Anniversary blues for subsidy reform
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
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…)
Taking the surprise out of Iran’s low unemployment rate
The fact that after a long hiatus the Statistical Center of Iran (SCI) has decided to publish the results of its quarterly Labor Force Survey should be welcome news but instead it has been met with controversy and disbelief. The new report for summer 1390 (2011) shows a surprisingly low unemployment rate of 11.1%, down from 13.6% the same quarter a year ago. In the absence of data on the Gross Domestic Product (GDP) from the Central Bank in the last 3 years, analysts were hoping to find answers to questions about the economy’s health from unemployment data, but instead they were disappointed. Many reports, including one interview with a former SCI deputy director, dismissed the data as cooked. A closer look shows they are right to be skeptical of the lower unemployment rate, but not to question the survey’s veracity. Based on the published report I argue that the actual rate of unemployment maybe as much as 40% higher than what has been officially reported. (more…)
The trouble with rial
Iran’s currency, the rial, is about to change if not disappear altogether. Iran’s Central Bank is seriously considering taking 4 zeros out of the embattled currency, and even changing its name, perhaps to something Persian sounding like parsi. Neither of these two actions, if they come to pass, deal with the real trouble with rial. I am all for taking the zeros out, and could go along with the name change if that would help people forget that the new rial is the old rial 160 times less valuable (compared to 1977).
Affirmative action for Iranian men — to help women!
A recent news item posted on Alef’s site (in Persian) with the provocative title, “33 harmful effects of increase in women’s enrollment in universities,” reported the opinions of “experts” and politicians, including some members of the parliament, on the consequences of the rising presence of women in universities. Expressing concern about the imminent “takeover” of universities by women, and suggesting the need for affirmative action for men, is not new (I wrote a short article on this subject more than three years ago). What is new is the claim that it is not good for women. Affirmative action for men to help women! (more…)
Egypt: between populism and subsidy reform
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…)
Getting More from Less: Merging Ministries in Iran
The recent decision by the government to merge several ministries has ignited a fresh round of dispute between President Ahmadinejad and his conservative critics, but the controversy has been all about whether the president has the authority to merge ministries and very little has been said about the actual merits of the proposed mergers. It now seems clear that the Guardian Council and the Parliament will have their say on the merger (see this report in Persian), but in the highly politicized environment in Tehran, I doubt that the merits of the proposed reorganizations will get the attention they deserve. The stated objective — to cut down the size of the government — is unlikely to be realized beyond cutting the size of the cabinet. I am not aware of any downsizing dividend from the “dissolution” of the Management and Planning Organization two years ago. (Incidentally, that decision was made in a similar manner to these mergers, but at the time it was the reformers who questioned the government’s authority to change the line up of the ministries.) As far as I know, MPO’s bureaucracy is still in place. (more…)
The poor and the middle class
A recent article on Tehran Bureau’s website portrayed urban Iran as “a sea of poverty”. This stark description was based on the calculations made by three Iranian researchers that showed as many as 55% of urban Iranians were below a poverty line set at 58,035 rials per person per day (more on the methodology of the paper later). For an unpublished study that was relegated to the poster sessions of a conference in Tehran it has been hugely successful, getting quoted in dozens of Persian and English language websites. The reason is not the study’s novelty of techniques or approach, which is standard, but is its extravagant claim about Iran’s poverty rate, which appeals to those who think the news portends political change. Although I have seen even higher claims of poverty rates for Iran (as high as 90%), those did not make it to the prestigious TB, which is part of the PBS/Frontline website. So I decided to write a reply to set the record straight. (more…)
Iran inflation accelerates, is the subsidy reform in trouble?
The recent inflation data from Iran’s Central Bank is higher than expected and has the potential to undermine the country’s bold attempt at subsidy reform. The latest published monthly increase in prices of 3.4% for Esfand 1389 (21 February-20 March 2011) is nearly twice what was reported for the same month last year (1.8%), and 30% higher than for the previous month of Bahman. The widely reported “12.4% annual inflation rate” for the year, or the year-on-year average, is misleading because inflation has been accelerating in recent months. The monthly inflation rate has increased steadily from 1.5% in Azar, just before the subsidy reform went into effect, to 3.4% in Esfand. Even the much higher month-on-month (Esfand 1388 to Esfand 1389) increase of 19.9% in the price level underestimates the extent of inflationary pressures: the annualized rate (=(1+monthly rate)^12) has gone in one month from 34% in Bahman to 49% in Esfand. These numbers probably overestimate inflation because of rising Nowruz expenditures, but the fact that the monthly increase in the price level this year is twice what it was last year suggests strongly that the annual inflation rate has at least doubled in recent months, to over 20%. (more…)
More on Iran’s subsidy reform
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.
Tyranny of numbers 
2 comments