Tyranny of numbers

Rial devaluation and inflation — without the hype

Posted in General, Macroeconomy, Sanctions by Djavad on October 29, 2012

For the past several weeks, the rapid fall of the rial has been linked to hyperinflation and a possible quick end to the impasse in nuclear negotiations with Iran. Inflation estimates of 196% per year in NYT, 70% per month in Boston Globe, and similar reports in Washington Post and Bloomberg, were all traceable to an article in the Cato website that had prematurely added Iran as the 48th worst case of hyperinflation in the world. Some commentators could hardly hide their joy in the prospect that sanctions were finally, and mercifully, about to spare the Middle East yet another war and the Iranian people years of suffering under sanctions. But these predictions have failed to materialize, and the media interest in the issue has waned. We are slowly hearing the other story of the rial devaluation, its positive effect on local production (see, for example, Jason Rezaian’s informative report in Saturday’s Washington Post).

Prices for most goods have been rising fast but at rates well below hyperinflation. The price of some key staples have hardly risen in the weeks since the fall of the rial: energy prices have remained unchanged (thanks to the parliament’s objection to the second phase of the subsidy reforms), bread is still selling at 5000 rials a loaf, and chicken at about 50,000 rials a kilo. The annualized inflation rate for the month of Shahrivar (ending on 20 September 2012) was about 30% according to figures released by Iran’s Central Bank (their annual rate for month on month was 24%). I expect the inflation rate for 2012 to remain below 50%.

As I have explained in this blog (and most recently in Foreign Policy), the hype about hyperinflation was misleading because it was based on a faulty analysis of how Iran’s foreign currency markets work. But while the hyperinflation story has lost its appeal, people still speak of “rial’s devaluation” and its size as if it were easy to measure. Let me explain why it is not, and why talking as if it is can be misleading.

The short answer is the multiple exchange rates system. The long answer requires the use of an example that explains the mechanics of Iran’s devaluation. The example involves some knowledge of arithmetic but no economics — and there is a short quiz at the end.

Suppose a college football stadium needs to undergo renovation removing half of the seats from the market. Ordinarily, ticket prices are $10 per game, and at this price half of the seats are occupied by students and the rest by townies and alumni. This year, with only half the stadium seats available, the college estimates that the (equilibrium) market price could be as high as $20, a price that few students will be able to afford. To keep students coming to the games to cheer their team, the college decides to sell 80% of the available seats to students at the old price of $10 and sell the rest in a “free market”. Suppose also that the free market price is $40.

The short quiz is to calculate the rate of increase in the price of tickets. If you answered 400% you can get a job at a prestigious international newspaper but you flunk the quiz. Why? Because there are two markets and 300% is the ratio of the new price in one market to the old price in another. Actually, this turns out to be a trick question because it does not have a simple answer. For students (80% of the market) there has been no price increase, while non-students (20% of the market) experience a price increase of 300%. If you had to give one number, you might say 60% (= 0 x 0.8 + 300 x 0.20). A more complex answer would take into account the cost of students waiting in line resulting in a higher average rate of the inflation. Compare these answers to what the price increase would have been — 100% — had there been a single price.

This is pretty much what happened this summer to Iran’s foreign currency market. Iran lost about half of its supply of foreign exchange because of sanctions, and the government decided to protect its population from the worst part of its consequences. It abandoned the unitary exchange rate regime that had brought a decade of economic growth to the country in favor of multiple rates. As in our example, there is a single supplier of foreign exchange — the government — which allocates a part of its forex to basic necessities (at 12260 rials per dollar) and sells the rest to licensed buyers in the recently set up Foreign Exchange Center (at about 25,000 rials per dollar). It may be supplying some of its forex to the so-called free market (at widely fluctuating rates, between 30,000 and 45,000 rials per dollar) but we do not know how much, if any. The latter price is equivalent to the price of auctioned stadium seats. So, as in the example, calculating the rate of devaluation by dividing the rate in the free market by the previous singular rate (say 33,000/11,000, or 200% increase) is incorrect.

