The Thirsty Fish

Iranian Sociology and its Discontents

I recently returned from Gothenburg, Sweden and the quadrennial International Sociology Association’s World Congress.  It’s kind of like the World Cup of sociology.  There I sat in on a session organized by the Iranian Sociology Association, where a few presenters, including its president Hossein Serajzadeh, discussed the state of social science in Iran.  I have visited many sociology departments in Iran, both in Tehran and elsewhere, over the past few years, and the comments I heard echoed my earlier experiences.  Sociologists feel that most of the problems of social science institutionalization in Iran stem from the state’s politicized relationship vis-a-vis the disciplines.

With the recent intensification of state pressure on Iranian social scientists, including “early retirements” for some of the professors in the most prestigious faculties in the country, no one should dismiss the constrained atmosphere in which Iranian social scientists and students operate.  But is that the only problem with Iranian sociology?

Two of the presentations focused almost exclusively on institutional aspects of Iranian social science - enrollments, programs, number of students, and its history.  This is par for the course - I often find that discussion of social relations in Iran takes the form of “just the facts,” usually with a comparison between Iran and wealthy countries thrown in for good measure.  This time, Iran’s undergraduate and Ph.D. enrollments in the social sciences were stacked next to OECD countries, like the US and France, as well as Turkey and South Korea - the perennial “model states” that Iranians compare themselves to.  Frankly, Iran didn’t look too bad.  But this type of comparison - deeply rooted in an exceptionalism that pervades both mass and elite society in Iran - displayed a lack of reflection itself.  Sociologists should try to question the standard frameworks and categories that others apply.  If you put Iran up against Brazil, Egypt, Indonesia, China, India, Mexico, etc, - in other words, the large Third World countries that are more reasonable to compare Iran with given their common histories - what would we find?  I wager that many of the “backward” statistics Iranians often point to - not just on social science institutionalization but also in almost every other category - would fall neatly in the middle of the range that is observable in the former Third World.

Better yet - Iranian sociologists should be asking a question one level removed: Why does this latter sort of comparison never occur?  Confronting - and theorizing - that conundrum would call into question some of the most deeply held myths present in Iran today, no matter where one stands on the political spectrum.  But that is the job of social scientists, because few other intellectuals are interested in myth-busting, especially when nationalism is involved.

To be fair, none of these characteristics are exceptional to Iranian intellectuals at all.  Exceptionalism is part of nationalist rhetoric from Poland to China to Madagascar, thus it is the least exceptional thing about Iran.  Intellectuals, historically, have been one of the main conduits for such exceptionalism, in as much as they see themselves agents of the nationalist cause.  This has produced some great work over the 20th century - Eric Williams’ Capitalism and Slavery comes to mind.  Part of the job of successive generations of intellectuals, of course, is to take apart the bundle of myths that previous scholars embed in their analyses.  In Iran, this can be seen in the critique (or, sometimes, wholesale dismissal) of Ali Shariati which became prevalent in the 1990s.  I rarely, however, see Iranian social scientists reflect on what myths or assumptions are the most prevalent ones among Iranian intellectuals today.

One refreshing exception to this was the last presentation at the panel, by Shirin Ahmad-Nia.  She and her colleagues hinted that Iranian social science cannot recognize a range of social problems in Iran because it still relies on frameworks of understanding Iranian society through the antiquated paradigm of modernization theory.  Indeed, the large majority of Iran’s reformist intellectuals in the 1990s portrayed Iran’s problems as stemming from its trapped position “between tradition and modernity.”  It still forms the basis of rhetoric among many Iranian elites (and has done so, on and off, for the past 150 years).  Yet this too, is nothing exceptional - China’s social scientists are obsessed with modernization theory, for example.  So, I would encourage Professor Ahmad-Nia and her colleagues to reflect further on why Iranian intellectuals utilize modernization theory so, well, religiously.  We need, in other words, a sociology of Iranian intellectuals of the kind that Pierre Bourdieu did so well on the subject of French intellectuals.

In sum, many of the problems that Iranian sociologists noted about the state of their discipline in the country - a reliance on quantification of basic indicators instead of qualitative and critical analysis, a faddish and uncritical importation of the Western social science of the day, and an under-institutionalized training system - are not Iranian problems per se.  They are large structural problems within knowledge production in the global South.  Iranian sociology would mature greatly if they took this context as a starting point for their considerations.

Lawrence on Collier and Mintz on Haiti

The field of economic development has more popular books in print than was the case ten or twenty years ago.  In fact, the last decade where such a volume of print existed on poorer countries and their prospects was the 1970s.  That previous era, however, generated a more critical perspective on the promises of “catching up” to the wealthy Northern states.  Now, within the popular debate between, say, Jeffrey Sachs and Bill Easterly, there are huge assumptions underpinning both “sides” that are left unspoken.

