The Thirsty Fish

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.

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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 Salehi-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 Salehi-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?

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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 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 enterprises 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.”