A more reasonable estimate of the extent of devaluation in Iran should take into account (at least) three rates of devaluation: the official rate (10%), the Exchange Center rate (about 150%), and the free market rate (about 200%). But, unlike in the example, we do not know the shares of the forex going to these three markets, so even a simple weighted average of these rates is not available. If the share of forex allocated to the three markets are 0.40, 0.55, and 0.05, the weighted average would be 96.5% (= 0.40 x 10 + 0.55 x 150 + 0.05 x 200), which is much lower than 200%.

Any devaluation close to 100% is a huge shock to the economy, so the point of this exercise is not to minimize the gravity of the situation, nor to simply offer a formula to estimate the size of the devaluation. Understanding the mechanism is the important point. Even if we cannot quantify the rate of devaluation, we can still analyze its consequences if we have the right model. The consequences of a single-market devaluation are very different from one that involves transition from a unitary to a multiple exchange rate system. Put this together with the fact that the government is the main supplier of forex, and you can see why hyperinflation is a misleading account of post-devaluation Iranian economy.

Advertisements

19 Responses

Subscribe to comments with RSS.

  1. William Simpson said, on November 8, 2012 at 10:06 pm

    How does the Iranian treasury deal with the effect of sanctions on the devaluation of Iran’s currency? Is there a way for them to predict the subsequent inflation as a consequence of further sanctions?

    • Djavad said, on November 9, 2012 at 6:47 am

      They do that by managing the supply of their foreign currency, selling at different rates to different buyers.

      I doubt it is possible to forecast such things accurately, but they should have a sense if something will cause the value of the rial to fall.

  2. Baddu said, on November 6, 2012 at 6:53 pm

    Dear Dr. Hamid H,
    With much interest I read your detailed comment in response to Ali’s. Your analysis of Iranian society and the dynamics of the ruling ideology in the geopolitical context was accurate, deep while emotionally calm. May I, a lifetime resident in provincial Iran, suggest that you write an article on the subject. It may save numerous souls here in Iran, where, in the face of bureaucratic mismanagement, it is easy to become emotional, loose one’s head and fall into the abyss separating independence and servitude.

  3. Dr. Hamid H said, on November 1, 2012 at 12:27 pm

    From the news about Iran’s stock exchange: http://www.youtube.com/watch?v=UuZ8aXL0rRY&feature=channel&list=UL

  4. Ali said, on October 31, 2012 at 8:59 am

    Dear Djavad,

    The effects of subsidized dollar and the foreign exchange center are negligible.

    Even drugs for especial diseases are not given cheap dollars.

    Besides, foreign exchange center is just a cover up for the government to make it able to say ‘we have done something’. Request for foreign exchanges are queued in a long list and after weeks of waiting, the foreign exchange given (if any) is in the form of Chinese Yuan or the Indian Rupee.

    You can omit the effect of these two phenomenons by simply multiplying them by a coefficient of zero!

    Also consider the fact that Iranian govt. is extremely corrupt it is not able to distribute the resources in a rational way even at times of stability, leave alone the present crisis!

    • Djavad said, on November 1, 2012 at 9:04 am

      Sounds like deductive reasoning, starting from your last sentence moving backward. Not at all convinced that all $’s are sold at the free market exchange rate. Corruption means just the opposite, that $’s are sold cheaper but not to the right people. I guess the test of your hypothesis is in the prices of basic items. If wheat and chicken feed are imported at 34000 rials per dollar, we should be able to see that somehow. It would be great if people could actually listed prices for the times.

      • Ali said, on November 1, 2012 at 12:39 pm

        Just because the prices have remained stable for a period of time, it does not mean they will remain the same for the upcoming future.

        Food prices have at least doubled within the last year (milk price has quadrupled), why shouldn’t they increase even further? We shall see what will happen in the future.

        One more thing about the corruption. Cheap dollars go into the wrong hands, they import at discounted prices, but they sell the imported goods at the free market prices.

        For the record, USD was around 31500 IRR today. Thanks for sharing your valuable time with me.