Peter Lawrence, a geographer, takes on such assumptions in the latest development fad to hit your airport bookshelves: Paul Collier and his solutions for the “Bottom Billion.”  This short piece from New Left Review is one of the most trenchant critiques of the current development field that I have read.  Obviously the methodological criticisms are the easy ones - the application of econometrics to problems of political sociology is economic imperialism of the highest order.  But more substantively, the unmasking of Collier’s theoretical assumptions is what makes this review great.  The task left wanting by Collier’s work is that we still need to explain the “independent” variables that Collier uses for his explanations of endemic poverty and war - GDP levels, “bad governance,” etc. 

What Lawrence does not touch on in this piece, and something I would add, is that using PPP-adjusted growth rates as a correlative measure for any social outcome is highly suspect, given that they are doubly distorted.  They are distorted the first time when the World Bank issues them (and continually changes the historical record of GDP levels without telling anyone or explaining why).  The second order of distortion comes from using PPP-adjusted income levels on top of that.  To say something like, “For every 1% increase in GDP growth rates, one would expect 0.5% better governance” is a ludicrous statement on so many levels.  If you don’t believe me on the World Bank’s changes in its historical GDP data, go take a look at how the GDP for large Southern states such as China and India for the year 1960, say, keeps changing over time.  This is their GDP at foreign exchange levels, before they are even adjusted for Purchasing Power Parity.

Lesson to Iranians who often use indexes of business freedom and transparency when discussing their country: these scales are not very useful in understanding why countries are richer or poorer.

On a different note, the anthropologist Sidney Mintz has a wonderful essay in the Boston Review on his field work in Haiti from the 1950s.  In it, we get a sense of the importance of markets to subsistence production by the rural sector in an impoverished country like Haiti.  Mintz recounts the strategies of income pooling by women market sellers and the sophistication of the networks that existed.  It reminded me of something Giovanni Arrighi once told me, which was that peasant/rural life requires far more “skills” than urban life.  Put any of us in their position and we would starve shortly thereafter.

Implications for Iran from this piece: rural-urban linkages and peasant production are a source of vibrant social activity, not a traditional backwater.  Individuals who take part in such economic activities are likely more savvy than anyone (including the state) gives them credit for.  Notions that the rural areas are bought off by the state, or duped, are therefore suspect.

Yes, We Take Dollars

If you recall, a few years ago a lot of stink was made about Iran moving the currency used in its oil transactions from the dollar to the euro.  This fit neatly into the swirling conspiracies of the day.  For US hawks, this was a sign that Iran was an “ideological” actor hellbent on undermining US hegemony in the global economy.  For some on the political left, who also seem to equate currency exchange rates as the only measure of international power, this ensured that the US would subsequently go to war with Iran in (insert very small number) months.  When I was in Iran during the summer of 2006, and Iranians were quite scared of the threat of war, this kind of talk only made it worse.

Last Thursday (May 6th) in the newly re-opened Shargh newspaper (unfortunately, not available online at all), it was reported that the The Central Bank of Iran announced that it would not be replacing the remaining dollars in its foreign exchange currency basket with euros.  Furthermore, industrial units that held debts to the banking system could still pay them in dollars.  This is because state loans to large industrial concerns in Iran often use hard foreign currency in order to allow them to make international purchasing easier and reduce the inflationary costs on domestic business.

The article features responses by several high ranking Maljes members, all of whom make sure to state that this is not a “retreat” away from the euro.  Indeed, the government bragged last year that it had made $2 billion by converting foreign exchange reserves to the euro over the past several years, due to the dollar’s relative decline.  That was certainly announced with a lot of sound and fury.

However, note what Musa Servati, member of the Majles Budget and Planning Commission, had to say: “When the dollar’s rate is up, it is better to use the euro, but when the euro’s rate is up, it is better to use dollars in transactions. …Hence, we cannot say that the Central Bank’s policy was necessarily to move from the euro to the dollar, but it is a form of policy on money that we should use in order to have a varied currency basket.”

In other words, the Iranians play the international currency markets like everyone else, and the deep (and unresolved) crisis of the world economy is temporarily sending everyone back into dollars.  Provided the European currency survives this year, I am sure none of this will be mentioned the next time Iran moves into euros again.

Are the Iranian Poor a Bunch of Welfare Queens?

The picture we usually get of the Iranian poor in the media is one of two extremes: the wretched of the earth, or the equivalent of Ronald Reagan’s “welfare queens.”  (If you remember, Reagan attacked the meager US welfare system by inventing a group of people that did not even exist: pink-Cadillac driving, children producing, unwilling to work black women.)

One hears similar things about Iran, in an exaggerated caricature of the truth.  Rural villagers are handed money and told to vote for conservatives.  The religious poor are recruited into the basij and indoctrinated.  War veterans get the plum jobs and their kids get into the universities.  The middle classes get nothing and, due to the favorable treatment of the poor, end up resentful and rebellious against the lower class.  This is usually called “populism,” a pejorative word that has almost no analytic value in its current practice.

At the same time, one also hears that the Iranian poor are the extreme lumpenproletariat with nothing to lose except their chains.  They are taken advantage of by a state where connections mean everything, exploited by a capitalist sector that laughs at the de jure wage laws, and get shamed by the middle classes because they cannot compete in the conspicuous consumption race (without a finish line).  In some versions of this story, they are also the most revolutionary, imminently about to rise up.

