Monday, November 11, 2013

All quiet on western front

Today WWI ended, the greatest man slaughter in history come to an end. The tragedy of WWI is not the bloodshed, is the fact that it was not the last major conflict. Allies dictated such inhumane terms to defeated Germany that paved the way for Hitler and his Nazi thugs and another war. Versailles Treaty was not a bad deal according to Clemenceau. 22 years later the French begged to differ. In the very same location in the very same railway carriage France signed another armistice, accepting severely humiliating German terms. The victor was the vanquished. 
I can't help thinking about negotiations between Iran and P5+1 what is considered a good deal by hawks could be a very bad deal, international accords have a way of inspiring nations to take the wrong road. A good deal is a one that ends the conflict not the one that inspires new ones. And no deal means war. WWI does tell us even when a war ends it really has not ended. 

Tuesday, June 04, 2013

The Problem is the Same: Economy

Another piece I wrote for IranOpinion.com on the economic challenges ahead and the significance of the economy in the upcoming election:

As Iran’s presidential election approaches an increasing number of analysts and observers comment on the state of Iran’s economy. The last reports indicate that some segments of Iran’s labor force are experiencing high unemployment rate while the economy is experiencing an increasing inflation rate. The next president faces economic challenges some might consider unprecedented.

Last month Statistical Center of Iran (SCI) announced employment data for the last Iranian calendar year from April 2012 to March 2013, reporting the unemployment rate to be at 12.2 percent, which is almost at the same level with the unemployment rate in the preceding 12 months. According to this report, Iranian youth experience higher than average unemployment rate, 28% for males aged 20 to 24 years old. The youth unemployment varies widely across the country and in some provinces it is reported as high as 50%. The SCI puts the number of the unemployed at 2.9 million, 100,000 more than its last annual report. However several websites report the unemployment numbers to be much bigger, referring to discouraged workers’ effect.

One source of discrepancy comes from the definition of employment, which has changed during the current administration and now it includes individuals who work for at least one hour during the week. Many believe that this definition, which is also used by several other countries, underestimate the unemployment in Iran while overestimating the size of employed population. They argue that given the increasing inflation and reports of business closures and the slowdown in manufacturing, it is logical to see an increase in unemployment rate and not a decrease. However in offering an analysis one has to rely on the available data and observations. The increase in the size of unemployment is evident. Although one might argue the unemployment rate has not increased. One thing can thus be said with certainty: more Iranians need jobs.

According to reports by SCI and Central Bank of Iran (CBI) inflation rate has been increasing at a faster pace in the past two years (read here). A recent report by Majlis Research Center (MRC) warns that the economic growth might fall to -4%. In other words Iran’s economy has begun to shrink. When an economic contraction begins, in the presence of inflation, the only logical conclusion is that the volume of economic activities is declining within the society. This means less investment, less business enterprises and eventually less jobs and employment opportunities. The American and European consumers are only too familiar with this phenomenon; many lost their jobs and even their homes following the global financial crisis of 2007-08. It seems as prices are on the rise the ability of Iran’s economy to create jobs is declining.

Increasing unemployment and increasing inflation rate increase the possibility of hyperinflation in Iran’s economy. This increases the uncertainty investors and businesses face daily in marketplace. Under these circumstances any modest drop or price change could alarm consumers and producers prompting them to become irrational in the marketplace. Consumers will try to buy commodities because they expect them to be more expensive later, producers will be reluctant to sell because they do not know how much the same product will cost them in the immediate future. The outcome will be a vicious cycle of inflation which would discourage manufacturing even further. That means slower job creation and even higher unemployment. In order to prevent this, any administration’s first task is to battle the uncertainty while promoting entrepreneurial endeavors.

A large portion of Iran’s population are younger than 35 years, they require jobs and market stability to make individual decisions in pursuit of their happiness. To provide them with such stability government needs to change course. Its first step could be to adopt higher standards in fiscal and monetary responsibility. The second step should be defining a viable economic target. According to MRC the current administration has been slow in addressing its budget deficit, while increasing money supply via banking system and accepting commitments it cannot fulfill.