      • Dr. Hamid H said, on November 1, 2012 at 7:02 pm

        Dear Ali,

        Here is a video of the professor talking about it. I guess I would go with the professors version of things: http://www.youtube.com/watch?v=VbwpTf0HRaY

    • Ali said, on November 2, 2012 at 11:35 am

      Dear Hamid,

      Thanks for the link. It basically contains the same info we may find in the present post by the professor. Here are my comments:

      1. I live in Iran and I have a lot of contacts with samples of the below the middle class people. Contrary to what we should conclude from professor’s presentation, they are very unhappy and very mad at the govt. Why is that then? I guess simply because they are not animals to just be fed enough chicken or bread! Every other aspect of their lives are being influenced. They have children in Azad Univ., they would like to have fun and recreation, they have to pay the rents, etc.

      2. The biggest uprising of Iranians after the revolution was held by middle and even upper middle class people. Actually it was mostly against the will of under middle class people at the time (2009). So we can’t say by just feeding the poor the govt. can be safe.

      3. Private sector is experiencing very hard times. It can’t import the basic materials it needs and it can’t find customers because of the great recession. True it would be great for the private sector to be safeguarded by expensive foreign goods that it can simply compete with them by producing cheaper goods. But the case is that, expensive foreign exchange at the time is stemming from misery, not a planned and smart devaluation!

      • Pirouz said, on November 2, 2012 at 1:07 pm

        Dear Ali;

        I know that Iranians are very different from the rest of humanity and having a full stomach does not prevent them from making a revolution. So good luck with your revolution. I guess by this time next year we have a secular “democratic” government in Iran with a US and Israeli embassy in Tehran huh?

        PS. Since when “below middle class” have been able to afford to send their kids to Azad University? If that is the “below the middle class” in Iran then long live the Islamic republic, because that means that our people are extremely well-off thanks to the Islamic government.

      • Ali said, on November 2, 2012 at 1:29 pm

        Dear Pirouz,

        I’m not going to take part in a revolution, keep your sarcastic blessings for those who are interested in that matter!

        P.S.: Since when did you become the reference that defines social classes? Based on my observations, I want to classify my society in my own way. Is there any standard definition for social classes?

      • Dr. Hamid H said, on November 2, 2012 at 4:52 pm

        Ali Joon,

        Your comments are noted and I appreciate your interest and observation over the events, and though that is one dimension of what is happening, it is not the whole picture.

        1- People (or rather segment there of) are mad! That is understandable. People get mad when things get tough. People are mad in many other places as well. It is not only Iran. You see times have changed. It is not 1960’s or 70’s anymore. Competition has become global and cut-throat. It is even tough to land a good job in places like Spain or Greece nowadays. Not that I am comparing Iran with those nations, but just giving you my own observation. People are less happy than they were decades ago.

        Now I have my own way of seeing things. I do not even consider the professor way of seeing things as being the whole picture neither I would consider my observation whole. But this is what I have come to after following Iran situation for years. There is the truth, then there is the perception of truth and then there is perception of the perception of the truth. I guess what the truth is really has become irrelevant in a sense. Perception of the truth is relevant though, since that is how people react towards it. The professor, me and you are on the other hand are in the dimension of perception of the perception of the truth. Philosophically it just means what we think might not be the truth itself or far from it, be the opposite.

        Yes, people are not animals. But your analogy is wrong. Even animals love recreation. Cows that get to roam on a large farm and get massaged produce more milk than the cows that are kept in a close area and just fed their feed. Every one needs recreation (Ref. to scientific study of agricultural research). Even animals need recreation as any owner of dogs or cats will testify to the fact. But the most important part is to be fed. Without food, life can not be sustained. Recreation comes afterwards. Chicken has become the staple of Iranian cuisine, that is good. It is certainly much more healthier than red meat from a medical point of view. But a billion people around the world actually are vegetarians and do not consume any meat and they are well and alive. What professor was talking about was sort of about the perception of the truth and not about the truth itself. One might be vegetarian and not eat any meat or another might be a red meat lover. The micro-truth at the level of an individual in society might be completely different from that perception.

        Some one likes to have recreation by going on long drive on his red Ferrari, another might want to have a beer party, another one might do mountaineering, someone else might enjoy simple company of his/her friends or family. Each one finds the recreational activity that best suits their taste and pocket. To say that people do not have any recreational activity whatsoever might be the right perception of the perception but not the whole truth. I am sure alot of Iranians are having fun even now, both in rich and poor segments of society.

