Back in 1951 when the British put an oil embargo on Iran to punish Mossadegh for nationalizing Iranian oil, his brilliant young foreign minister Dr Hossein Fatemi came up with the idea of an oil-free economy for Iran. The thought flashed again briefly after the 1979 revolution, but fizzled because it was fed by ideological blustering not dire necessity (Iran-Iraq war something to do with it too). The planned 2012 European oil embargo may lead some Iranian economists to entertain the idea again and draft a backup plan for a worst-case scenario where Iran has no oil revenue. Will such a plan succeed and how painful will it be?
Right at the start, the Iranian government will lose about 55%of its spending money (if we use the 2009-2010) budget. Does this mean that Iran will lose 55% of its economy? Not at all! The nation does not live by oil alone; the amount of trade that Iranians do with each other is larger than what we trade with foreigners. The country’s gross domestic product (total of finished goods produced) is about $400 billion a year, whereas the total revenue from all exports, including oil and gas, is roughly $85 billion. Losing foreign trade would be a dizzying blow to the economy for sure, but not a knockout punch, if our nation had its act together (I can hear it now, "if the nation had its act together, there would be no embargo in the first place!").
I asked about the idea of an oil free economy from a friend teaching business at one of Iran’s universities, who replied with a polite “zeki!.” Not practical, he said. If it was workable, it would have happened when Mossadegh proposed it. So why did Mossadegh’s plan fail? Turns out he tried to sell government bonds to the public to finance government operations, but no one bought them. Bonds are a way for the government to borrow money from the people. You give the governement your money to pay salaries and build infrastructure, and the government gives you a piece of paper promising to pay you back with interest a few years down the line.
The idea works very well in the U.S. For example, World Wars I and II were fought with money borrowed from the American people. And bonds are pretty safe investments because if for some reason the government can’t make enough money to pay you back, it can just raise taxes on everyone and come up with your money that way. In other words the rest of the nation insures your loan whether they like it or not.
I’m guessing Iranians didn’t buy Mossadegh bonds because they weren’t sure the government would last. Ditto the IRI. Also they weren’t sure if their money wasn’t going to end up financing European mansions instead of factories that create jobs that breed taxpayers that help pay back the money you lent the government. Ditto the IRI and Canadian mansions.Hence the "zeki!"
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duplicateby RonPaul Iranian Fan on Sun Jan 08, 2012 05:26 PM PST
duplicateby RonPaul Iranian Fan on Sun Jan 08, 2012 05:26 PM PST
duplicateby RonPaul Iranian Fan on Sun Jan 08, 2012 05:27 PM PST
Ari, Prior to 2008, anby RonPaul Iranian Fan on Sun Jan 08, 2012 03:32 PM PST
Prior to 2008, an autarkic state was not preferable to being integrated in the global economy. Iran's limited economic isolation however shielded it from the financial collapse of the house of cards. In any event, a state of pure Autarky is going to be highly imporbable in the case of Iran, because of her geographic location, and the importance of her energy resources to the global economy.
"Isn't Ron Paul inclined to a U.S. Autarky, in a narrower sense?"
I think the answer is an unequivocal no. Paul is an advocate of free trade, and by free trade he does not mean managed trade or priviledged trade which is for example what NAFTA represents. His economic philosophy stands in vehement opposition to central planning of the economy which is typically a prominent feature of Autarky.
Notorious difficulty of approximating the Informal Economyby Hooshang Tarreh-Gol on Sun Jan 08, 2012 01:35 PM PST
Disclaimer: these are notes of a student.
Ari jaan, my first encounter with this
concept/term was through works of Claus Offe in his book Disorganized
Capitalism. He cites the necessity of having the informal
sector in all modern economies, and his estimate for the size of the
informal sector in advanced industrialized economies is five to ten
Manuel Castells in his works on the
informal sector for developing countries makes it ten to fifteen
percent. So, the suggested thirty five percent would be abnormally
high and above the average.
Then again in Iran with Sepah the
problem remains not only the practical impossibility of having access
to accurate data. But also just where to look for such type of “off
the book” activities. In one sense Sepah being the largest importer
in the country (“smuggler brothers” as AN puts it) that hidden import
sector alone byitself could be a few percentages. What would be the
Drugs, illegal exports(arms, drugs), construction of
clandestine Sepah facilities,...
P.S. In the past few years we have had many
outstanding economists active in Iran, from Fariborz Raiesdana, to
Mohammad Gharehgzlo, Mr. Maljo, Ahmad Saief,.. at some point it would
be good to introduce some of their works here on IC.