When Mr. Ahmadinejad came to power 8 years ago he promised a zero unemployment rate by creating 2.5 million jobs in 2-3 years. Last month in a live program Dr. Nili, an Iranian economist, shared some of SCI reports with the viewers which showed the net job creation from 2006 to 2011 to have been an average of 14,200 jobs per year. The government side produced reports backing its claim, but many agree that unemployment in Iran is on the rise. With the current reports on negative economic growth, it seems the government’s means to address this issue are diminishing as well.  However it still can face its challenges by defining a viable economic target. Reducing inflation could be such a target. First it is doable and creates credibility for the government and second it reduces the economic volatility encouraging investment and rational behavior. Iran’s economy can benefit from both significantly.

The question these days is not who will be president, but if anyone could face these challenges and succeed despite sanctions and public mismanagement and structural deficiencies embedded in Iran’s economy?  It seems whoever comes to office needs to know his economics 101 pretty well

Sunday, June 02, 2013

President vs Unemployment: what are his chances?

My note for IranOpinion.com

Can the next Iranian administration solve the economic issues facing the country? Its options might be limited. However the public expects the next president to deal with issues such as unemployment and inflation. The fact is that the next administration's actions might pay off in the long run and not in the immediate future. Its options are limited by the economic realities and their efficiency might be reduced in the political process.

Eight presidential hopefuls are permitted to seek the office of president of Islamic Republic of Iran. Listening to them it seems all eight use the same keywords when it comes to the economy: reducing inflation, creating jobs, increasing and absorbing investments and promoting domestic production. However reviewing their comments one does not see any specifics about how they would accomplish these. As one observer put it mildly, “candidates have confused economic slogans with economic planning”. And there's not much time even for planning, for Iran’s economy faces daunting challenges and demands quick action. In a recent meeting of Tehran’s Chamber of Commerce Dr. Masoud Nili told a gathering of businessmen and entrepreneurs that if the current situation continues, in three years Iran’s unemployed population would increase to something between 5 and 8 million. The latest official estimate at the time of writing is 2.9 million. Dr Nili singled out unemployment as the most serious challenge for Iran’s economy.

The question is whether the next president could address the increasing unemployment while keeping inflation in check? Any answer should take the following into account: what powers does the office of president hold and what options are palatable given the political and economic realities.

A first challenge arises from the decentralized nature of economic and fiscal decision making. The executive branch prepares the budget and the development plans; however, they need to be approved by the legislative. The legislators, or Members of Majlis, use this opportunity to seek political patronage and to reward their support base using the process. The outcome will be a policy package of compromises done to gain the necessary political support. The new president faces an uphill battle: he has to implement the required policies without too much compromise in the political process that would dilute those policies.

Addicted to subsidies

Another major challenge is the public opinion. Many Iranians, habituated by decades of central planning, hold the government - and only the government - responsible for energy, public utility, health services and economic infrastructure. If the next government’s solutions for unemployment and inflation affect its ability to provide subsidized services, or reduce the resources available to public services, it will certainly face widespread discontent. The public may not appreciate the tradeoffs required for addressing the economic issues left to the new president by his predecessor. If he tries, on the other hand, to keep the public happy at all costs, his government’s ability to address the economic problems will decline rapidly.

If the next administration wants to solve the problem of unemployment, it needs to eliminate the sources of economic volatility. It definitely has to do this without compromising on programs such as monthly cash subsidies to Iranian households. This means spending money without increasing the money supply. However with the oil revenues declining because of the sanctions and Iran’s limited ability to use these revenues in the global market, the government either needs to adjust the price of energy and eliminate the multi exchange rate system or to borrow money from the Central Bank. The latter will increase the money supply, which will increase the inflation. The former will be resisted because many suspect it causes inflation, even though it will create a more stable economy in which jobs can be created.

The problem is that the process of creating jobs is not a fast one. Dr. Nili estimates that any economic effort to create jobs would take three years to pay off. In these three years Iranians should shoulder increasing prices for gas and imported goods. Public pressure against those policies will mount.