When anyone hears either one of these extremes, one should first realize they are encountering a highly politicized debate.  This involves domestic Iranian political factions from right to left, diaspora Iranians and their various political lineages, western-trained Iranian academics who import the latest fads in social science, and, finally, the plodding accumulation of “common sense” among journalists who do not know much about Iran.

In this debate, you would not hear that the largest welfare program in Iran is the Social Security Organization (sazman-e ta’min-e ejtema’i), which covers 27 million Iranians to some degree.  This organization provides various forms of health coverage, old age pensions, and unemployment insurance to mostly formal workers in the labor market.  It also is attempting to extend coverage to Iran’s self-employed (the large informal sector or the petty bourgeoisie), agricultural workers, carpet weavers, seminary students, and even nomads.  It has not been very successful at getting the more vulnerable social groups covered since these new policies were only recently implemented in the Khatami era, but could be expanded if it was more of a priority.   A smaller, more “revolutionary” welfare organization, the Imam Khomeini Relief Committee, gives regular aid to no more than 5-6 million Iranians, who are usually the poorest.

Health care in Iran can be disastrous if you have a catastrophic disease, and the various public health insurances that exist often cover no more than 30% of out of pocket costs.  However, almost all health services in Iran are subsidized by the state and the costs are kept well below market prices.  Many Arabs, Russians, Turks, Pakistanis, and Iranians from Los Angeles travel to Iran each year to obtain cheap, professional medical care.  I spoke to a dentist in Tabriz two weeks ago who informed me that, although there is almost no dental insurance in the country, I could get a root canal for around $75-100.  He actually looked at my own teeth and said that my gold fillings, which I had gotten in a Chicago dentist’s office on the cheap because I had no insurance and could not afford the more expensive composite fillings, were of shoddy quality.  He could replace them all for around $250-300.  Pharmaceuticals in Iran are incredibly cheap, and 97% of them are made domestically.

More good news is that, in the upcoming subsidy reforms that may be finally enacted this year, health services and pharmaceuticals will not be touched.  They were removed from the subsidy reform bill in its early stages in the Majles.  The only health services that are not subsidized in Iran are cosmetic surgeries – the ubiquitous nose jobs being the known example.  My dentist friend said that services like teeth whitening, orthodontics, and “smile therapy” are the equivalent in his profession.

Furthermore, if you are part of the 30% of the population who lives in a village, or you can at least claim residence in a village, you have access to Iran’s village insurance system and get free basic healthcare along with free medicine, family planning, check ups, vaccinations, and birth control.  On a recent trip to a village clinic – a “health house” or khaney behdasht – the health workers told me that the biggest diseases in the village were diabetes, hypertension, and depression.  These are diseases which many middle-income countries would love to have, because they usually only manifest themselves if your population survives to old age.

I could go on, but the overall point is that Iran’s welfare system, while it is confusing, is primarily targeted towards the middle strata of the population.  Universal programs such as subsidies, or welfare programs stemming from the “German model” such as formal sector pensions, are both the norm and the most expensive part of the system.  As we also know from the US welfare system, universal programs usually end up benefiting the middle classes rather than the poor, and they are politically quite popular.  The Iranian elites are all in favor of removing subsidies for gasoline, but look how scared they are of actually implementing it – it now seems that subsidy reform will not happen in March as was planned, and will be pushed back to September if not further.

Why does none of the coverage – sadly, I am not exaggerating here – discuss social welfare in Iran in these terms?  One reason is that certain state policies – subsidies, pensions, control of health costs – are seen as entitlements or social rights, while other policies – preferential hiring of veterans, dividend paying “justice” shares – are seen as charity or means-tested.  This dual caricature exists in any welfare system, and activists have long known that if you want a policy to last beyond its implementation, it is best if it acquires a universal flavor.  Otherwise it leaves the policy more open to political jockeying.

Second, however, is that this rather normal political conversation is encased in the electrified fence of Iran media coverage, where someone can be accused of being a regime apologist if they say that the tap water in Tehran is potable.  This is not likely to go away, but one can hope that basic media literacy - that is, don’t trust everything you read - will expand enough so that the “common sense” on Iran becomes less common.

I have listened to middle class Iranian students, not rich by any means, fulminate about the preferential treatment of the poor.  I then usually asked the students if they themselves received free health care at the state university they were attending, to which they replied, “of course.”  I then usually enjoyed the look on their face when I told them that in the US, public university students are bankrupted by health care and loans before they even enter the job market.

My Recent Piece in Inside Iran

I have a new piece on the debate over poverty in the online analysis site Inside Iran - read it here.  Most discussions of Iran’s economy make it sound like the place is falling apart.  I’ve never seen a good comparison of Iran with other middle income states on basic indicators of welfare, industry, education, etc.  Instead we hear a lot of catastrophic language.  Critique is fine, and should be encouraged, but it has to be grounded in an understanding of the constraints and challenges that middle income states have faced over the last sixty years.  Iran falls in the middle range of middle income country performance on a lot of indicators, including inequality.  Yet I have a sinking feeling that people who want to discuss Iran only like to say that everything is going horribly, or everything is going great.  Thus, one needs to clear some ideological brush before building a new comparative understanding of Iran in the world economy.

