Tyranny of numbers

Was the Living Standard of Iranians Higher Before the Revolution?

Posted in General by Djavad on March 21, 2018

It is not surprising to hear Iranians say that life was better before the revolution.  Depending on their social class, they could be thinking of a variety of metrics, social and economic.  But to hear economists speak about how life was for the average Iranian was better before the revolution, is surprising, at least to those with access to data.

Two and a half years ago, I addressed this subject in this blog, refuting a claim made by an Iranian economist that in 2013 Iran’s GDP per capita was 42% below its 1976 level. Then a week ago, Masoud Nili, the top economic advisor to President Rouhani, made a similar observation, this time with much wider publicity, saying, according to press reports, that, “income per capita now is 70 percent of its value in 1976.”  So, it’s time to repeat the argument of why this comparison is wrong.

The easiest way to show that this claim cannot be true is to look around, into people’s homes, and engage in casual empiricism.   And if you are not old enough to have looked at how people lived way back then, the indicators in the table below may help.  I have selected these indicators of household welfare from the urban household expenditure and income surveys conducted by the Statistical Center of Iran.

Table. Access to basic services and ownership of selected household assets

1972 2016
Electricity 83 100
Piped water 68 100
Refrigerator 23 99
Washing machine 4 85
Vacuum cleaner 2 90
Air conditioning 10 82
Car 7 48
Telephone 8 100

In 1972, 68% of households in the survey had piped water and 83% had electricity; today these numbers are 100%.  Life quality improves tremendously when these basic services arrive.  Thanks to universal access to electricity, the availability of electric appliances have increased sharply: back then 23% of households had refrigerators, now they all do; 4% had washing machines now 85% do; and vacuum cleaners went from 2% to 90%.  These appliances make life much more pleasant, especially for women.  I hesitate to say the same about the increased car ownership, from 7% to 48%, but there it is.  Air conditioners, which are less ambiguous in terms of welfare, increased in prevalence from 10% to 82%.

How could people be so much better off in terms of assets if GDP per capita is 70% lower?  You might say that ownership of assets is higher because of accumulation over time, and can be consistent with output going down part of the time (though not for longer than a decade). Fair enough.  What do GDP numbers say about this?  They corroborate the picture from household assets if production is measured properly.

And by proper I mean using the right deflator to compare production over time.  For this purpose, the GDP deflator used by the Central Bank of Iran underestimates improvement in services (such as utilities), which have expanded but are undervalued by local prices. The best way to make the comparison is to use data from the  International Comparison Project, which uses a PPP deflator, which is less affected by changes in relative prices in Iran.  In the graph below, I compare the series from the Penn World Tables and CBI to show what a big difference it makes which series one uses. (In my previous post, I used an earlier version with PWT 2005 PPP, which is the reason why the two graphs are somewhat different.)

Figure. Two accounts of GDP per capita, 1959-2014. 

gdppc_pwt_cbi
Note: Both series normalized to 100 in 1976 (peak value in the CBI series) . PWT series is based on Real GDP in 2011 PPP (rgdpo), CBI series are 2004 constant prices.
Source: PWT 9.0 and CBI.ir data bank

As you can see, the story of Iran’s living standards depends a lot on which series you use. The most recent peak in the CBI series, in 2011, is 70% of the all-time peak in 1976, whereas in the PWT series it is more than twice as large.  I cannot be sure that the good people at PWT have done the best calculation possible for Iran’s GDP, or if their PPP calculations take care of the price index issue adequately, but if I had to choose between the two series, I would go with PWT because it fits the facts on the ground much better.

One final note: several sites attempted to confirm Nili’s assertion using a “reliable international source,” namely the World Bank data bank (WDI).  Like PWT, WDI has PPP and local currency GDP series.  Their PPP series follows the PWT closely, except that it goes back to 1990 only.  Two sites I noticed use  the constant 2010 USD  series, which is basically the CBI GDP data converted to USD with the 2010 exchange rate. So they are not confirming anything, just replicating the same data Nili uses.

 

14 Responses

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  1. Arash said, on April 6, 2018 at 2:20 pm

    Professor Salehi,
    Thanks a lot for your post.
    Given that this is such a fundamental question, it would be great to understand the difference the exact difference between the two price series. Am I understanding correctly that you are guessing that one of and perhaps the main difference is about of non-tradables?
    I recall an argument in trade literature where oil countries have over-valued non-tradables, can that be related? Perhaps we need here that inflation rate (not price level) of non-tradables will be higher, am I right?
    Many thanks

  2. Rd said, on April 3, 2018 at 11:31 pm

    To give consideration for those living ‘abroad’ point of view, it may be beneficial to look at the living standard on this side of the pond (US). How has the standard of living changed for US population from 70s to today! Last year, the top 10% earners had 50% of the income and the top 1% had 20% of the income. You can imagine where the rest of the population is!!! Ofcourse being able to borrowing money like there was no tomorrow should not be a substitute for better/higher standard of living.

    the grass is not greener on this side of the fence, as some believe, though it certainly is shinier.

  3. Roozbeh said, on March 30, 2018 at 6:49 pm

    Dear professor,

    I doubt that refrigerator. vacuum cleaner, air conditioning are domestic productions. If you check Iranian households’ goods at home, most of them are imported products from China. Therefore, even if your graph and your explanation about GFP per capita, PPP and differences in measurement might be correct, there is no link with your initial debate about Iranian life standard.

