Tyranny of numbers

The economics of negotiating with the West

Posted in General by Djavad on October 9, 2013

I published this post on Lobelog today in which I raise a theme familiar to the readers of this blog:  there is a deep misunderstanding of Iran’s economy in the West, exemplified by a NY Times story of last week that invoked the “collapse scenario.”  I have been hearing the “collapse” theory of Iran’s economy lately, something that I thought people gave up after the economy recovered (sort of) from the huge shock of the rial devaluation last October.  Inflation is coming under control and unemployment has a real chance of declining thanks to a producer oriented (as opposed to merchant-oriented) Rouhani administration.

But years of negative reporting on the economy (“inflation and unemployment are always double what official data say”) had created the impression of a teetering economy and the temptation in the West to be tough with Iran and extract more concessions.  I argue that this could be a big mistake and shows ignorance of the facts about Iran.

Returning to the global economy, this time as producer rather than shopper, is extremely important for the future of the country.  The time is right in many ways, and Rouhani’s team have done a good job to show they are serious about rapprochement with the US, but the more charm is brought in the more people think Iran is desperate and the less the West should change its position.  At the center of this is the lack of a credible story about the dynamics of Iran’s economy.  How bad is it really and where is it heading.

The freeze on national income data in the last few years has hampered the effort to put such a story together for Iran.  The online data banks of most government agencies (Iran’s Statistical Center and the Central Bank, in particular) have little new data past 2008.  Numbers are slowly coming out in the Persian-language press in Iran, but unless they are available in English, it is difficult to make the case that Iran’s economy is not about to collapse and the West should approach these negotiations wisely.

3 Responses

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  1. HO said, on October 10, 2013 at 11:57 am

    A very nice article. Though I am not an economist, but I would like to know what the learned author thinks about the time frame Iran would need to ramp up its production. After all there is this feeling that the sanctions are winning (at least in the West). After all Iran has always been a “merchant” nation and not a producer one (if I am not wrong).

    Another question would be, why Iran does not sell its oil on spot market for example using bitcoin, which can then be spent at least for small/medium sized transactions? In desperate situation one needs creative solutions so why Iranian banks that now are cut off from the world, not having any access to SWIFT do not start using bitcoin for their cross border transactions? (It would help at least their small customers)

    • Djavad said, on October 10, 2013 at 12:50 pm

      Thanks. The time question is difficult to answer. We are beginning to see the benefits of the more realistic exchange rate. I have read in the Iranian press about increase production of textiles and automobiles. But hard data is in short supply. So my predictions are based less on actual data and more on economic logic (and faith!) that where profits are to be made people will make them. I’d say that this process takes a year or two to pay off. The domestic impediments to production have to be removed and those take time (like solving the banks’ liquidity problem so they can lend to producers).

      The backdrop to all the debate on Iran’s economy, which I am sure is not lost to anyone, is the campaign by hawks in the West to argue that Iran’s economy is about to collapse (the new Roubini-FDD study is an example) so we need to rebuff Rouhani and wait for the big prize, which, as Netanyahu expressed to BBC Persian, is regime change. I hope that cooler heads prevail.

  2. Darjusch Tafreschi said, on October 10, 2013 at 10:43 am

    Thank you for this clear statement. I am in fact hopeing that the SCI will eventually allow researchers to access Iranian data again.

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