Does Iran’s Urban Working Class Have a Rural Subsidy?

There has been increased labor unrest in Iran during the past few years, and just in the past few weeks organized protests by workers have occurred in Ahvaz and Shiraz.  Much less attention is paid to these types of protests compared to the recent student unrest within universities, yet Iran has a long history of labor activism.  The Abadan oil strike of 1945 was the largest coordinated labor strike in the Middle East probably until the general strikes of 1979, where workers played a major role in ending the Pahlavi monarchy.

Yet one should not overestimate the homogeneous nature of the Iranian working class, and draw from that unrealistic assessments of its solidarity or predictions of a nascent “shop floor” revolution.

Iran, like many middle-income countries, has a small formal labor force, often located within nationalized (or formerly nationalized) industry. This section of the working class benefits from its position as “formal” labor, meaning that these workers have been able to extract better pay and benefits, working conditions, and legal contracts from their employer, who is often the state. But Iran, like many middle-income countries with large-scale industrial projects, never transformed most of its population into the industrial proletariat that was expected by theories of liberal and Marxist economic development.

Instead, what did occur in most of the world was the creation of pockets of formal labor, but mostly massive depeasantization and deruralization. These former peasants usually traveled to cities and became “informal” labor – a term that exists only in contradistinction to formal labor. This is the largest group of people in the world today, and it is the fastest growing social class. Many of these individuals make their daily living through a variety of economic activities – transient or temporary wage labor, self-employment, dependence on income from small remaining land parcels, and pooling resources within extended families. They have a very different life than formal workers.

Often those countries that carried out radical land reform, such as China and most of East Asia, gave their informal labor a more flexible way of moving back and forth between town and country. Those countries that completely removed the peasantry from the land decades or centuries ago, like much of Latin America and Southern Africa, are now suffering worse conditions as it becomes apparent that the world’s population will not be converted into an industrial proletariat.

The irony here is that, while a country still has a rural sector that can support itself, either by producing goods for subsistence or by selling them on the market, the rural sector can provide a form of subsidy for urban-based capitalist development.  This is because migrants who come from rural areas and maintain ties to those areas can depend on those ties to make up part of their own subsistence.  This makes it cheaper to use their labor in urban locales, thus increasing the profitability for capitalists who employ them.  During the initial formulation of this conception of rural-urban ties in the late 1960s and early 1970s in Southern Africa, it was called the “rural subsidy” thesis.

When the rural sector is decimated through either “accumulation by dispossession,” in David Harvey’s term, or by land reform that is geared towards generating capitalist accumulation in the rural sectors, it undermines the rural subsidy to urban labor, and therefore raises the cost of labor in the urban sector.  Rural individuals now begin to depend on ties to urban sectors for their subsistence, which raises the cost of urban labor even more.  It is very possible (and often happens) that it is not worthwhile for domestic capitalists for employ urban labor at this cost, especially if they have to compete internationally.

The end result of this is that the chances for capitalist development in poorer countries is actually lowered when they become “more” capitalist - when their labor force resembles the wage-earning proletariat of our understanding of a “developed” country.  This seems to have happened in the very country where the “rural subsidy thesis” originated.  South Africa now has an official unemployment rate of around 40%.

As far as I know, there is no empirical work on how Iran’s labor force is structured with regards to the changes of urban/rural ties over the last 30 years.  But, I wager that, as with most things, Iran is somewhere in the middle and not at the extremes of the spectrum. Its land reform in the 1960s was by no means radical, and the more conservative factions of the Islamic Republic stopped attempts at additional land reform in the 1980s. The result is that some urban-based Iranians who are in the informal labor force can fall back on rural incomes, but not all of them.  Other urban-based Iranians provide an “urban subsidy” to their extended families who have remained in the rural sector.  That means there are at least three structural groups in the Iranian working class that need to be considered separately: 1. Formal workers in mostly state industries and the public sector; 2. Informal workers who retain beneficial ties to the rural sector, and thus part of their livelihood can come from the rural sector; 3. Informal workers who have no ties to the rural sector, or must provide an urban subsidy due because their ties, and thus all of their livelihood must be found in urban areas.

Note that, thus far, I have not brought in the state to this analysis.  The state can exacerbate or ameliorate any of these existing tendencies.  In Iran’s case, I would also wager that basic welfare provisions for the poorest Iranians, through a variety of welfare organizations as well as subsidized consumption, have lowered the cost of labor for domestic capitalists.  It also may have homogenized the working class to a degree that would not have existed if the state did not subsidize consumption.

However, it would be going too far to say that, when labor unrest occurs in Iran, it is always because of the same grievance.  The structural divides of formal and informal labor are very apparent here, and overlap with ethnic cleavages (including migrant labor who ends up as the super-exploited class).  The lack of horizontal organizational ties and representation in the government, except for the state-provided “House of Labor,” adds to the standing limitations on labor activism.  Yet, even with these strictures, some related and others unrelated to the existing regime, labor unrest continues to pop up in unpredictable ways.