Resource reallocation might be another source of public dissatisfaction when it comes to fighting unemployment. If the next president decides to give higher priority to employment, then it may need to allocate more resources to industries and the development of the private sector. This could mean shifting some of the existing resources from higher education and other public sectors. He will thus have the unhappy task of explaining to Iranians that having more of everything is not an option. Still this could be a great opportunity to implement some lasting reforms by expanding the private sector and improving the efficiency of the public sector.

Of course, many would think that lifting the sanctions would solve Iran’s economic woes overnight. This perception is wrong however. Iran’s economic challenges are no doubt caused in part by sanctions; the government would have more resources to deal with these issues where the sanctions to be lifted; yet lifting the sanctions alone will not be enough.

The next administration is expected to deal with the economic challenges using a limited set of policy tools; it can also make a difference by increasing the efficiency of public sector and improving on accountability and management standards. That will be a tough job, but it is a doable one. Despite significant challenges both due to the bureaucratic process and the public opinion the next government can start an economic reform process which will pay dividends in the long run.

Saturday, April 20, 2013

Second International Conference on Iran’s Economy


International Iranian Economic Association (IIEA)
Second International Conference on Iran’s Economy
Bilgi University, Istanbul
24-25 June 2013 
  1. The International Iranian Economic Association (IIEA)
IIEA is a pioneering initiative to foster high level academic research and scholarship on Iran’s economy. This project is initiated by twenty five senior economists from various institutions the around the globe who act as its ‘Founding Members’. The inaugural conference of the IIEA was held in SOAS, University of London in December 2011.
 
  1. The Conference
IIEA’s second conference is scheduled for 24-25 June 2013 and is to be hosted by Bilgi University in Istanbul. We have already received a keen response to the call for papers that went out in late 2012. The Programme committee is now in the process of screening and selecting the final papers.
 
Program Committee Co-Chairs:
  • Yeganeh H. Farzin (University of California, Davis)
  • Hassan Hakimian (SOAS, University of London)
 
Scientific Committee:
  • Parvin Alizadeh (London Metropolitan University)
  • Mohsen Bahmani-Oskooee (University of Wisconsin-Milwaukee)
  • Mahdi Barakchian (Sharif University, Iran)
  • Sohrab Behdad (Denison University)
  • Firouz Gahvari (University of Illinois at Urbana-Champaign)
  • Hamed Goddusi (M.I.T.)
  • Nasser Khiabani (Institute for Management and Planning Studies, Iran)
  • Esfandiar Maassoumi (Emory University)
  • Hamid Mohtadi (University of Wisconsin-Milwaukee)
  • Farhad Nomani (American University of Paris)
  • Djavad Salehi-Isfahani (Virginia Tech)
  • Davood Soori (Institute of Banking Sciences, Iran)
  • Homa Zarghamee (Columbia University)
 
Organizing Committee Co-Chairs:
  • Hadi Salehi Esfahani (University of Illinois at Urbana-Champaign)
  • Esra Gürakar (Okan University)
  • Ege Yazgan (Bilgi University)
 
Admission:
  • Standard rate £200; 
  • Academic rate £70; 
  • Students: £20
 
 
Contact email: Valentina Zanardi: vz1@soas.ac.uk
Contact Tel: +44-20 7898 4490
Venue:
Santral Campus of Bilgi University
Santral, Istanbul
Eski Silahtarağa Elektrik Santralı
Kazım Karabekir Cad. No: 2/13
34060 Eyüp İstanbul

Wednesday, April 17, 2013

Still resilient: people vs. prices

My recent article for IranOpinion.com

As Iranians came back from a long new year holidays they face more volatility in their economy than they expected. Two digits inflation rate has been part of Iran’s economic reality for the past decades, however recently Statistical Center of Iran (SCI) announced that inflation has reached new heights in the last month of last Iranian year (March 2013).

According to the SCI latest report released on April 1st 2013 Consumer Price Index (CPI) has reached 601.4 using 2002-2003 as a base year. This signals an increase of 40.6 percent compared to the same month in the previous year when CPI was 427.6.  Compared with the prior month the CPI has increased by only 3 percent rising from 583.7 to 601.4. The lion share of increase in CPI belongs to increase in the price index for food products; 85.1% of the change is due to the increase in the prices of these items. Overall CPI increased by 31.5% during last Iranian calendar year (March 2012-March 2013), however this ignores the point to point increase of 40.6% and downplays the drastic increase in the price levels.