        People do get mad yes, but are they mad enough (bored enough?) to rise and fight the regime? Are they mad enough to fight a civil war? Maybe even an extended one? Because though I am myself an apolitical person, I have this “perception” that Iranian regime is actually more powerful than people give credit for. And the constituents of that regime though not representing a significant segment of society are highly committed, trained, equipped and organized to fight it to the last bullet. Do not take my word for it. Look at Libya. Do you think Khamenei or Rafsanjani or whoever else in the regime is ready to die like Qaddafi by not fighting vigorously enough? I do not think so. Some one who is cornered for his life will fight to the end, just like Assad in Syria is doing. So will the Iranian regime if there is ever going to be a civil war in Iran. Now a blood bath in Iran is going to be not pretty at all. Iranians know that. So even if they perceive to be bored and a little less fed, they will never go that far as Syrians have gone. Iranians have wised up and matured in this past 35 years. They saw a bloody revolution, followed by a bloody cultural revolution and then war and sanctions plus mismanagement. They are not going for any adventure that will endanger what they have right now in their hands.

        2- That is right. They were big riots. Nobody is contesting that. But the truth is, the regime was not budging even one millimeter. And though less reported, Iranian regime had its own supporters as well. You aptly mentioned rich and middle class Iranians. Well, here, I have to be the bearer of bad news. Unfortunately, revolutions are not brought about by rich or the middle class. The rich (upper class) are only successful at bringing about change by coups and then only when it benefits them financially. There is no evidence that the rich even tried to do that in Iran, or even are contemplating doing that. Worse, Iranian state has already been designed from its outset to be “coup-proof” so to say. Two sets of armies, multiple centers of political power and a myriad of shadowy organizations watching each other. Thus rich will never even think about a coup since any try at a coup will be so nasty that the disorganized nature of it will put their properties, wealth and savings at risk if not their lives. That is a risk too far for them.

        The middle class usually brings change through sophisticated political processes. Their biggest tool but I have to emphasize not the only tool, is elections. Relatively fair and free elections. Why I say relatively, since I have not seen any free and fair election anywhere in the world. Every where there are tricks and discrepancies during political processes or the elections themselves. But a relatively free and fair election with such perception thereof is the most important tool in middle class segment. That is why Iran had riots, since the middle class perceived that their access to this tool had been denied. What the truth was, nobody can for sure say. But the riots were real and were very broad, infact the broadest since the 79 revolution. But they died out. Because, of a simple reason. The Iranian regime is not a normal thug regime that you see in third world countries so often. The regime is truly independent. They unlike the other dictators do not get their foundation power from another world power. So they can do as they please without asking for permission. That is why this regime has an escalatory element built into its design. They will escalate a situation to a point that the initial escalator player never thought even possible. That is one of their favorite tactics.

        The middle class rioter thought they would apply pressure on the regime by clogging the streets and appealing to international community. It was doomed from the beginning. The regime does not care about international community one bit specially if that be of western orientation. That is where their independence really helps. Clogging the streets actually had no effect on operation of the state either. The impact of riots on Iranian economy (which I believe deserves a thorough study) appears to be negligible. No military units suffered any kind of damage or desertion. State apparatus was functioning like clockworks. The middle class at that point had two choices. To take up arms or to go home. Taking up arms is not easy, since Iran is not a militarized society unlike eg Libyans who had arms in almost every house even before their riots. Iranian society as a whole is actually a pacifist and a peaceful one. It is a sophisticated urban population, unlike the Bedouin Arabs who still keep arms at their homes the same way they did for thousands of years in desert. So they had to get arms supply either from outside foreign sources or from deserting Iranian military units. None were forthcoming since Iran was too powerful for foreign actors to sneak in arms without Iranian military knowing and the Iranian military itself never took any political position against the state during the riots. They stood firm and where they deemed necessary they crushed the rioters with brute force.