I hope to add more to my ongoing discussion on Iranian labor with a future post on Farhad Nomani and Sohrab Behdad’s recent work.

On the Media, Kapuściński version

Time goes fast when you’re having fun, so it looks like posts here will be few and far between. But, sometimes one has to share a quote.

The departure of many foreign journalists from Iran after the election, coupled with the intensification of the media spotlight, proved to be an odd experience.  I picked up a copy of Ryszard Kapuściński’s The Soccer War while I was in Copenhagen.  The old book seller offered me a glass of wine and said, “People either love Kapuściński or hate him.”  I love him, if only for the reason that there are few like him around today.  And, The Soccer War is his best, since it is not really one book but about ten short books.  Plus, it has extremely dry humor.  To wit, here is Kapuściński describing a group of foreign journalists who had come to Honduras to report on the four day Soccer War between Honduras and El Salvador:

The major advised us to return to Tegucigalpa, because advancing might mean getting killed without even knowing who had done it. (As if that mattered, I thought.)  But the television cameramen said they had to push forward, to the front line, to film soldiers in action, firing, dying.  Gregor Straub of NBC said he had to have a close-up of a soldier’s face dripping sweat.  Rodolfo Carillo of CBS said he had to catch a despondent commander sitting under a bush and weeping because he had lost a whole unit.  A French cameraman wanted a panorama shot with a Salvadorean unit charging a Honduran unit from one side, or vice versa.  Somebody else wanted to capture the image of a soldier carrying his dead comrade.  The radio reporters sided with the cameramen.  One wanted to record the cried of a casualty summoning help, growing weaker and weaker, until he breathed his last breath.  Charles Meadows of Radio Canada wanted the voice of a soldier cursing war under a hellish racket of gunfire.  Naotake Mochida of Radio Japan wanted the bark of an officer shouting to his commander over the roar of artillery - using a Japanese field telephone.

Should We Use PPP-Adjusted Data to Discuss Global Income Inequalities?

Most economists, even my favorite ones, use Gross Domestic Product adjusted for purchasing power parity (PPP) when they compare the “wealth of nations.”  In my last post, I made a short case for why comparing income levels in the world economy should use national income calculated at foreign exchange rates (FX).  Given that my assertion falls in the minority position in the world of social science, I would like to expand on that claim.

After my justifications, I will also argue that Gross National Income (GNI – formerly known as Gross National Product/GNP), rather than Gross Domestic Product (GDP), is a better indicator of wealth levels in the world economy.  I hope that readers will be able to sift through the econo-speak and get at the substantive issues at hand.

GDP is an overall measure of the flows and stocks of economic activities linked to market processes within a particular political territory.  Yearly increases in GDP are the “value added” by the market to any existing and new economic activities over an annual period.  When GDP per capita is measured at FX-based prices, this means that the market “value” of the overall set of market-linked economic activities within a certain territory is denominated in the national currency.  This can then be converted at the international exchange rate to a common currency (usually US Dollars).

The GDP figure by itself (or when divided by population size to get GDP per capita) does not tell us what portion of the country’s wealth is distributed in labor incomes, property incomes, or entrepreneurial incomes – the “wages, rent, and profit” of classical political economy.  Nor does it tell us anything about inequality of income within a country.  GDP is simply the total product (hence, gross).

The concept of GDP has a long history of criticisms.  Feminist and ecological critiques argue that many economic activities – constructive (e.g. child-rearing) and destructive (e.g. pollution) – are not always assigned “value” in the market.  Without a market value, these activities are not recognized as “production” in the accounting of a country’s total wealth.  Alternative measurements do exist that attempt to calculate what wealth levels of a country would be like if reproductive labor or ecological destruction were taken into account.

Another critique of FX-based GDP is that international currencies fluctuate in the short term.  Therefore calculating a country’s wealth via its exchange rate with the world economy distorts the “real” value of its economy.  The World Bank attempts to rectify this with the Atlas method, which adjusts for fluctuations in currencies and also in variations of inflation rates.

The critique of FX-based GDP that resulted in the PPP “project” by the 1960s, however, was that there were observable differences in prices for goods and services between countries.  Tradable goods and services, ones that can be bought and sold on the world market, can differ due to the national effects of tariffs, subsidies, and taxes.  Non-tradable goods and services, especially the latter, differ widely around the world, with prices for many services usually much lower in poorer countries.  The PPP advocates argue that income levels calculated at FX rates do not take into account these differences in price levels.  PPP adjustments, in theory, recalculate FX-based national income using estimates of prices for goods and services in that country.  As a result, PPP-based GDP is supposed to give a better picture of relative consumption levels in the world economy.