Citing these differences some argue that the data does not reflect the true inflation rate in Iran. However that argument is valid about many countries. For example Canadian government adjusts CPI estimations from time to time to keep the official value within the targeted area of 3%. Recently USA government has decided to use a different approach to using CPI in estimating the adjustments in the social security payments. The important point about CPI is not how much it is but how one can interpret its changes.

Interpreting variations of CPI many economists will remind you that an increase in CPI reflects a potential decline of shopping power for the average typical household. After all CPI is estimated using an average typical household’s consumption basket. This basket includes the average amounts of items consumed by average families. This is the practical approach to estimating CPI, however by using a fixed weight for different items and using a limited number of items CPI does not necessarily reflect all the changes. Thus it is not a good way to measure what people are actually buying at the store. It does not take into account the simple fact that shoppers might alter the amount of their purchases when the prices are rising. A household’s budget dictates the total cost it can spend, not the amount of items. When prices change a household cope by changing the amount of items they purchase. Here one must look at the numbers more closely.

Inflation: increasing at an increasing rate

The price index to for overall category of food, drink and tobacco products reached 895.6 in the last month with the price index for food items reaching 937. This is an overall increase of 57.4% compared to the same month last year, when one estimates point to point inflation in food products. In other words average typical Iranian family had to spend 57.4% more on average on food items in this Nowruz compared to the previous one. It is only logical to think that many Iranian households had to make adjustments in their consumption baskets by choosing to buy less from some products, food items in this case. Since the total consumption is not known for different items it is difficult to identify where average Iranian households had to compromise. The true welfare effects of this increase in inflation are unknown.

Traditionally SCI and Central Bank of Iran (CBI) report the average change in price indexes and not the point to point changes, which is usually higher than 12 month average.  One also needs to take into account that Iranians experience the sharpest increase in inflation during the Iranian New Year shopping season. Reporting a 12 month average would reduce the seasonality affect. However the fact remains that the inflation has increased across all the months for the last Iranian year. It is noticeable that it increased at an increasing rate during fall of 2012 and winter of 2013.  Some might argue that this pattern is not alarming and it follows the traditional business cycle in Iranian economy. However reviewing SCI report one notices that 12 month average increases in inflation for March 2012 through March 2013 are uniformly higher than the same averages for the period of March 2011 through March 2012.

Facing these changes the question remains that how an average Iranian household will react to increasing prices. One interesting observation is the number of domestic travelers during the Iranian New Year holidays. According to one estimate the number of domestic travelers passed 61 million. That is a significant number in a country of 77 million. Again this aggregate number hides the substitution effects, which might exist. It is true that some Iranians might have chosen domestic travels because traveling abroad has become too expensive following last year devaluation of Rial, Iranian domestic currency. However looking at the number of travelers one can conclude that the average Iranian family can still afford traveling and a three weeks holiday, a not insignificant fact to remember.

Reading SCI report on price indexes one has no doubt that the prices have been rising at a faster pace than before in Iran. Many observers will follow the inflation in Iran closely in coming months. However when placed in the overall context of the economy and when other economic factors are taken into account one has to admit the average typical Iranian household has remained resilient in the face of economic volatility.

Tuesday, April 09, 2013

Bushehr Earthquake

Mehrnews reports that an earthquake of 6.1 magnitude hit Kaki county in the province of Bushehr at 4:22 PM on Tuesday April 9th. The center of quake is 160 km from Bushehr nuclear facility. So far casualties stand at 32 killed and more than 500 wounded. A large number of wounded needed first aid and were released after being treated.

Sunday, April 07, 2013

Impasse

The 5+1 reminds me of Iran's negotiations with Iraq before Iraq attacking Kuwait. They met, they talked but nothing came out. Then Iraq attacked Kuwait and out of sudden "There was a will" on Iraqi side. They released our POWs over night almost. I remember that night I was camping with my high school in Golestan Forest in Gorgan. Our bus driver came to tell us and our teachers that "The dude said to come and to take your boys home". We were so happy three of us had fathers who were POWs then.
I do not know what is needed for a will to exist this time though.