Tyranny of numbers

More on Iran’s subsidy reform

Posted in General, Inequality, Macroeconomy, Poverty, Subsidy reform by Djavad on March 5, 2011

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.

6 Responses

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  1. Mohammad said, on March 29, 2011 at 8:06 am

    (Sorry for my late comment) Is it really possible to control unemployment rate without compromising inflation? I mean, I thought that an uncontrolled surge in unemployment (>20%) is inevitable, if the government keeps inflation at bearable levels (less than 40%). Is there really a chance for the (b) condition you mentioned? I’m really worried of what will happen to the businesses (and hence, the workers) in the next one or two years. Add to that the new wave of the youth bulge (1980s baby boom) entering the labor market. (Dr. Nili once wrote a great lengthy article on the coming unemployment crisis here)

    In short, what will the government have to do to avoid the inflation-unemployment trade-off?

    • Djavad said, on April 4, 2011 at 9:41 pm

      Better late than never! Thanks for your comment. I think the key is in reforms that add flexibility to the economy, enabling private sector to take advantage of the opportunities offered by higher energy prices–yes there are opportunities when some costs increase and other goods and services become more economical.

      By the way, the youth bulge is actually passing. I beleive it peaked in 2010. See my most recent paper on this subject: http://belfercenter.ksg.harvard.edu/publication/20414/iranian_youth_in_times_of_economic_crisis.html.
      My earliest paper on dates back to 2000–Demographic aspects of Iran’s economic development, Social Research, Summer 2000 (http://findarticles.com/p/articles/mi_m2267/is_2_67/ai_63787345/?tag=content;col1).

      • Mohammad said, on April 5, 2011 at 2:58 pm

        Thank you very much for your considered reply. I just read the more recent paper. My point was that since job opportunities seem to shrink or not grow fast enough (because of pressures due to the subsidy reform and that government can’t just increase spending and credit because of inflation concerns), and that in addition we are at record high youth unemployment rates (because of the youth bulge), the unemployment genie won’t go back into the bottle soon (it seems so). And the risk of social disorder grows as the increasingly numerous and disillusioned unemployed youth turn to other things than seeking jobs.
        I also understand that you’re proposing institutional reforms (perhaps to increase the “ease of doing business”) as the only way to avoid the inflation-unemployment trade-off, as you’ve also mentioned in your next post. Am I right?

        On a related sidenote, I think that every socio-economic policymaker in Iran should read the DI working paper! If you don’t mind, I hope someone translates it to Persian and publishes it in some well-read Iranian outlet.

      • Djavad said, on April 5, 2011 at 5:51 pm

        Thanks. I have posted a link on this blog (Research papers on Iran) to a later version of the paper which is forthcoming in Iranian Studies (Iranian youth in times of economic crisis).

        On your larger point, I agree with you that Iran’s economic situation is not good at all–acute demographic pressures at a time of high inflation and unemployment. Often difficult conditions like this are the times when politicians are willing to take bold steps. The question is where the pressure for reform will come from?

  2. Arghami said, on March 7, 2011 at 2:25 am

    The article mentioned at the beginning of the post is long and well written and agrees, at least in its economic content, with the views of the author of the present post. It praises the Iranian statesmen for their courage to take the risk of implementing an economic necessity under the pressure of sanctions and in the face of some internal political divergence. The article, however, does not commit itself to predicting that the resulting cost-push “at one go” inflation, in a country already afflicted by the problem, is not going to be a prelude to an indefinite period of hyper inflation.

    • Djavad said, on March 9, 2011 at 6:12 am

      Thanks for your comment. The altest figures from the Central Bank show that the inflation rate has jumped to a monthly rate of 2.5% (which tranlates into an annual rate of 34%). Two months ago it was 1.5% per month. Energy prices play the biggest role here, no doubt, but hyperinflation is not likley. The government has tried to control inflationary expectations (by repeating that it will not allow inflation to rise) and by using that to control wage increases. If it loses the battle for expectations, and wages being to increase because of it, the danger increase of a return of the high inflation rates of the past. But, with good management, inflation can be kept at about 20% while the economy adjusts to the new energy prices.

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