The Thirsty Fish

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.

The Privatization Panacea in Iranian Politics

Some foreign analyses of the post-election events made the argument that the factions and politicians associated with the Mousavi campaign, especially Hashemi Rafsanjani, were planning to rush through a privatization of Iran’s state-owned companies and assets if they had won.  The usual epithet of the left – neoliberal – was hurled at Mousavi and his circle.

A quick aside: two words are used quite often in left leaning writing these days: neoliberalism and imperialism.  The former often stands in for plain old capitalism, the latter for almost everything else the left does not like – a far distance from Hobson and Lenin.  I rarely read anyone claiming himself or herself as a neoliberal or an imperialist.  They are ad hominem terms, which make them excellent for politics, but not very helpful for social science.

Back to Iran.  Only a few years ago I recall a particular book on Iran that argued the Ahmadinejad administration was the true neoliberal bête noire.  Again, the privatization of state assets and their “tunneling” to shadowy figures was the accusation.  As usual, the reality is not so simple.

Assuredly, many Iranian economists would love a huge private sector in Iran, since the public sector ranges between 60 and 70% of Iran’s GDP.  The quasi-governmental sector, where the state still provides funds, staff, and has either majority or minority control, ranges around 10-20% of GDP.

The word privatization has been uttered in Iranian politics since the late 1980s, when Iran emerged from the war and entered its “reconstruction” phase.  The zeitgeist of the time was “shock therapy.”  The idea was to rapidly sell off state assets to private hands without much planning, and it was implemented with gusto in many Latin American countries and, most infamously, in Russia.  The market would sort it out, and even if the market failed it could not be any worse than state failures in provisions of goods and services.

In Iran, there was a brief but rapid liberalization of the economy under Rafsanjani in 1992-3.  Here, just like in Russia, Bolivia, Argentina, and other cases of induced “transition,” there were austerity protests due to the rapid rise in costs of living.  Unlike Russia, Bolivia, Argentina, and many other cases, however, Iran backed off of its liberalization plan (to the dismay of many Western-trained economists inside Iran).  If Iran was supposed to be run by neoliberals who did not care for the economic consequences of their policies on the population, then they must be still in hiding after Rafsanjani performed a volte-face.

Since then, Iran’s economy has performed in the middle range of developing countries in the world economy (the subject of an upcoming post, I promise).  Also, since then, whenever anyone is asked how the sclerotic economy can be made better, all Iranian politicians throw forward the word privatization.

Just recently, Etemaad-e Melli interviewed Hamid Fooladghar, the head of the Parliament’s Special Commission on the implementation of Article 44 of the Iranian Constitution.  Article 44 lays out which sectors of Iran’s economy are to remain in public hands and which should either be in the private or cooperative economic sectors, and it is a buzzword for privatization.  He said that the privatization efforts have not been very successful, and that government capital which is theoretically supposed to be moving into the private sector is instead “circulating” within the government itself.  There are many reasons why privatization moves so slowly in Iran, which I might discuss in the future, but for now I just want to point to the original text of Article 44.

Here is what is says:

The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State.
The cooperative sector is to include co-operative companies and ententes concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.
The private sector consists of those activities concerned with agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors.

In 2004, while Khatami was still president, Iran amended article 44, part of a long-term project to join the World Trade Organization (the US has continually blocked Iran’s application).  As with China’s entry to the WTO in the late 1990s, the regulatory environment of Iran needs to legally conform to the standards set by the WTO to gain entry. Some of the main points of Khamenei’s exective order on the subject are:

The government shall not be allowed to engage in economic activities that fall outside those envisioned in Article 44. Moreover, it is obliged to relinquish any activity, including continuation and operation of previous activities that are covered under Article 44, and cede them (at least 20 percent annually) to the private and cooperative sectors by the end of the Fourth Five-Year Development Plan.

Also, some other goals:

…Increasing the share of the cooperative sector in the national economy to 25 percent by the end of the Fifth Five-Year Development Plan. …Support by the government of the cooperatives, proportionate to the number of members….Establishment of nationwide cooperatives to cover the three lowest deciles of the population with a view to poverty alleviation….Change in the role of government from direct ownership and management of enterprises to policy-making, guidance and overseeing….Economic empowerment of the private and cooperative sectors, and enabling them to enhance competitiveness of their products in international markets….Preparing Iranian enterprises to apply global trading rules intelligently and in a gradual and target-oriented manner.

And, finally, the privatization amendment to article 44:

Eighty percent of the shares of State-owned enterprises, covered under Article 44, shall be ceded to the private sector, joint stock cooperative companies and non-state publicly-held companies as follows:

1. State-owned enterprises engaged in large mining activity, large-scale and mother industries (including large downstream oil and gas industries), except the National Iranian Oil Company and companies involved in extraction and production of oil and gas.