There are lots of methodological problems that still exist in the construction of PPP data: many estimates are not made from direct observation of prices at all but from complex calculations, the quality of various goods and services are often not the same and attempts are made to factor this in, benchmark countries are used to calculate PPP incomes for other countries with not so great accuracy, and the backward historical projections in changes in PPP-based income use growth rates from FX-based data.  All of these problems are compounded when calculating PPP-based income for poorer countries.  The University of Pennsylvania, who has undertaken a large portion of the PPP project, estimated that in its 5^th set of PPP benchmarks (released in 1991 with analysis of 64 countries), the range of accuracy of its income data for countries with less than a tenth of the US’ income was 60% up or down.  As I pointed out in my last post, the most recent 2008 PPP benchmarks (the first to actually contain any systematic price data from China) have once again radically changed our understandings on poverty and consumption for large parts of the global South.

However, even if PPP-based data was entirely problem-free in its collection, and it accurately reflected average consumption levels for each country, a more serious problem exists when using them to understand global inequalities in wealth.  With PPP-based data, we attach more importance to domestic economic processes in analyzing the reasons for the relative wealth of nations, and minimize the role of economic processes that take place across borders.  If PPP-based income represents the command over economic resources a population has within its territory, FX-based income represents the command a population has over world economic resources.  If the latter is more relevant for understanding why countries “catch up” or do not “catch up” with Western wealth levels, then PPP-based incomes underestimate the inequality between states of global income distribution.

It is understandable, then, that most economists like PPP-based data, since their models of growth are based on domestic factors of production (land, labor, capital).  The best-known model of growth, and the one implicitly referred to by Hadi-Esfahani and Pesaran in their article, is associated with economist Robert Solow.  The Solow theory of economic growth argues that, given population growth is equal to zero, the accumulation of capital is driven by technological progress.  Or, as Hadi-Esfahani and Pesaran put it, “new ways of producing more output given [a set amount of] inputs.”  Therefore, they write, “…the study of economic growth can be viewed as the analysis of the factors that enhance or hinder the acquisition and use of technology.”

In a wider understanding of “technological innovation,” like the one used by the economist Joseph Schumpeter, “new ways of producing more output given inputs” means something more than simply the invention of new technology or the upgrading of existing technology.  It broadly includes the introduction of new methods of production (i.e. the assembly line), new goods and services for the market (i.e. the automobile), new sources of supply for production (i.e. rubber grown in Brazil instead of Malaysia for tires), new trade routes and markets to sell existing goods and services, and new forms of organization that combine the various factors of production (i.e. the vertically-integrated modern corporation).  This is why Schumpeter argued that the “entrepreneur” – any person or organization who accomplishes one or more innovations out of these types – is the driving force of capitalism.  Recurrent economic growth is based on “creative destruction” in the market: “creation” of new profit-oriented innovations that result in the “destruction” of existing methods of production.

Schumpeter, however, also pointed out that no single technological innovation could permanently guarantee a source of profits.  Competition by other economic agents would eventually increase as the innovative methods were emulated, leading to a decline in profits for the original agent.  The key to capitalist success, then, was to continually shift the pressures of competition elsewhere, either by generating a continuous stream of innovations within a particular organizational area (i.e. the auto industry in its early stages) or by shifting the area itself in response to other agents’ competition (i.e. moving out of cars circa 1982 and into computers).  As Schumpeter portrayed, the most successful economic agents in capitalism are those that “are aggressor by nature and wield the really effective weapon of competition.”

As Giovanni Arrighi pointed out, this “creative destruction” in the market via continued rounds of technological innovation (or, better put, entrepreneurial activity in all its forms) historically clusters the accrual of profits not only over time, but also over space.  In other words, those businesses that can continually innovate in world economy tend to be grouped in particular states.  This is largely because states have a big effect on how the “weapon of competition” affects their domestic constituencies.  States vary in their abilities to control access to the most lucrative niches in the global production of goods and services, provide higher levels of infrastructure to support continual innovations, and create a political climate that most favors capitalist entrepreneurs over other actors.  Some states do this more effectively than others because greater economic command, at least over recent world history, can be translated into greater political command.

If there were no states, and the world market was all contained in a single political entity (the dreaded “world state” of the US right), the accumulation of capital would be quite volatile over time, and we would not see such a clustering of wealth in particular areas as exists today.  In other words, economic command over world resources by states and their population matters.  If we want to understand the sources of capitalist growth over periods of history longer than a few years, such as Iran’s relative position during the 20^th century, it matters more than economic command over domestic resources.

With that lengthy but necessary exposition let’s return to the original question: should we use PPP or FX-based data to understand relative wealth levels?  The ability to continually generate technological/entrepreneurial innovations depends in the long run on participation in the world economy.  In business school speak, closing the wealth gap between a poor country and the West requires “moving up the value chain” within areas of global production of goods and services, as occurred in South Korea over the second half of the 20^th century.  This is easier said than done, as I attempted to show in my last post, but in any case one needs a relational lens to even begin to discuss the reasons.  FX-based GDP per capita is a better measure of the concept of economic command over world resources, and therefore the relative ability to sustain the continued innovations required for capitalist growth.  PPP-based income data inflates a poorer country’s relative command over world economic resources, and therefore should not be used when looking at the few successes and many failures in “catching up” with the West, or when the words “economic strength and size” are invoked.