Repliesby Ari Siletz on Sun Jan 08, 2012 12:36 PM PST
RonPaul: Autarkic may work fine for Iran for however long it takes to internally mature our strategic industries. Unlike North Korea, Iran is blessed with virtually everything she needs in terms of raw material. And there is no shortage of world class brains. Isn't Ron Paul inclined to a U.S. Autarky, in a narrower sense?
Hooshang: I often hear that the "informal economy" of Iran runs at about 35% of official GDP. Any idea where this number comes from?
The Dismal Science? Notby Hooshang Tarreh-Gol on Sun Jan 08, 2012 07:48 AM PST
Determining GDP should not be all that mystified when based on a simple Input-Output table (model) and done by any reasonably well trained student in Econometrics.
Of course even then the end result will be an approximation of what we have in reality, but its an approximation very close to the "real" thing.
An item that always get left out in all these economic calculations is what in Economics is usually refered to as The Informal Economy. Simply put all aggregate economic actvities OFF THE BOOKS.
Of course in IR with Sepah practcally running the country's economy and in control of many illegal imports, this "informal" section tends to be larger than the usual five to ten percent we see in most other economies.
Last but not least, if this whole Oil embargo leads to a drastic rise in Gas prices in the pumps and leads to unhappy drivers in the US, then we coul dsafely say it has back fired on Obama (though there is very slight possibility of this happening, at the moment).
An Autarkic Stateby RonPaul Iranian Fan on Sun Jan 08, 2012 12:56 AM PST
You may be right in that the IRI will somehow adjust to the loss of a third of it's revenue from crude oil sales, and that an EU oil embargo will more than likely fail as the knock-out punch it is intended to be. Patriotism certainly runs deep in Iran wherever one looks, but the effect of vaghf on compensating for revenue losses cannot be determined until it materializes, and in any event, sooner or later this source will be completely depleted. And, the boniyads depend on the government for their survival as it is, siphoning large amounts of government revenue toward highly inefficient or wasteful enterprises in a system where no accountability exists. In terms of government bond sales, the rapid and significant losses of the Rial's value over the last couple of weeks is a clear indicator that government bond sales will not be very successful. The IRI is being pushed into an autarkic state like that of North Korea. The West is playing with fire here. It may get a lot more than it is bargaining for.
بدون نفت، مردم ایران میتونند زندگی کنند ... ولی زالوها نهShazde Asdola Mirza
Sat Jan 07, 2012 06:49 AM PST
Bad Stories for Bad Kids
Hooshangby Ari Siletz on Sat Jan 07, 2012 12:58 AM PST
The Iran GDP cited comes from IMF estimate which lists it as $475.052 billion for 2011 and$407.382 billion for 2010 (wikipedia uses this source and by the way CIA factbook gives it as $357.2 billion for 2010 estimate). Future estimates exceed $480 billion.
As you have discovered the qualifier "about" which I have used in the blog is a must in analysis involving GDP estimates because the concept is meaningful only in a ballbark sense even for past years--also exchange rates can vary dramatically as we have seen recently. As an example of calculation issues, the figure of $407.382 billion which the IMF gives suggests that the GDP was estimated to an accuracy of two parts in a million! Even pegged currencies don't remain stable to 2 parts in a million. A scientist would find this many significant digits hardly credible for such a crude concept as the GDP, though an accountant is required to accept the result of the calculation at face value.
Iran's historical, structural, macro economic problemsby Hooshang Tarreh-Gol on Fri Jan 06, 2012 09:23 PM PST
Some Iranian economists have correctly cited our over-reliance on imports, which has always exceded our exports (and this apllies to all governments in Iran from Ghajars, to both Pahlavis, Mosadegh and IR) as the main problem to be solved, first and foremost.
I checked a couple of sources on Iran's GDP, and the figures were respectively $331 billions or $355 billions. Where did $400 billions come from?
VPKby Harpi-Eagle on Fri Jan 06, 2012 06:22 PM PST
The mullahs are reasonable men, I'm sure they can be encouraged if they are staring at the wrong end of a 12 Gauge Shotgun. :)
Payandeh Iran, our Ahuraie Fatherland
Harpi-Eagleby Veiled Prophet of Khorasan on Fri Jan 06, 2012 01:24 PM PST
put all 600,000 mullahs and their ~ 2,500,000 goons in these camps
Ha! Ha! Ha! If you get Mollahs to work you are a better man than me. You might get the goons to work but a Mollah never.
Faramarzby Ari Siletz on Fri Jan 06, 2012 03:52 PM PST
Thanks for the etymology of zekiseh.