        Then came the reality. The middle class segment had the choice to go to civil war. But they did not. The principle reason was again very simple. In a civil war or a revolution, the ones who lose the most are the middle class. The rich can hide and buy their way out along with their wealth or a portion of it. They also have the connections. The middle class on the other hand suffers. It is very simple to see why. An average middle class individual who has a house, a car, maybe some savings in the bank or in stock exchange, and some other worldly possessions. He/she can lose these overnight in a protracted revolution or in a civil war. First the value of the house will drop like a stone then it might even be destroyed physically. Same goes for the car and other stuff. It was a step too far. The middle class instead chose to go home than escalate the situation further. They were not ready to lose everything for their ideology or even the lack of recreation and mere boredom. They instead chose to have some chicken and drive their cars as they did before. You see they were not fighting for their survival, they were fighting for some extras. The regime on the other hand was fighting for its survival so they would not have minded to even have a civil war.

        Now, you referred to the poor. That is a whole another ball game. But suffice to say, that they are the ones who bring down governments, go to civil war and even execute the revolutions. And they love chicken and by their nature are almost all conservatives (not only in Iran but also around the world) so they see boredom as actually a pious thing. They get thrilled by religion and nationalism. They have few soft corners for liberalism or international sympathy. In a word, if anything Iranian regime is afraid of, it is the poor, not the rich and not the middle class. The poor are the ones who can look down the barrel of a tank and fight it. The weak heart rich or the delicate middle class can not and will not. That is why Iranian regime wants the poor on its side and that is why their whole economic plan looks upside down to you. Their priorities are not for the average middle class Iranian Joe to import the latest touch screen smartphone. Their priority is for the poor to be able to afford chicken if that is what the poor perceives to be of importance. And that is where the regime gets most of its support and that is where they can call reserves from when they ever have to fight a war or a civil war.

        3- As for the private sector, my perception perhaps is even less accurate. Regime might actually decide to wrap up the private sector businesses. Or they might actually decide to help them. It is too soon to judge. You see I think the core of Iranian regime has decided to follow the China model with some modifications to suit Iranian situation. China also had huge mismanagement and political issues after their revolution which actually was much worse than Iranian situation, causing the death of tens of millions of Chinese by starvation. But that is history now. What the regime core thinks, is I guess something like this: Build up so much military power so as to become economically unfeasible for a foreign adversary to pick a fight. That is where their missile program and even the nuclear program fits. Then as per Chinese book, liberalize manufacturing and trade to some extend but not completely. Suffering of the people or their recreation is not really the concern of the China model. The concern is to have an industrial base, a local economy that can feed itself since they do not want to be like Saudi Arabia that basically imports everything from the simplest foods to SUV’s by selling just oil.

        They want to make the regime permanently founded on Iranian soil without changing their ideology. To become Saudi Arabia, they must compromise on their ideology with the west. That is not what they intend to do just like Chinese communist party. Alternatively they want to pressurize the west to accept them as they are the same way west accepted China. Now for that they need an industrial base, a larger population and a more sophisticated military. Industrial base is needed to keep the country going and if ever an understanding reached with the west it will become a money earning segment of Iranian economy doing exports but for now it is not even important to make money, it just needs to produce and supply the local market for survival purposes. The larger population has a protective effect on state by lowering the risk of civil war or foreign invasion. As Fleet Admiral Gorshkov had said: “Quantity has a quality all its own”. And lastly a fairly advanced military that can sustain itself enough to make any invasion plan too expensive to be executed efficiently. Looking at Iran today, you can see all the elements are being worked on by the regime. Their goal in the years to come is to survive and thrive. Once they have outmaneuvered the west, they hope the western power centers would approach them, accept them and let them in the global game of realpolitik the same way they allowed China.

        This has been going for decades now. Whether Iranian regime calculation will prove to be wrong or whether they will win what they want, which is ultimately the security and economic command of the region, is to be seen. In the meanwhile Iranian people will have to get by as it is. I am sorry to say, but that is the reality. Some people even are making wealth in these harsh times and others might be losing their wealth but the whole population on average will feel pressure for years to come. Those who are aligned with the regime ideologically, see this as a necessary suffering to mature Iran into a global power. Others might see it as wasteful and unnecessary adventurism that could lead to war and destruction by sanctions. Still others might have other views. But the reality is the regime core is in command and has decided this and my hunch tells me that they are not going to change direction. So in a bigger picture, this is not about economy, devaluation or recreation. It is about who is going to be in command. The mismanagement issues are making Iran suffer but the reality is even if there had been no mismanagement, suffering would occur regardless maybe abit less but it would be there. There is a price to be paid when a nation challenges the world’s super power and its policies.