After that, though I do not wish to add any more confusion, it is rather easy to explain why per capita Gross National Product/Income (GNI) is better to use than per capita Gross Domestic Product/Income (GDP).  GDP calculates the total output of production within the borders of a given political territory, no matter who generates it.  GNI calculates the total output produced by all the “nationals” of a given political territory, no matter where that output is produced.  Methodologically, GNI includes net income (wages, rents, profits) from foreign production (the current account balance).  GNI, then, focuses on the owners of economic production.  Usually there is not too much difference between the two figures, but given that sometimes it does matter, when we pick a measure to understand the relative wealth of nations, FX-based GNI per capita is the better indicator.

Economists might respond that they care most about relative standards of living in the world and not relative economic command over world resources.  As I said before, there are uses for PPP adjustment as well, even with all of its methodological problems, and consumption levels are a valid use.  However, there are also substantive reasons why consumption levels may not be the best indicators for relative standards of living and well-being in the world.  That discussion must wait for another post.

You might notice that in the last post I used FX-based GDP per capita to show Iran’s relative wealth levels over the last 50 years.  I did this so that it would be easier to discuss the article in question.  In a future post I will further discuss Iran’s trajectory with FX-based GNI per capita data, though the overall trends will not be starkly different than the tables I already posted.

Thanks to Roberto Patricio Korzeniewicz for consultation on this post.

Did Iran Lose its Chance of Catching Up With the West?

Does Iran’s economic trajectory over the 20^th century look very different from most other countries in the Third World/South?  This is an important question which is rarely asked.  While comparisons between time periods within a single country can be useful - say, comparing average growth rates of the Pahlavi monarchy with the Islamic Republic - they can also be highly misleading and misinterpreted.

In a recent and detailed article by Hadi Salehi-Esfahani and Hashem Pesaran, the two authors go beyond the usual comparisons of Iran with itself (Pesaran is a major economist on Iran and his influential publications go back decades).  They make the point that the only period of sustained and stable economic growth in Iran’s 20^th century history was between the early 1960s and the mid 1970s - true enough.  But, in addition, they state that Iran was catching up with the wealthy Western states by the 1970s.  The authors rightly assume that the goal of “development,” as it was argued in the 1950s and afterwards, meant “catching up” to the First World/North, and not simply increasing the absolute size of the economy.  Wealth (or its numerical proxy, Gross Domestic Product) is understood and shown as a relative measure.

Using per capita GDP figures adjusted for purchasing power parity (GDPpc PPP), the authors note that at the end of this rapid period of growth in 1976, “per capita income in Iran had reached about 64 percent of the average for 12 Western European countries.” In the figure below, from their article, Iran’s real GDPpc PPP is graphed alongside the wealthy West, the average of all developing countries, and Turkey (probably because Iran often compares itself to Turkey):

From this particular angle, it certainly looks like Iran was catching up by the 1970s, while the rest of the Third World was not.  We can see that all countries were growing their economies, but the “North-South gap” was not decreasing (no major convergence has taken place since either, as the figure shows).  In the wake of the 1979 Revolution, we see that Iran’s economy shrinks relative to the North (actually, in 1977-8, Iran’s economy experienced a down turn and this can be seen as well).  After the 8-year war with Iraq, Iran’s trajectory returns to an average one that is shared by the rest of the South: growing, but not catching up (developing).

But is this an accurate picture of economic history?  Was Iran’s trajectory that different from the rest of the global South after all?  There are a few problems with the way the Hadi-Esfahani and Pesaran present the data.

First, by using GDP per capita adjusted for purchasing power parity (a measure which most economists use today), wealth levels of Iran, as well as the rest of the South, are inflated.  A major reason that economists use PPP, it is argued, is that comparisons of income between states do not take into account the varying costs of consumption of local goods.  A haircut in New York costs much more than a haircut in Tehran, so $1 in Iran “goes farther” – it has more purchasing power for certain goods and services.

This seems uncontroversial, and economists mostly all use PPP-adjusted income figures (as well as journalists).  However, there are two reasons why PPP data should be used more judiciously.  One, PPP adjustments to income released by the World Bank have turned out to be quite erratic, and the “true” figures keep changing.  Just in late 2008, new PPP figures (and their levels extending back to 1980) were released after re-calculations were done.  As economist Branco Milanovic noted, this drastically changed our conceptions of which countries were poorer than others: Vietnam’s GDPpc PPP for 2005 went down 41%, Bangladesh down 37%, India down 40%, China down 39%, Nigeria up 58%, and Mexico up 9%.  All because of changes in calculating how consumption is to be adjusted.  I assume that Hadi-Esfahani and Pesaram are using the pre-2008 PPP figures, so maybe their own data will show a large change.

Second, and more importantly, there is a substantive problem with using PPP to compare countries’ relative levels of wealth.  PPP is trying to get at consumption levels, and since economists generally assume that consumption is a proxy for an individual’s well-being, they like using PPP adjusted data.  But that is a contentious assumption (albeit not in neo-classical economics).  For sociologists, people (and states) pursue wealth not just for consumption, but also for all sorts of reasons related to status, prestige, and power.

