Tyranny of numbers

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.

I have long been thinking to write something in this blog about the confusion in Iran between criticizing policies and politicians.  If Ahmadinejad is bad, then every policy he implements must be bad (like subsidy reform) and if a president is good he can do no wrong (the wasteful $1.2 billion job creation program under Khatami).  Today, I opened an article in Al Monitor entitled, “Ahmadinejad Takes Parting Shot At Iranian Women,” and was much surprised to learn about the parting shot.  Apparently, the outgoing president has angered activist women by proposing a bill that would reduce the working hours for women to 36 hours per week while paying them for 44 hours, or if they work the full 44 hours, they get two additional paid days off per month. How will this hurt women? According to the article, “women’s rights activists believe this bill is another attempt by Ahmadinejad to dramatically reduce women’s participation in the workforce.”  I am not sure about the intention part but I do agree with the conclusion.  Most economists would argue that an attempt to raise hourly wages by reducing working hours while keeping pay constant would cause employers to favor men in hiring, which would hurt women’s employment. (more…)

I just published a short piece in Al Monitor to refute the widely held belief that Iran has been experiencing hyperinflation.  As I explain there, the myth originated in the application of textbook economics of hyperinflation to Iran, not taking into account two important facts.  First, that the Iranian government does not have to print a lot more money just because the free market rate for the dollar tripled.  This is because it sells foreign exchange, not buy it.  If the government had to buy its foreign exchange from private exporters, then to manage its operations it would have to print money at an accelerating rate to meet its obligations.  Second, because the government is the main supplier of foreign exchange, and is therefore a price maker, not a price taker, it can price discriminate, and sell forex at different rates (three rates now).  Of course, there are limits to its price making ability.  It can pour more money into the free market and lower the rate there, or sell more at the subsidized rate of 12260 rials per $ to keep inflation down.  But since it has a limited (and shrinking) supply of foreign exchange, mainly thanks to the sanctions, it has to be careful how it uses its forex.  If the Central Bank tries to feed capital flight or speculation  (as in did in the early 1990s), it may look in charge for a while but soon will be sorry. (more…)

Iran’s multiple exchange rate system which has been in effect since last October has led to much confusion about the new dollar parity for the rial.   Most people in Iran consider the “free” or parallel market rate, which has fluctuated around 30,000 rial per USD, as the new equilibrium exchange rate.  Published Western reports have used a similar number.  For example, an article in Foreign Policy last month put the decline in the value of the rial at 300%, which is not easy to interpret but probably means 3 times what it used to be a year ago (around 10600 rials per $), or about  30,000.  A story in Washington Post yesterday noted that the rial had declined by more than 40 percent relative to its value in August — again, around 30,000 rials per $ since the free market rate in August was around 19,000 rials.  A Reuters report today used the exchange rate of 30,000 to convert rials into USD.  But has rial really fallen by this much? (more…)