Tyranny of numbers

Iran’s Inflation showing signs of moderating

Posted in Inequality, Macroeconomy, Poverty, Sanctions, Subsidy reform by Djavad on January 10, 2013

The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months.  The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%.  This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year.  This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future. (more…)

Iran’s subsidy reform survives crucial hurdle

Posted in Inequality, Macroeconomy, Poverty, Subsidy reform by Djavad on May 21, 2012

What is described as the second phase of Iran’s Targeted Subsidy Program appears to be on its way to implementation after the parliament approved to increase the size of the program to 660 trillion rials (about $54 billion using the official exchange rate), denying the government its request for a much larger program (1,350 trillion or $100 billion).  The compromise allows the government to increase prices of subsidized goods and at the same time raise the monthly payment of cash to families by an as yet undetermined amount.  Some reports suggested that the current cash rebate of 450,000 rials per person per month could increase by as much as one third for the remainder of this year, which ends on March 20, 2013.  The timing of the second phase is unknown but there is no doubt that it will happen.  Getting the parliament to authorize the second phase means that the subsidy reform program has passed a crucial test, all the more because the economy is under stress from the effects of past inflation, sanctions, and general macroeconomic mismanagement.  The critics who wanted to stop the program on its tracks have had a field day in pinning various failures onto the reform program.  For the time being they seem content with having slashed its extravagant proposed budget. (more…)

Anniversary blues for subsidy reform

Posted in General, Inequality, Macroeconomy, Subsidy reform by Djavad on December 21, 2011

The anniversary of the subsidy reform, on December 20, 2011, arrived with fireworks, but not the kind the government had hoped for.  In a day that President Ahmadinejad was addressing a conference of the first anniversary of the subsidy reform in Tehran, the rial fell by more than 5%, breaching the psychological 15,000 rials per dollar barrier.  These two events are more than coincidentally connected.  The rial has been weakened by the inflation unleashed by the subsidy reform, a cost of the reform that was both foreseen and justified.  At the same time, the precipitous devaluation of the rial adds to uncertainty and macroeconomic instability that can undermine the subsidy reform.  The real benefit from the reform derives from reduced demand for energy, which can only happen if households and firms are willing to change their behavior and invest in energy saving equipment, which in turn requires confidence that the post-reform energy prices will not be washed up in some cycle of inflation and devaluation.  Remember, unsubsidized energy prices are equal their world prices multiplied by the exchange rate.  With 15,000 rials to the dollar, gasoline (at 4000 or 7000 rials per liter) is 50% cheaper than it was a year ago when the new price was set, and is once again subsidized.   (more…)

Iran’s place in the world distribution of income: an update

Posted in General, Inequality, Poverty by Djavad on December 18, 2011

My post by the same title a year ago that featured a graph developed by Branko Milanovic was the second most visited post on this blog last year (after one on Iran’s energy subsidies), receiving 912 views.  So when I learned last week that he has been working on an update of his analysis of the world distribution of income, I requested an updated graph.   Branko was the keynote speaker at an Economic Research Forum conference that I attended in Cairo, where he was introduced as “Mr. Inequality”. His new results show that Iran’s position in the world distribution of income improved between 2005 and 2008, something that should surprise no one since during this period Iran was the recipient of about $200 billion worth of transfer from the rest of the world as oil income. (more…)

Egypt: between populism and subsidy reform

Posted in General, Inequality, Subsidy reform by Djavad on June 17, 2011

Cairo, June 14, 2011

This is my first trip to Cairo since the uprising that toppled the Mubarak regime.  The airport was unusually quiet and all Mubarak pictures are gone, but otherwise there are few signs of a country that has just experienced its most dramatic social upheaval since the 1952 revolution. Egyptians like to think of the uprisings as Revolution (“al thawrah”) which in Arabic signifies deeper social change than “enghelab,” the word Iranians use for revolution.  But what has transpired in Egypt’s first six months of “revolution” pales in comparison to Iran’s 1979 Islamic Revolution.  There have been no executions or mass exodus of the rich, and not even an overhaul of the high echelons of the bureaucracy, as happened in Iran. Egypt’s judicial system has taken the lead in calling the members of the ancien regime to account. So far it is moving cautiously; only 45 individuals are currently in jail or standing trial for their alleged crimes, including Mubarak and his two sons.  If the judiciary can satisfy popular demands for justice, Egypt has a good chance for a soft landing on this side of the uprisings, and its judicial system may emerge as a strong pillar of its future democracy. If it fails to do so, revolutionary justice may take over and all bets would be off about democracy and restoring the economy to its previously robust growth path. No one seems certain how Egypt’s revolution will end.  As de Tocqueville has said, “in a revolution, as in a novel, the most difficult part to invent is the end.” (more…)