2. State-owned banks, except the Central Bank of Iran, Bank Melli of Iran, Bank Sepah, Bank of Industry and Mines, Bank of Agriculture, Housing Bank (Bank Maskan), and Export Development Bank.

3. State-owned insurance companies, except Bimeh Marakazi and Iran Insurance.

4. Airline and shipping companies, except the Civil Aviation Organization and Ports and Shipping Organization.

5. Power supply companies, except the main electricity transmission grid.

6. Postal and telecommunication companies, except the main telecommunication networks, frequency assignment services and the main and basic postal services.

7. Industries affiliated to the armed forces, except defense and security products and services that are deemed essential by the Commander-in-Chief.

This is supposed to be done by pricing the assets through the stock market, and then holding companies will sell off the shares.  Ahmadinejad’s administration got involved when it began to distribute shares of privatized companies to low income families and named them “justice shares” (seham-e edalat).  Last year each justice share supposedly paid out around $70 as a dividend (probably not from the actual “profits” of these companies).  Note that the amendment says nothing about discriminating for or against foreign capital.

Is this neoliberalism?  Certainly not right now.  The main problem Fooladghar describes is that the shares of public companies are simply being bought up by other public or semi-public agencies - the Social Security Administration, the various Religious Foundations, the Army, the Revolutionary Guards.  This may not be as nefarious as some commentators claim, though.  All of these organizations possess built-up pension programs, which contain huge pools of capital that cannot be invested outside the country very easily.  This actually resembles the same form of pension financialization that occurred in Brazil, Argentina, and of course, the US (the California Nurses and Health Workers Union, for example).  Given that the entire state apparatus is “all on board” for this process, and the result is currently very little 100% privatization of anything, it is doubtful that this is shock therapy round two.

In reality, no faction wants full and rapid privatization of the state sector, nor would that be a very good idea given the failures of rapid privatization in other countries.  They all say (Ahmadinejad waffles on it, but Khamene’i brings it up at every opportunity) that privatization will be the key to economic success, but they are not very specific about the process.  Fooladghar said that these quasi-public pools of capital easy outcompete private sector capital when obtaining state assets.  If anything, Iran’s private sector still needs a “leg-up” from the government.

Instead, Iran’s state-business relations look much more like China’s in the early 1990s rather than Russia’s – a slow and gradual subjection of some state enterprises to market pressures coupled with the use of the national market to lure in foreign investment (including diaspora capital).  I am not sure if the government meant to enact such a gradualist industrial policy, but that is what has happened.  Given the track record of the Chinese vs. Russian economies over the last 20 years (and the absolute declines in Russian welfare indicators due to its economic collapse), it was probably a preferable path.

In a way, platitudes on privatization are probably leftover from the 1990s and the “magic of the market.”  Given the political turn in the global political economy, though, the talk seems rather hollow.  That is not to say that privatization of certain state assets could be a positive development in Iran, only that the salvation that economic privatization represents is likely a dying discourse that will hopefully be replaced with sound and historically proven economic and industrial policy.

CUMINet commentary

Last week I reiterated some of my comments here on the excellent Danish blog CUMINet, run by Rasmus Elling.  This was partly me testing the e-waters.  The only comment I received was understandably disconcerted.  Yet I was not implying that the possibilities for a renewal of “people power” were forever gone.  I was simply trying to add to a beginning critique of the reformist faction that is long overdue.  A few days later, Columbia Professor Hamid Dabashi echoed some of my points in Al-Ahram.

As Ernesto Laclau wrote in his recent book On Populist Reason, one of the problems of analyzing contentious historical moments is “the replacement of analysis with ethical condemnation.  …There is nothing wrong [with condemnation].  The problem begins when condemnation replaces explanation, which is what happens when some phenomena are seen as aberrations dispossessed of any rational cause.”  He goes on to say that this occurs not just with negatively connotated events, such as genocide, but also “with events that have positive emotional connotations.”

A Quick Post-Mortem, and Something Left Out of the Analysis of the US Response

Now that the demobilization of the opposition rallies has generally occurred, we can try to make sense of what was a most chaotic event. I am not implying that anything is back to normal … let’s just say it is back to quasi-normal. 2009 will be remembered as an historic year in Iranian history, whatever happens hereafter, to join 1906, 1953, 1979, and 1997 in the annals.

The social movement that just occurred in Iran was highly innovative and added many tricks to the general repertoire of protest movements, some of which became fetishized in the Western press, but it also borrowed from socio-cultural norms and symbols in Iran that run deeply through its history. This is how most effective social movements operate, and we should not be surprised that the coming together of hundreds of thousands in a highly charged emotional setting directed towards a single goal would generate such a development.