        But all is not dark. There is another element in this bigger picture and that is Afghanistan. If Iran did survive this economic condition and a possible war, till 2014, then situation might change specially if Obama wins the election. In that year, US will leave Afghanistan and would need to have some negotiated settlement with Iran over Afghanistan’s future. Surely US after its longest war in history of America do not want to see Afghanistan degrade to where it was before. It would be a strategic defeat. And Americans have no one else to turn into to stabilize Afghanistan but Iran. Its not only US either, even India has interests there that can only be served through Iran. So if Iran survived the next two years, there is a good chance that a negotiated settlement might reach between Iran and US encompassing all the issues from Bahrain to nuclear issue. All these games that are going right now between Iran and US is to pressurize the other party to give up more than it will take in. The regime core in Iran thinks that by holding out abit longer, they can make US agree to Iran having an advanced atomic program, let Iran in WTO, remove all sanctions and probably give Iran some security and economic advantage in Persian Gulf region as well as some kind of settlement in Syria favorable to Iranian strategic vision. In return probably Iran will drop its support for Hamas (but not Hizbollah since they are Shia), stabilize Afghanistan the same way it did in Iraq and probably agree to never test a nuke the same way as Israel. This is what looks like the regime is preparing for. The economy is just a tool for them and not the goal right now. They are pushing for a global strategic role since that would guarantee their rule over Iran.

        =======

        As you can see this is the bigger picture of things happening. It might be the wrong picture or the wrong perception of the perception of the reality but I guess for now it explains the macro level of things. At the micro level of course it means nothing. If you have to go and buy expensive medicine or food, it would not alter the dire reality. And by the way my own take on the Iranian currency the whole point of this discussion is that Iran should go from a fiat currency towards an energy backed currency plus state support for massive industrialization.

        On political front, not much can be done due to the entrenched nature of political fronts inside the country. Surely the regime will never allow Iran to become a western liberal democracy or a monarchy without significant bloodshed and massive loss of national wealth. But a reasonable demand can be made from the current regime and if this demand gets high public backing then the regime has no other choice than to accept it. Though the situation will not be ideal things can improve this way. That demand is a constitutional amendment. The amendment must include these points:

        The supreme leader post must have a term. It can be a longer term government seat, which is even better since it would become a seat to direct long term planning in the country. For example a 6 to 8 year term. And he can only hold office twice and once leaving the office he can not return to it ever again (to avoid Putin/Medvedov effect). The supreme leader is to be publicly elected by a parliament separate from the main Iranian parliament. This parliament should be elected directly by the people of Iran and should have a short term lets say 2 to 4 years. The mullahs can have ofcourse their demands thrown in as well for example only Ayatullahs can become supreme leader or only mullahs can become the member of parliament. That should not be an issue, as long as they are Iranian and they are elected. The main issue is for supreme leader to become an elected one with a defined term in constitution. This is of utmost importance and the greatest weak point of Iranian constitution currently. Now, this can happen now in an orderly fashion but I believe it will happen regardless since even regime people like Rafsanjani are suffering because of this constitutional defect. So even if they can not push it now, when Khamenei dies, there is going to be debate of some sort, so people should be ready when time comes to push this point.

        Other points for constitutional amendment should be addition of two separate government branches in addition to the current legislation, executive, judicial and supreme leader. One additional branch should be tasked to give public reports about the other five branches to the people, continuously investigating their performance and efficiency. It will not have any powers to implement anything but it will make Iranian regime more transparent. The other branch to be added is to be for a completely independent election commission tasked with organizing all the elections and ensuring that they are transparent to the public. The public, judiciary officials and officials of the other new branch should monitor the election and give their public reports. The other points for amendment are clear division of powers specially that of supreme leader’s powers. It should be clearly defined who has power over what. It does not matter who will have more power as long as it is clearly defined by the constitution. At any rate I believe Iran should evolve its political system. I do not believe civil war, riots, madness, foreign invasion or revolution is the right path. Iran has only one path and that is evolution.