More on Iran’s subsidy reform

Posted in General, Inequality, Macroeconomy, Poverty, Subsidy reform by Djavad on March 5, 2011

This oped of mine on Iran’s subsidy reform appeared on the Brookings website on Thursday.  Suzanne Maloney of Brookings also wrote a nice piece on the same program, viewing it as a possible solution to Iran’s economic problems, which is a fresh approach instead of the more usual view that we have come to expect from commentators in Iran and the West — as the harbinger of economic ruin.  I think the program’s initial success to raise prices at one go without mass protests is noteworthy, and perhaps a model for other Middle Eastern countries to follow, but its overall success depends on two things:  (a) whether consumers will use the cash rebate to pay their energy bills and buy local goods and services, like health and education, or spend it on luxuries imported from China, like LCD televisions; and (b) whether producers can manage to stay afloat, by hook or crook, without shutting down or laying off many workers, long enough for the economy to adjust to the new price levels.  Both of these depend on complimentary economic policies that the government will introduce in the next few months to improve the business climate in Iran.  As usual, reform of the markets for labor, credit and foreign exchange are at the top of the list for action.

Is inflation anti-poor in Iran?

Posted in Inequality, Macroeconomy by Djavad on June 9, 2010

This week Iran’s Central Bank announced that the annual inflation rate has dropped below 10%, so it may seem like an odd time to talk about how rising inflation might affect Iran’s poor.  But if the government implements the subsidy reform law, as it has promised to do in the second half of this year (Iranian year 1389), inflation will most likely rise.  The strongest objection to this reform is not that it will increase the rate of inflation, but that higher inflation will hurt the poor.  If that were to happen, it would be the height of irony, for the entire scheme was proposed to promote social justice, not to take money away from the poor.  From the point of view of social justice the best part of the scheme as it was originally proposed was that the rich would pay full price for energy and other basic goods while the poor received their subsidy as income.   With that scheme, the poor would have gained, at least in relative if not in absolute terms.  But the progressive cash-back scheme is no longer on the table, so the distributional effect of the subsidy reform very much depends on how inflation affects the poor versus the rich.  So, the crucial question is this: will the inflation that follows the removal of subsidies hurt the poor more than the rich?  I have not seen serious evidence that can answer this question (perhaps there is, but I have not seen any).  To satisfy my own curiosity I review here the historical evidence on inflation and equality, which seems to suggest that in Iran inflation may not be the cruelest tax of all, as the saying goes. (more…)

Iran’s place in the world distribution of income

Posted in Inequality, Poverty by Djavad on June 2, 2010

Branko Milanovic is a leading authority on the global distribution of income. His influential 2005 book, Worlds Apart provided the most comprehensive account of how global inequality has evolved over time.  He has just completed the sequel (The Haves and the Have-Nots,  Basic Books, forthcoming), which updates his earlier analysis using survey data on income and expenditures from 119 countries for 2005.  He finds that despite rapid economic growth in China and India, two very large and poor countries, in recent years global inequality has remained constant and very high (Gini index = 0.80).  I asked him to help me understand where Iran was located in the global distribution of income, and he produced this amazing graph.  (more…)

Greater equity through redistribution: what can the targeting of subsidies do?

Posted in Inequality, Poverty by Djavad on March 31, 2010

The Fifth Five-Year Plan of the Islamic Republic of Iran (1389-93, 2010–14), still under review by the parliament, has a clear goal for reducing inequality in five years– a Gini index of 0.35 for income.  This is a substantial reduction from the high level of inequality that has plagued Iran in recent years.  The law for targeting of subsidies, which was passed last January but is still in limbo, is the main instrument for reaching this target.  It aims to raise prices of energy products to world prices during the plan period and redistribute half of the proceeds to lower income households.  How radical would the redistribution have to be for the government to reach its inequality goal? (more…)

A good time for goodbye to subsidies

Posted in Inequality, Macroeconomy by Djavad on January 16, 2010

Everybody acknowledges that Iran’s $50 billion subsidy program cannot continue forever but many don’t think that the time to undo past excesses is now.  Iran’s economy is in deep recession, external threats of sanctions and military strikes are on the rise, and internally the nation is in the grips of an unprecedented political crisis.  Yet this week the bill to reform the vast subsidy program became law and the Ahmadinejad government is getting ready to take the plunge.  (more…)