discuss their plans to solve the country’s immense economic problems.  With lower oil prices and considerable uncertainly about the political and economic future of the country, public and private investment must have fallen fast.  The rial is highly over valued, discouraging production for exports, and the limited rebound in the oil market is insufficient to bring the economy back from the brink.  Let us see what new trick the new Ahmadinejad administration has in its sleeves to turn the economy around.

8 Responses

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  1. amirhossein said, on September 5, 2009 at 9:23 am

    we have many samples(like Roosevelt and Lincoln) that prove when politicians ordain the economic policies, many problems would be appear. Now our economic policy makers are military leaders not even politicians. and tehir main problem is that they can’t kill economy with gun!
    but in economic view i think one of our greatest problems is constant dollar’s rate. dollar’s rate have increased bye 36% since 1381 and labor’s wages increased by 360% at the same time.(we have the similar rate between 1387 and 88). thus our producers prefer to reduce their production and increase imports, and it means greater unemployment.
    What’s your idea in this case?

    • dsalehi said, on September 5, 2009 at 12:10 pm

      Thanks for your comments. I agree with you that economic problems cannot be solved by military force. The incentives of economic agents has to be right.
      Speaking of incentives, as you correctly point our the exchange rate does provides all the incentives to import at a time that foreign exchange is short and none for export. Did any of the ministers responsible for the bring this up in their majlis speeches last week?

      • amirhossein said, on September 5, 2009 at 1:16 pm

        I think members of majlis were more responsible than ministers, they have to say that and ask minister to give his plans for these problems. but when they don’t ask, minister won’t answer for sure.
        I think when we add the petrol prohibition and oil price reduction to the other issues we can assume ahmadinejad’s government faces with insoluble problems.

  2. کیوان said, on August 31, 2009 at 8:44 am

    Prof. Salehi-Isfahani,

    What of the reports of double digit price inflation in meat and chicken? That got thrown around by the reformist media here a few weeks ago.

    And is there any constituency in Iran that argues for a controlled devaluation of the rial? That would help the ailing domestic agro and manufactures sector who are screaming about foreign competition (sugar, for instance, and steel).

    • dsalehi said, on September 5, 2009 at 12:16 pm

      Specific commodities can have very high rates due to seasonal or idiosynchratic fluctuations in supply. Until I find a better measure, I’m going with the CBI inflation rate, which is not to say it measures inflation accurately. But it does better than going by specific items. Last month a few fruits and vegetables went down in price, but no one would like to use them to measure inflation!

      Re devaluation, there is a constituency–they are called economists! Exporters are supposed to lobby for devaluation but I have not heard them say anything. A few possibilities: They talk, but I do not hear (they talk to people who matter!). They do not talk because they are not organized. They do not talk because they are diversified and lose in other businesses from devaluation. What do you think?

  3. Mohammad said, on August 31, 2009 at 7:16 am

    Other than redistribution, a lower inflation seems to be at the top of the agenda rather than growth. At least to me it seems that Iranian people prefer a low inflation (1.2% is awesome!!) even if it means low growth, even recession.

    Now what should be done? What do you advise to do to keep both inflation and unemployment low?

    • dsalehi said, on September 5, 2009 at 12:21 pm

      You are absolutely right about Iranian fear or dislike of inflation. It is a bit irrational but I suppose one has to accept it. I would like to understand it, however. There are many people who sell things that go up in price at the same rate as what they buy (they work, rent homes, own homes, and shopkeepers) but they all focus on only one side of the equation.
      About what should be done, the first thing I would like to happen is intelligent debate over the issues. For example, what is the cost of reducing inflation with draconian credit crunches? How many jobs are lost, lives ruined? Is credit restraint the right thing to do when oil prices and government spending are going down? I am not a macroeconomist and do not know all the facts so I am better in asking questions than offering solutions!

  4. Mehdi said, on August 31, 2009 at 5:13 am

    What do you expect to come out of his sleeves? only sharper knives! It can solve many problems, but economy.

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