        And the first step to that evolution is creating awareness about the need for a constitutional amendment among the public specially the middle class and then the poor. When a significant portion of Iranian society demand for this constitutional change, it will become the new chicken and the new perception and there are elements inside the regime who would grab at the opportunity to clip the wings of the supreme leader eg Rafsanjani, Ahmadinejad, Iranian military etc. But right now the level of political sophistication in the country specially among the middle class is very very poor. They do not even know what is constitutional amendment and how according to Iranian constitutional law it is done. There is absolutely no idea among the people about these issues.

        Even the intellectuals who talk about evolution in Iranian politics have no clue. But of course it might change. Great changes always come slowly. If on the other hand no awareness was created among the public then the situation might get tricky after the death of Khamenei. It will be like the China after Mao’s death. After Mao died, no one trusted anyone to become their supreme leader since too many had got burned the way Rafsanjani is burning today. Many even got killed. So basically they never put in a supreme leader again, instead they invented a politburo comprised of five people functioning as supreme leader. It will be very unfortunate if Iran follows this Chinese example. Since this kind of un-elected politburo will be insensitive to public demands and all evolution of political nature will stop as it has stopped in China. There might be economic development and cultural or scientific advancement but the politics will freeze in such a model. That is why Iranians must be ready to demand a constitutional change and avoid the Chinese politburo system that currently Iran is going towards. Death of Khamenei is inevitable as he is human, be that far or near but the politburo will live forever, since it is not a person, it is a small committee with big powers.

        I hope my rather long reply would help with your comments.

        Thank you.

      • Dr. Hamid H said, on November 2, 2012 at 7:05 pm

        Dear Ali,

        ” Is there any standard definition for social classes?”

        I do not think there is a solid definition. But usually we have upper class people who have large amount of capital wealth, investments and lands usually even in more than one country eg big head traders or industry owners. The upper middle class who have considerable amount of wealth eg. a successful plastic surgeon or medium level trader or industrialist. The lower middle class who have some wealth eg. office worker or simple trader/shop keeper. And then we have the poor who usually have very little wealth usually living in villages and are usually less educated as well. They are more religious and unlike the other classes usually never have a serious dream of going abroad. And lastly we have people living under poverty which as per United Nations definition are those who have access to less than 2 dollars (PPP) per day per person. And then we have another kind of poor as per United Nations, those who are living in extreme poverty defined by having access to less than 1.25 dollars (PPP) per day per person. Theoretically Iran should not have the extreme poverty since almost everyone is getting the subsidy handout which in terms of purchasing power parity puts every one outside the extreme poverty definition. And if they are working even some menial jobs in a part time fashion the small income plus the subsidy hand out should again theoretically put them above the 2 dollar poverty line as well. According to Iranian government’s own definition of poverty those who live below 11 dollars (PPP) per day are poor (I guess it is 2009 data from Iranian parliament).

      • Ali said, on November 3, 2012 at 4:06 am

        Dear Hamid,

        Thanks for your comments. Although I found a good part of your longer comment not to be very relevant to what we were talking about (devaluation of IRR), it must have taken a considerable amount of time to be composed, thank you very much indeed. It was informative and very well organized. I wish you all the best.

      • Dr. Hamid H said, on November 3, 2012 at 5:07 pm

        Dear Ali,

        You are welcome. I tried to put things in perspective as part of a larger picture since the devaluation is not an isolated thing that can be analysed on itself. I am sorry if it was not helpful to the degree you hoped, but that is the reality. Here you can watch among other panelists, the researcher to the US congress one of the people who has designed the sanctions on Iran talking about this economic war which the devaluation is only part of. I hope it would give you even a broader perspective on the issue: http://www.c-spanvideo.org/program/309080-6

  5. rad said, on October 30, 2012 at 12:10 pm

    Hi. I can’t understand your calculation about ticket price in real world..
    if students buying ticket 10$ and then sell them to townies 40$, then the consequence is 400% increase in ticket price.
    maybe you think that it is illegal , but they found a way for sell their tickets.
    for example government try to allocate dollar only for buying chickens and petrol and supervise on this process but
    1- some people sell them to another countries like Azerbaijan, Afghanistan, Iraq and…
    2-on the other hand most companies that import strategic goods , show fake bills and try to get more dollar to sell in black market.
    3-don’t forgot the Corruption in government bodies .
    4-there are more than 3000 Port illegal that can import and export (sell tickets to townies!)
    and many other similar reasons

    so I am think that control inflation with multiple rates system only work for short time…
    I would appreciate it if you explain for me that “is it possible multiple rates work on these situation for long period in Iran under sanctions?”