Its leadership, if one can use that term with the variegated reform politicians in Iran, was not so impressive. The protests and rallies are falling off, but not only due to state sanction. The opposition and its representatives’ strategies still seem to reflect politics as such in Iran over the last 30 years – every man for himself. Last week, on the same day, Karoubi, Khatami, and Mousavi’s people made three different calls for rallies. The problem was that they were proposed for three different places in Tehran. Nothing demobilizes a social movement like the perception of incompetence and disorganization at the top. Obviously they are under duress. But a nonviolent movement requires very good organization and discipline, and this will hopefully be part of the post-mortem as they consider what could have been done differently and move ahead.

What may be interesting for US-watchers, rather than Iran-watchers, is the US response to these events. Many have attacked the Obama administration for “not doing enough.” The European Union is even more perturbed about its lack of involvement, and is meeting constantly to ruminate on its enervation. The remarkable thing about the entire event, though, can be gleaned via a comparison with the Clinton era. During the triumphant 1990s, where a hyperpower United States supposedly existed during its unipolar moment, President Clinton would never have declined an opportunity to discuss a foreign election, and, of course, its relevance to the US or the US’ role in the world. The US was the yardstick by which all other events were judged, and Clintonian foreign policy was full of liberal clichés about the direction the world was going and if a particular country was acting “responsibly,” and thus along for the ride.

Both Clinton and Obama are intelligent people, yet Obama has basically declined to involve the US in the Iranian election. This may be called part of the “realist” strategy of Obama, coming after the messianic Bush years. But, this is not your father’s realpolitik. Unlike Nixonian/Kissengerian foreign policy by proxy, where the US actively engaged its spheres of influence and triangulated its rivals against each other, Obama’s realpolitik is the strategy of a country that (sometimes) realizes that this is not the 1990s.  The long term trend is that the US in decline vis-à-vis the rest of the world.

“Managing decline” is not a great bumper sticker, but it is what a responsible US foreign policy would be in the present moment. The opposite course, repudiating decline in the face of reality, was tried for the past 8 years. Like the British 40 years after World War II, the US may have some Falkland moments to bring back the memories of the good old days (Iraq War I and II probably belong to that category). Also, there is no guarantee that the “declinists,” who probably do not go by that moniker, will win out against US hawks of the liberal type to effectively corral Obama’s ear. It is far from clear that the US could have accomplished anything positive with a different strategy on Iran over the past month – those who say otherwise should lay out what they think would have happened. Yet this reluctance to “do anything” may be a sign of the coming multipolar world that, while less predictable, contains the seeds of a more balanced world political system.

Revolution Redux?

I’m sitting here in a lower-middle class neighborhood in Tehran right now, listening to choral chants of Allah-u Akbar outside my window.  It’s been the third night that I’ve had the pleasure of doing so.

There’s no need to recap here all of the events of the last 9 days.  The June 9 election results were evidently manipulated to such a large degree that even supporters of Mr. Ahmadinejad were surprised.  I’ve attended several opposition pro-Mousavi rallies over the last two days.   These are mainly middle-class affairs, albeit cross-generational and somewhat spontaneously organized.  Permit me not to go into particulars, but instead posit a question: what kind of social movement are we seeing here in Iran?

Many western journalists, some of whom cut their teeth on the last Iranian Revolution, have been quick to compare 2009 to 1979.  They note the call to mourning by opposition leaders in memory of the recently killed, the clerical splits that herald weakened support for the regime, the possible switching of allegiances of the police and security forces, and the chants that I’m hearing right now out of my window.  These journalists even point out (though they are now not allowed to go) that the opposition marches’ routes are along paths that were made famous by protestors in 1978-9. 

But is also possible that the Iranian opposition is pursuing a different path, one similar to the so-called color revolutions that occurred in former Soviet satellite states over the last few years.  These were organized within the middle classes, used mass media and nonviolent gatherings, and came after contested election results.  They rallied behind liberal nationalist leaders who had been sidelined in the post-Soviet order, and also behind business interests who wanted more open channels to Western capital.   They also all resulted in weakly democratic states and a new set of ineffective elites that, in Ukraine’s case, placed the government on permanent vacation, and in Georgia’s case, started a Quixote-esqe war to prevent collapse.  In these cases, there was only superficial rupture with the old post-Soviet regime and its local nomenklatura after a few years.

As the eminent Iranian sociologist Ahmad Ashraf described, the 1979 Revolution’s initial participants were 1. intellectuals and students, 2. radical ulaama (clergy) associated with Ayatollah Khomeini and 3. bazaari merchants and craftspeople.  The “new” middle classes of the 1970s in Iran – salaried workers in the public sector and the industrial working class including oil workers – were latecomers to the Revolution.  Each cycle of revolutionary contention between the Shah and the opposition broadened the latter’s base with the entrance of new participants.

