Getting the facts right on Iran’s economic growth
A post on Iran’s GDP may seem very wonkish, but it is actually very relevant to two important political debates. One is the current debate in the US about Iran’s economic prospects and the other is the never ending debate in Iran about the economic cost of the Islamic Revolution of 1979. Neither seem to be well informed with the facts.
How Iran’s economy has been doing in recent years is now a central issue in the debate over the July 14 Iran nuclear deal. Iran hawks in the US (and Israel) used to argue that Obama’s overture to Iran two years ago was premature because sanctions had brought Iran’s economy to the verge of collapse, time was on the US side, and more pressure would force Iran to capitulate (an argument with which I have disagreed). More recently they have been sounding much more optimistic about Iran’s economy, arguing that it is healthy enough that the infusion of billions of dollars of cash from sanctions relief –often exaggerated by factors of two to three — would spring it into a military giant that would destabilize the Middle East.
For his part, the Obama administration has been defending the July 14 deal by making the point that Iran needs all the cash it can get to dig itself out of the economic sanctions whole, that if Rouhani is to keep his election promises to improve the lives of the Iranian people, little money will be left for regional mischief.
I tend to agree with the this argument, and I made a similar point in my latest oped in Lobelog, but for the record I should note that the decline during 2012-2014, which Treasury Secretary Jack Lew said was 20%, was quite a bit smaller, at least according to preliminary figures from the Central Bank of Iran. These figures show that in 2014/15 (1393) Iran’s GDP at factor cost was only 5.8% below its peak in 2011. (GDP at factor cost is the only number available at this time; national income which includes the terms of trade effect — mainly the change in the value of oil internationally — is a more accurate picture of national welfare, but will probably has to wait for CBI’s annual report for that year.)
As for the debate inside Iran about the state of Iran’s economy and the cost of the revolution, a highly skeptical account appeared in an article published this week by the reformist Iranian economist, Saeed Leilaz. He estimated that in 2013 Iran’s GDP per capita was 42% below its 1976 level, before the revolution, and that it would take Iran half a century to reach that peak.
To make his point, Leilaz uses the constant price series of the Central Bank of Iran, available on the Bank’s website. According to the series GDP at factor cost in 1383 (2004) prices, GDP per capita in 1391 (2012/13) was 28% below its level in 1976/77, not 42% (CBI preliminary figures for 1393 show a 29.1% drop).
This is a large discrepancy arising from the same source of data, which I do not know how to resolve. In any case, it is secondary to a more important discrepancy, one between the CBI constant price series and common sense. Is the average Iranian enjoying 42% less food, household durables (TV, refrigerator, washing machines, etc.), health, education, clothing, and travel? There is a preponderance of evidence that living standards of the average Iranian in 2014 is much higher than it was in 1976. (Some Iranians I know do not believe in national averages and prefer to look at their immediate circle; for them Mr. Leila’s numbers resonate.) I have documented these things in my research (you can find them on my webpage), so I will not repeat them here.
But you do not have to even look at the data to know this. Just looking around would show you that the average Iranian eats more food, has more household appliances, enjoys better health, has more education, and travels more.
Fortunately, there data that corroborates the common sense view, and comes from the widely respected and widely used International Comparison Project, also know as the Penn World Tables (PWT). Economists use these data to measure economic growth over time and to compare countries at a point in time. It turns out that the CPI and the GDP deflator we use to translate nominal output data into real values do not do a good job of comparing production in 1976 and 2014.
The PWT data track the CBI series (see Figure below) quite well until the 1980s, but after that diverge quite significantly. According to the PWT data, GDP per person in 2012 (last years data is available) was 61% higher than in 1976 not 28 or 42 percent lower!
Notes: Right axis: GDP pc (m rials), Central Bank of Iran, GDP at factor cost, constant 1383 prices; Left axis: GDP per capita (PWT_PPP), Penn World Tables, in 2005 PPP USD (output side, chained method).
Why the large difference between the two series? There could be several reasons. One important source of the divergence is probably the various subsidies that have mushroomed across the economy. The PWT series is constructed applying US prices to a basket of goods and services (the so-called Purchasing Power Parity, or PPP, method), so they do not include Iran’s subsidies. For example, as the price of energy has increased over time, the rate at which the PPP figures increase the value of Iran’s production of energy is much faster than Iranian prices, hence the difference in the PWT and CBI accounts of economic growth over the past two decades.
I am sure others with deeper knowledge of growth accounting can explain better why the two series diverge. But, you can take it from me that the 61% increase in living standards is much closer to reality and then the 42% decline reported in the Iranian media.