In fact, the relationship between consumption and well-being (either measured by “happiness surveys” or by welfare indicators like life expectancy and literacy) is not very correlated, especially when we look at countries in the global South with a wide range of per capita incomes.  China was one of the poorest countries in the world in 1980, but it had a higher life expectancy and literacy rate than Iran’s in the same year.  Which country had a higher average level of well-being?  Should we use income-related or non-income related measurements?

Lastly, PPP data does not get at the international inputs that the national pursuit of wealth requires.  For a country to be considered developed, it probably needs a large university system that can invest and channel research in high technology fields.  Yet a world-class research library cannot be purchased domestically – one needs to pay the international market price for hundreds of thousands of books.  That is just one of many examples where PPP is useless.

PPP-adjusted income is really a compromise indicator that economists think is measuring welfare (through consumption) and wealth (through income) at the same time.  In reality, it is not a good indicator of either.

(Note: the Human Development Index actually combines PPP per capita income with three other non-income welfare measurements.  But by doing so, it further conflates all the problems discussed here: is it trying to measure wealth or well-being or consumption?)

I am not advocating throwing it out – if I want to know how far a dollar “goes” in China, PPP is useful.  When I teach students about international poverty lines, the $2/day line is a good way to make them understand some basic facts about poverty in the world economy.  But when we want to compare countries’ wealth levels in the context of a world economy, we should look at income per capita at international exchange rates (FX rates).  This is the way that everyone used to look at economic development only a few decades ago.  The reasons they do not anymore are not wholly scholastic.  Let’s try the FX method and see what we get.  The following table calculates Iran’s GDP per capita (FX) as a % of the OECD’s (basically, the major wealthy Northern countries) GDP per capita (FX).  The OECD is listed as 100% of itself for each year by definition - it is the baseline I am using for what is considered a “developed” state of wealth.

Iran certainly still had its relatively wealthiest years in the 1970s, but it was not at “64%” of the North by any means.  After the 1979 Revolution, the years of isolation and war, and a recession in the early 1990s, Iran’s gap was even larger.  Only with the recent years of economic growth has Iran reversed the trend and begun to converge with the North.  Yet it still has a long way to go.  But, let’s go back to our original question on development trends of Iran vs the rest of the South: was Iran breaking away from the “pack” in the 1970s only to rejoin it later?

Here we have the economic performance of individual countries and also whole regions relative to the OECD (North).  Unlike Hadi-Esfahani and Pesaran, who use an average line for the entire developing South, I break out the data by region.  Each country or region’s “peak” before declining is marked with bold type.  Like Iran, Turkey and Egypt, as well as the entire MENA region, peak between the 1970s and 1980s.

Latin America peaked even earlier in the 1960s – Argentina and Mexico lose ground on the OECD well into the 1990s, and Brazil peaks under the dictatorship in the 1970s (although data for the 1950s is not listed, Latin America did grow quite rapidly in the 1960s so the peak is not an artifact of the table beginning with that year).  During its period of high growth, Iran’s economy was deemed a “miracle” economy, but let’s not forget that Brazil and Mexico also were ascribed “miracle” status during their own relative wealth peaks.

China and India have been catching up since the 1990s (China even earlier), but still remain at low per capita GDP levels, no matter all the talk about dragons and elephants rising.  However, the East Asian region as a whole shows a trajectory very different than either the Latin American or Middle East story, where development efforts peaked in past decades only to experience one or even two “lost decades.”  Russia is also included so we can see what the “Second World” looks like in comparison to the OECD these days.

South Korea’s spectacular rise, when compared to other countries, is hard to believe.  It was already closer to the OECD in 1975 than Iran.  But from this we can see that South Korea is the exceptional case, not the developmental rule.  Comparing Iran only to South Korea (something that is done quite often in the Iranian business press) is not very valid if we are being serious.  The popular idea that Iran could have “leapt forward” into the club of rich countries (see Iran scholar Abbas Milani’s quote here) needs to be more critically reflected upon.

In sum, Iran’s economic trajectory replicates – though perhaps in more dramatic form - the story of most poorer countries outside of East Asia.  Promises of catching up seemed real in the 1950s and 1960s, during what is now called the “golden age” of Keynesian development for the South.  Yet all experienced relative declines in the 1970s or 1980s, during what is now called the “lost decades” of Southern development (I’m not even including Sub-Saharan Africa which did even worse).  This general decline, since it was so general, cannot be attributed to the internal political or social climate of each and every country.  Instead, it had much more to do with the world economic environment of each decade – something that poorer countries usually have little control over.  Even the OPEC oil rebellion of the 1970s, a main reason for Iran’s income gains during that decade, ended in the 1980s and the price of oil stayed low for two decades.

This calls into the question the overall impact of the 1979 Revolution on Iran’s economy.  We could play some interesting counterfactuals to guess what the contours of Iran’s economy would be like if events had been different.  But, judging from the relative economic performance of large swaths of the South over the last 40 years, significant and permanent “catching up” with wealthy Western states, as the Shah liked to boast about, would still have been unlikely.