Tyranny of numbers

Money illusion

Posted in General, Macroeconomy by Djavad on April 27, 2010

Recently an article posted on the government’s website claimed that household resources have doubled under the Ahmadinejad administration.  Quoting from the Central Bank’s urban expenditure survey, it said that household expenditures rose from 56.6 million rials per year in 1383 (2004, the last year of Khatami’s presidency) to 113. 2 million in 1387 (2008).  The numbers are accurately reported, but I can’t imagine that anyone in Iran would take the claim of doubling of family incomes seriously.  One thing you cannot accuse Iranians of is money illusion.  If there is any illusion it is in the opposite direction–that inflation reduces real incomes no matter how fast incomes increase in nominal terms.

As the article acknowledges, prices have increased during the same period, but not by enough to wipe out the nominal increase.  True, but barely so.  During 1383-1387 (2004-2008) the Consumer Price Index (CPI) increased by 83.3 percent, which means there wat a 16.7 percent real increase in expenditure, but food, which can cost as much as half a poor family’s budget, nearly doubled in price (all Central Bank numbers), as did housing, which can take another 30 percent.  Why boast about an average 4 percent increase in real urban household expenditures (16.7 percent  in four years) during a period when oil prices reached above $140 per barrel? 

The picture for household resources appears even less flattering according to the data published by Iran’s Statistical Center (SCI).  The figure to the left shows how nominal expenditures have changed according to the two series.  The CBI series shows a faster increase in expenditures.  And the one to the right shows what happens when you deflate expenditures by the CPI (1383=100): 

All series show a decline in expenditures in 1387 (2008), which is not surprising given the poor state of the economy in that year (and still), but the SCI series shows a much deeper decline. 

Quite apart from the issue of accurate reporting of real and nominal figures, the data on urban expenditures, which both CBI and SCI produce, raise a more important question for those of us who work with Iran’s expenditure data:  What explains the divergence between the two urban expenditure series after 1385?  They seem to have tracked each other rather well until then.  Any ideas? (see the postscrip below)

Here is the table that I used to generate the graphs.  The numbers are current rials per year and taken from the household budget survey reports of CBI and SCI for various years.

Year Urban_CBI Urban_SCI Rural_SCI
1383 59,048,828 53,859,910 34,281,986
1384 67,029,089 62,060,409 38,525,881
1385 77,703,979 72,562,594 47,774,142
1386 98,816,925 84,134,612 50,010,727
1387 115,445,398 86,265,545 52,845,614

 

Postscript:  I think I found the reason why the Central Bank and SCI data differ.  The CBI expenditures data are collected from 72 largest cities, whereas SCI data is from all urban areas, which include small towns of about 5000 people.  We now learn something new from the graphs above: the impact of the economic contraction has been harder on smaller cities and rural areas.  The CBI data shows that the largest cities were not hit until 1388, whereas all urban areas were hit slightly in 1387, and rural areas significantly in that year.

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4 Responses

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  1. […] دیگری در باره توهم پولی در ایران (+) در این نوشته ادعای دولت درباره دوبرابر شدن مصرف […]

  2. Djavad said, on May 22, 2010 at 4:23 am

    Regarding the difference between the trends in the CBI and SCI data, see my postscript to this post.

  3. Hojat said, on April 27, 2010 at 8:16 pm

    I am amazed by this data. I was talking to a lady that recently has come from Iran and I told her that I think people are (economically speaking) in much better conditions compare to a few years ago. “You think so?” she said as if I have said something really stupid. This data supports her and contradicts me badly.

    So what has happened to all that money? Is it possible that the government has wasted all of that money without gaining anything sensible? Wow, that is amazing.

    Thanks for this post.

    • Djavad said, on April 28, 2010 at 12:21 am

      Yes, the decrease is real. Oil income dropped off 1.5 years ago and even before that tight monetary policty had plunged the economy into recession. But what happened to all that oil money is still a good question.

      By the way, I noted this decline in household expenditures sometime ago, I believe on this blog.


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