The current rallies and marches, as I can attest, are much larger than anything since 1979.  Yet to make 1979 analogous to 2009 would be to reverse the order of which social groups participated first.  The “new” middle classes in Iran – salaried professionals and public sector workers - have continued to expand since 1979.  If their members who are marching daily in the streets are persistent and tenacious enough to continue doing so, perhaps others will join in.  Journalists, however, should be careful when they throw around history.  Whatever the outcome of the current moment in Iran, even in the slim chance that everything goes the opposition’s way, a rupture with the regime is very unlikely.

Some Different Ways To Think About Iran, in lieu of an introduction

Well, here we go - my initial foray into sociological myth-busting on Iran.

Much of my discussions with fellow Iranians usually come around to the reasons for the actual or perceived state of Iran’s economy, politics, and society in the world.  Even when the array of grievances and complaints does not directly compare Iran with another country, a comparison is implicit (with the US often as the standard bearer).  Common to this list are: Iran is a wealthy country but its population does not benefit from this wealth, corruption on the part of bureaucrats and individualism on the part of society create a environment of “backwardness,” and, heard quite often, Iran was on a path to economic success until the 1979 Revolution set back its progress.

Iran’s Gross Domestic Product (GDP) per capita in 2007 was USD $3,990.  The US’ GDP per capita in 2007 was USD $45,778.  These numbers alone do not tell us much, and it is better to measure national wealth in relative terms (a subject for a future post).  Iran’s per capita GDP is though, once we do the math, 8.7% of the US.

I’ll leave the historical changes in this figure and comparisons with other middle income countries for another time.  First I want to briefly raise some points on what is often called the internal/external debate in sociology circles.  Much of the following was inspired from this excellent article by Professor Afshin Matin-Asgari.

Throughout the 1990s in Iran, amidst a period of relative openness for the publishing industry, several historical works on Iran became well-known bestsellers. These included Sadeq Ziba-Kalam’s How We Became What We Are (1995) and Tradition and Modernity (1998), Ali Riza-Quli’s The Sociology of Elite-Killing (1998), and Kazim Alamdari’s Why Iran Lagged Behind and Why the West Moved Forward (2000). These studies put forth a set of explanations that placed the blame for Iran’s historical and contemporary woes squarely on internal characteristics, usually by asserting that Iran had not developed the economic and political institutions found in Western states.

Alamdari provides an example of this argument when he asserts:

In the East, including Iran…the total domination of religions and their fusion with centralized governments left no room for free human thought. Free discourse was a result of a free economy and politics. But neither a free economy, nor free politics existed in Iran.

It is understandable that Iranians, frustrated by perceived inadequacies of their country, seek solace in perspectives that lay culpability on their own leaders, especially because the governing rhetoric in Tehran contains heavy doses of the “paranoid style of Iranian politics.” Yet, as Afshin Matin-Asgari pointed out, these studies usually identify “backward” outcomes of 20th century Iran as resulting from a series of absences: the lack of feudalism, private property, Western “rationality,” or separation of church and state. In doing so, contemporary Iranian social science often duplicates theories of political and economic modernization that formed the zeitgeist of American social science in the 1950s and 1960s.  Modernization theory tended to abstract from the leading state of its day (the United States) a set of ideal-type institutions and norms, and then describe the absence of such ideal-types in other parts of the world as “traditional.”

Various ideal-typical depictions of Western “success,” whether in the economic, political, or cultural spheres, are compared to an Iranian polity that is found lacking in institutions, mentalities, or policies that would facilitate its “transition” to a national society more commensurate with Western standards.  It is understandable that modernization theories in their Iranian guise are so resonant today, partly as a response to the intellectual currents of the 1960s and 1970s by thinkers such as Ali Shariati, who inspired much of the Third Worldist rhetoric of the 1979 Revolution, and partly as a reponse to state-sanctioned explanations/excuses.  Yet the relative immiseration of Iran vis-à-vis Western states since the 18th century mirrors similar fates for many states in the former Third World.

Do we explain the continued wealth gaps in the world economy between North and South with recourse to supposed characteristics that are only contained in poorer states?  Has Iran’s trajectory over the 20th century been exceptional, or can it be placed in a broader group of national states borne of former non-Western agrarian empires, almost all of which experienced top-down nationalist projects at state-building (Turkey, Egypt, India) or bottom-up revolutions (Russia, China, Iran)?  If you visit any poorer country, you will get an earful of exceptionalism as to why that particular country is in its position relative to the wealthy parts of the world.  The job of good social science is to sift through many single cases and come up with arguments that can better explain a set of similar outcomes.  Iran’s modernization theorists are partly instrumental, in that their accounting for Iran’s contemporary position vis-à-vis more powerful states have been used by politicians and intellectuals who desire substantial political and social change.  Yet that might not make their arguments right.

The internal/external issue remains.