So far we've been estimating IRI support using the protest, demonstration and shoar counting system, which as it turns out isn't a reliable method. We would get a much better measure if the IRI tried to sell bonds. So, if the oil embargo goes through I would watch the bond purchase volume in Iran. Incidentally, there is a sector of Iranian economy that is largely under the radar for Western economic analysts. This is the extremely bankable vaghf/bonyad system (and they support the Lobnan/Felestin deal). If this system successfuly kicks into action to substitute for poor bond sales among the public, the IRI's claim to owining the country will be hugely substantiated with proof of real action. Interesting dilemma for the Iranian public! To buy or not to buy, that is the question.
On a related topic. If there is financial support from the vaghf/bonyad system, the best strategy for the IRI in response to the planned European embargo is to stop selling oil to Europe immediately. The six month waiting period for the embargo is to cushion the impact on European economy as they find alternative sources of oil. The IRI strategists should not allow Europe this respite, as right now Europe is extremely vulnerable economically. This would undoubtedly have occured to the IRI think tanks and the fact that instead of this strategy we get threats to close the Hormuz Strait suggests that perhaps the vaghf/bonyad setup isn't moving up to the plate.
w/ IRI's insatiable appetite for oil money, a beelakh was betterby MM on Fri Jan 06, 2012 10:20 AM PST
Fri Jan 06, 2012 10:16 AM PST
قبل از اینکه صحبت از اقتصاد بی نفت و فروش باند و استقلال اقتصادی کنیم، باید در ایران دولتی سر کار بیاید که هدف اصلیش خدمت به مردم باشد نه اسلام، نه عراق و لبنان و فلسطین.
در اتمسفر فعلی که مردم دارن پولشون را تبدیل به طلا و دلار میکنن، آیا انتظار داری که بیان باند دولتی بخرن؟
واقعا که زکیسه، یعنی اینکه داری از کیسه خلیفه میبخشی!
An Idea for an Iranian Economy Without Oil ...by Harpi-Eagle on Fri Jan 06, 2012 09:49 AM PST
After the fall of IRI, we could make some massive "Work Camps" in the middle of Kavire Loot and Dashte Kavir and put all 600,000 mullahs and their ~ 2,500,000 goons in these camps and use their "Slave Labor" to make very inexpensive products and compete with the Chinese bastards who have been raping the our country for the last 30 years. Also we can stop selling our Natural Gas to Russia in wholesale and market it to Europe directly.
Payandeh Iran, our Ahuraie Fatherland
Good point Arastooby anglophile on Fri Jan 06, 2012 03:26 AM PST
Thanks folksby Ari Siletz on Fri Jan 06, 2012 02:04 AM PST
Bavafa: You're quite right to be worried about our grandkids. As you state, the damned thing will run out one day. Incidentally, there's a significant clue in this bit of history that can help settle the claims about the level of Mossadegh support at the time. If you really want to know how much confidence people have in you, have them drop the taarofs and bet on you with their money. How much they bet gives you a quantitative measure of their level of cofidence in your leadership. The insufficient number of bonds purchased says Mossadegh didn't have much real support, all the shoars notwithstanding.
Yolanda: Almost 85% of Iran's export revenues come from the petroleum industry. The other exports are comparatively small: oil= about 80 billion dollars. carpets = less than a billion dollars, pistachios =less than a billion. But you make a good point about surviving, because economies don't work in a linear fashion; a drop in export revenue of much less than 55% could create a chain reaction in other sectors of the economy leading to a total collapse.
GR: Bekhoda ghasam, they eat nothing but bread and onions in their mansions.
This Reminds Me!by G. Rahmanian on Thu Jan 05, 2012 11:14 PM PST
This Reminds Me of bread and onion idea which also got a "zeki" as well! Anyhow, there's no way IR criminals will stop selling oil simply because oil revenues pay for their mansions in Europe and North America. P.S.I thought it was "Zaki" after the name of Saudi Arabia's former oil minister, Zaki Yamani.
..........by yolanda on Thu Jan 05, 2012 10:23 PM PST
Thank you, Ari, for your blog! The problem is that not only the Persian oil embargo is in the offing, there are also Persian carpet embargo, Persian pistachio embargo, and other Iranian product embargo......it comes down to whether a country can survive without exports.
Ohhh, an oil-free economy in Iran...by Bavafa on Thu Jan 05, 2012 09:51 PM PST
A question that I have wondered about most of my adult life and why not?!?!?!?
I guess zeki is the common answer and probably the correct answer giving the state of our nation and people.
How sad for us Iranians though. This damn thing will ran out one day whether we like it or not and our grand kids will curse us for not having it when most other nations and people have it.
Thanks for the great topic and blog.
'Hambastegi' is the main key to victory