Did Iran Lose its Chance of Catching Up With the West?
Does Iran’s economic trajectory over the 20th 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 20th 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.