    • Djavad said, on March 30, 2018 at 10:48 pm

      You are right about the place of manufacture of the appliances. However, “domestic appliances” mean those used at people’s homes, not produced in Iran. Their increased availability at homes does imply a higher living standards, no matter where they were produced.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sdexio-z3yapif3xczq@comment.wordpress.com” <comment+2i1eh_sdexio-z3yapif3xczq@comment.wordpress.com> Date: Friday, March 30, 2018 at 5:49 PM To: Djavad Salehi-Isfahani <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “Was the Living Standard of Iranians Higher Before the Revolution?”

  4. Amir Habibdoust said, on March 25, 2018 at 12:53 am

    I think there is a misunderstanding. ! Dr Nili did not talk about living standards. You can not conclude following statement:” how life was for the average Iranian was better before the revolution “.
    Hi has not such claim.

    • Djavad said, on March 25, 2018 at 7:20 am

      You are right, his claim was about GDP per capita, which I address and refute in the graph. Living standards have a close connection with GDP per capita, so I ask how could living standards (as demonstrated by households amenities and assets from survey data) be higher if GDP per capita is lower. The discussion of living standard is to show the importance of getting the facts right on GDP per capita.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sdexio-z3wiaddlzlhw@comment.wordpress.com” <comment+2i1eh_sdexio-z3wiaddlzlhw@comment.wordpress.com> Date: Saturday, March 24, 2018 at 11:53 PM To: Djavad Salehi-Isfahani <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “Was the Living Standard of Iranians Higher Before the Revolution?”

  5. GT said, on March 24, 2018 at 12:22 pm

    Don’t forget that the literacy rate in Iran was about 50% by the time of revolution while the ones of Turkey and South Korea were close to 80% and 90%.

    Iran’s GDP was inflated because of high oil price/production. Is economy doing well right now? No! But it was definitely not better before the revolution.

    Life expectancy of Iran was even worse than Syria. It increased twice as fast as the average of the world after the revolution and it’s now pioneering the ME.

  6. Skeptic said, on March 22, 2018 at 3:56 pm

    Professor, with all due respect your post is a clear example of why people don’t trust academics anymore. You are making a political argument that shows your preference of the current regime, instead of applying basic facts and logic.

    Are you really saying Iran is more developed simply because more people have televisions and vacuums than 1972 (46 years ago)? Is this a serious argument? Maybe you should add another column which shows the percentage of Iranians who had cell phones and internet access in 1972 versus today? Anywhere in the world you go there are now more consumer goods than there were 46 years ago. By this logic of course we can say the whole world is better off today than it was in 1972, and if that is the case then there is no need for your post.

    But almost all Iranians say things were better off before the revolution because their basic quality of life has diminished. They hear about how the previous generations could find work easily with good wages, but that is no longer the case. They look at the development of the neighboring countries compared to Iran’s, and they ask ‘what about us”?

    Of course the currency: 70 IRR to 1 USD then, and now 50,000 IRR to 1 USD. Has there been a currency outside of Zimbabwe and Venezuela which has done worse than Iran’s? Does a horrible currency like IRR have anything to do with standards of living?

    What about the simple fact that everyone wants to leave Iran so badly today, but no one did in the 1970s? Even someone like yourself who bends over backwards to skew numbers to make your argument prefers to live abroad than in Iran.

    Professor, its OK to say the economy is a mess today and much worse than it was before. This is just common sense.

    • Djavad said, on March 22, 2018 at 4:09 pm

      I did not think I was making a political argument. The logic I use is the use of PPP USD to compare across countries and over time, and the facts come from surveys. You misunderstand the post as evaluating the revolution, which is your question not the one that has been posed (not by me but others). I do agree that Iran has not done well compared to many developing countries, such as Turkey and Korea. But saying that does not change the answer to the question I ask in this post.

  7. milad said, on March 22, 2018 at 3:43 pm

    Before revolution not only Iran had highest GDP per capita(nominal) in middle east region but even Iran GDP per capita was higher than South Korea..but now Iran GDP per capita is 5000 $ which it is super low..how can how can someone say revolution was good for economy??..
    and we should not forget that the Living Standard in the whole world has improved in the last 40 years … in other countries far more than Iran …

    • Djavad said, on March 22, 2018 at 4:00 pm

      I was not evaluating the benefits of the revolution. You can see in the graphs the sharp decline in income per capita in the 1980s. I was asking a much simpler questions: Is per capita GDP higher or lower than it was in 1976. Please note that comparison of GDP over time and across countries requires PPP exchange rate. The $5000 figure you mention is not in PPP USD, so it is not very informative.

      • Behroz keshtgar said, on March 25, 2018 at 6:42 am

        Acctually This is your question:
        Was the Living Standard of Iranians Higher Before the Revolution?
        And at least you say YES sir! It is!
        Mr Salehi, I live in Iran now and your article is nonsense for me.

      • Djavad said, on March 25, 2018 at 7:24 am

        You are right about the question and my answer. Living in Iran does not make you an authority on how life was 50 years ago! This site, “Tyranny of Numbers” is the wrong site for you if you are not interested in numbers!

        From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sdexio-z333ldiigeux@comment.wordpress.com” <comment+2i1eh_sdexio-z333ldiigeux@comment.wordpress.com> Date: Sunday, March 25, 2018 at 5:42 AM To: Djavad Salehi-Isfahani <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “Was the Living Standard of Iranians Higher Before the Revolution?”

  8. Alireza Alavi said, on March 22, 2018 at 10:49 am

    Reblogged this on Report to Utopia.


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