    • Djavad said, on October 30, 2012 at 2:47 pm

      Yes, if the students can sell their tickets openly, then we are back to the one market case and the $20 price. In US, students tickets require an ID to enter a stadium, so there is little diversion. You are right that this may not hold for Iran’s multiple exchange rate system. I also agree with you that in the long run the multiple rate system is not sustainable. This is why Iran moved out of it in the 1990s. How long will this be around? It is anybody’s guess.

  6. Dr. Hamid H said, on October 29, 2012 at 1:35 pm

    Sorry for being so long. But I just read your FP article and you had written:

    “For his part, Supreme Leader Ali Khamenei dismissed the sanctions as “not a new issue” and said that “enemies are making efforts to blow the issue of sanctions out of proportion, and, unfortunately, certain people inside are assisting them.”

    Does it mean that these certain people are counterfeiting the Iranian money? And as a matter of economic principle does counterfeiting ever lead to devaluation by affecting the money supply? Broadly is it because of this that countries like Australia and Canada have moved to printing polymer bank notes as both had huge counterfeiting problems in past?

  7. Dr. Hamid H said, on October 29, 2012 at 1:20 pm

    Another wonderful article by the professor. Also lots of thanks for the reply to my question in the previous article. I guess it is not only the crooks in Iran that are trying to benefit from devaluation of Rial but also a substantial number crooks outside of Iran representing themselves as “applied economists” and “market journalists”. It is so pathetic. But it is so good to have your expert voice on the matter at least for guys like me who are uneducated in economics.

    I have to admit that my nano-knowledge about economics is from my short readings of Marx’s Capital and Smith’s Wealth of Nation (I am in medicine actually). So my ignorance in comments is not intentional but rather comes as a second nature.

    1- I found these regarding my comment in previous post. Again your insights on the matter would be of great importance and appreciation:

    http://blogs.fin24.com/constantitempurchasingpoweraccounting/2012/10/29/a-response-to-steve-hanke-on-iran%C2%B4s-hyperinflation/

    http://www.econ.puc-rio.br/gfranco/How%20Brazil%20Beat%20Hyperinflation.htm

    2- Again back to my ignorance. I never understood Chartalism completely and how or why it works. But with regard to Iran, this question has always bugged me: Why Iran needs dollars? For example why can not Iran issue a new currency and directly link it with a specified amount of energy. Let’s say every new currency which for the purpose of the discussion I name it “Deric”, would be a government guarantee for 1 kilowatt of energy. Since Iran has lots of oil and gas and a fair amount of coal and uranium, it should be able to print lots of good money and replace Rial with it. Then Deric would come with high market confidence since it is redeemable at any time for the specified energy unit mentioned whether in terms of oil, gas or even electricity. While dollar is not actually guaranteed against anything. It is just paper. Now this question has been bothering me for quite some time now. Why Iran needs to keep printing paper Rial and then exchange them for paper dollars by selling oil? Why not just cut out all transactions and their associated costs and just go to oil or energy trade directly via Deric?

    3- And a final question: As Rial goes down, the local production must go up since imports become expensive. This I understand as an economic principle. But why most of the largest producers in the world actually have strong currencies or currencies that never depreciate. For example modern Germany, Japan or even China. Do they use some economic trade to remain competitive? And what about high technology goods. For example in the beginning of the comment section of the Jason Rezaian, there was a discussion between readers about high technology goods such as planes, semiconductors and other stuff that Iran can not produce. Will depreciation of Rial or sanctions stimulate their production, since Iran does not have the technology even today? Also there was a reference by another reader about India. It was said in that comment that India had tried to be self sufficient in a period between 1950-1990 but failed. Is that true? Or more importantly, can Iran as claimed by the Iranian politicians, ever become self sufficient or technologically more modern because of depreciation of rial and sanctions? Do such claims have any root in economic theories?

    As I always, I would feel indebted by your expert analysis, articles and reply. So once again Thank you.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: