Tyranny of numbers

Cash transfers increase after Iran protests, but do they make a difference?

Posted in General, Poverty, Sanctions by Djavad on December 1, 2019

The gasoline price hike of November 15 triggered widespread violent protests in Iranian cities.  Three days later the government announced that it would increase the amount of cash transfers to compensate for the price increase and soften its blow.  But do the new transfers adequately compensate for the gasoline price increase? My estimates below show that they more than compensate those in the bottom 40 percent of the population — generally considered to be the vulnerable part of the population — while the top 40 percent lose.  Most people in the middle break even.

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Iran’s gasoline price hike misses lesson from Iran’s own experience

Posted in General by Djavad on November 17, 2019

This Friday, as Iranians were getting ready for their day off, they were rudely greeted with a surprise government announcement — a sharp increase in the price of gasoline.  Within hours they in turn surprised the government by rioting in several small and large cities.  Worldwide, riots and protests almost always follow gasoline price hikes, Mexico in 2017 and Paris 2018 are the latest examples.  The price increase came with rationing and a two-tier price.  Rationed gas of 60 liters per month is set to sell for 5000 rials (500 toman) per liter and the free market gas for 30000 rials.  Rationed gasoline accounts for roughly one-third of the total supply of about 90 million liters per day, so, taking into account the much higher price of the free market, the overall price increase is more than 100 percent. The logic of the price increase is not in dispute, but the way it was done shows that an important lesson from the last price hike, in 2010, has not been learned.  The lesson is this: cash compensation is an integral part of the removal of subsidies, and for a distressed and incredulous public, government promises to pay are not the same as money in the bank.

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Can Iran’s economy restructure to minimize the impact of sanctions?

Posted in General, Macroeconomy by Djavad on September 20, 2019

In a post published on Lobelog.com today, I ask if Iran’s economy is sliding.  Available data do not allow me to answer this question one way or the other, but they do undermine the claim of doomsayers that the economy is on the verge of collapse.

A lot rides on the answer to this question, however, and I do not have more to say on it here.  There is no doubt that in the standoff between Iran and the US, time is on the US side. They can wait this out for a very long time, at least as long as Iran keeps to its promise not to develop nuclear weapons.  The question is then how quickly and to what degree will Iran’s economic situation deteriorate in the next year or so.  If the economic clock for Iran runs out fast, we should expect it to resort to asymmetric responses and further instability in the Persian Gulf.  If, as the data hints, the economy is stabilizing, albeit at a lower level, Iran could decide to use the sanction years (how long?) to restructure its economy away from oil and toward domestic production.

The reforms needed to do so range from reform of education and banking systems to better management of the exchange rate.  If the government is working on a strategy to achieve all this, I do not know.  But, when the big economic news from Iran is about kicking 800,000 rich people off the cash transfer roll, I have doubts. To be bust saving about $50 million a year when the economy is losing 5-10 percentage point in lost economic growth (worth $50 billion) a year, does not make sense.

 

 

 

Is Iran’s economic slide bottoming out?

Posted in General by Djavad on June 26, 2019

Last year, Iran’s economy was hit hard by sanctions.  The US withdrawal from the nuclear deal and the return of unilateral US sanctions turned 10 quarters of economic growth into (so far) four quarters of negative growth (see graph below).  During the year that ended on March 20, 2019, the economy shrank by nearly 5%, and further contraction is very likely this year.  The 5% decline was led by manufacturing, which fell by 12% in the last quarter of 1397 (winter 2019) relative to the same quarter a year ago.  Non-oil GDP fell by less since agriculture and services, which account for 3/4 of the GDP are less dependent on trade (services actually grew slightly). (more…)

A note on measuring living standards

Posted in General, Inflation, Living standards, Macroeconomy, Poverty by Djavad on May 22, 2019

A few weeks ago, in this blog and in opinion pieces (here, here and here), I argued that during the three decades since the end of the war with Iraq (1988), Iran’s economic growth exceeded that of Turkey, such that by 2012, when US sanctions intensified, living standards in the two countries were very similar.  My analysis, which surprised some and angered others, is because of the particular data I used to measure GDP per capita (which I also refer to as the living standard).  GDP comparison is not rocket science but most journalists (and even many economists) often get it wrong.  So, in this post I try to explain why it is important that we use data specifically intended for such comparisons.

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Rouhani’s new budget cuts back on expenditures, big time

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on January 31, 2019

If the government of Hassan Rouhani has a plan for fighting the downward trend in Iran’s economy, the one started with the US withdrawal from the nuclear deal, it is not to be found in its proposed budget for the Iranian year 1398 (March 21, 2019 to March 20, 2020).  The budget, which may be modified by Iran’s parliament in the next few weeks, is proposing serious cuts to expenditures.   Blaming shrinking revenues from oil, the government has decided to deal with the shock of the Trump sanctions and fleeing private investment by reducing its own expenditures.  Not a surprise from a government that has made fighting inflation its top priority and jobs creation the purview of the private sector. This is reasonable logic in normal time, but not when factories are cutting back on production and employment or shutting down altogether.     (more…)

The cost of sanctions for Iran’s economy

Posted in General, Macroeconomy, Sanctions by Djavad on July 23, 2018

There is no easy way to determine the impact of international sanctions on Iran’s economy, but looking at the growth rate of the GDP after 2011, when international sanctions tightened, is a good place to start.  The question has become more than an historical curiosity since Trump decided to pull the US out of the Iran nuclear deal and reimposed sanctions.   (more…)

The return of inflation

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on July 1, 2018

According to the Central Bank of Iran, last month (Iranian month of Khordad, which ended on June 20, 2018), consumer prices increased by 4.3 percent.  This translates into a whopping annual inflation rate of 67 percent.  The government announcement was much less alarming, using the so-called point-to-point inflation rate (Khordad 2018 over the same month 2017) of 9.4 percent.  As I explained in a recent interview in Tejarat Farda (in Persian), the point-to-point reporting is very misleading when inflation is accelerating, and does not fool anyone (any more than I could fool a police officer whose radar registered my speed at 80 miles per hour by claiming that my average speed since leaving home has been below the speed limit). (more…)

How large is capital flight from Iran?

Posted in General, Macroeconomy by Djavad on April 19, 2018

On April 10, Iran instituted new foreign exchange regulations involving three changes: devaluation of the official rate by about 15 percent, restricting movement of capital out of Iran, and making the possession of foreign currency in excess of 10,000 euros ($12,500) illegal.  This policy was largely to stop the run on the rial, but rumors of capital flight may have also played a role. In particular, a claim by a prominent member of the parliament that, as reported in Al Monitor, “$30 billion of capital had fled Iran in the final months of the last Iranian year.” (more…)

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 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.

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