Tyranny of numbers: The global sources of Iran’s inflation

by Djavad Salehi-Isfahani

The recent welcome slowdown of inflation in Iran, like its devastating acceleration four years ago, has something to do with global influences that are well beyond Iran’s control.  The credit in the current slowdown in inflation goes in large part to Rouhani’s economic team but what Iran’s economy minister, Mr. Tayyebnia, has called a “miracle”, has earthly reasons that are not even under the control of Iranian policy makers. Not realizing these influences can be misleading.   

Two important sources of inflation in Iran are the price of oil and food.  But for different reasons.  The influence of international food prices is obvious, because Iran is a major importer of foodstuffs.  But how oil causes inflation in Iran is less obvious because it is an export commodity.  The way the latter mechanism works is that expenditure of oil revenues causes not-traceable prices in Iran to rise.  This is the so-called real appreciation that requires the relative price of non-tradable to tradable goods to increase.  Of course, this can occur if prices are fully flexible, but that is a fairy tale people tell when they want to blame everything on the growth of money supply. The truth is that money supply has to grow to accommodate the change in relative prices through differential increase in the price of tradable and non-tradable goods.

Added to this is that commodity prices often move together, so increases in the price of oil often coincide with food prices increase.  (Why this is the case is beyond my expertise, but you can read about it in Hochman et al, American Economic Review, May 2010. Perhaps higher oil prices raise the cost of fertilizer and food, but other forces may have been pushing both prices up.)  The chart below shows the close movement of food and oil prices since 1990.  The soft oil market in the 1990s was coincident with stable or falling index of food prices.  As oil started its rise, which stopped (ended?) a few months ago, food prices increased rapidly. These prices continued to move together after the banking crisis of 2008 which led to a brief collapse of oil prices in 2008.

Figure 1.  Price of oil and food move closely together
Note: Food price is the FAO index, and oil is in USD per barrel.

And now look at how Iran’s inflation rate has behaved since 1998, the period after the price of oil bottomed out in 1998.  You can see in this chart clearly that there is a relationship between Iran’s inflation rate and the two commodity series.  Inflation picks up in earnest as oil revenues kick up in 2004 and food prices start their steep rise.  Likewise, falling inflation now has a lot to do with falling oil and food prices.

Figure 2. Iran’s inflation rate is also aligned with oil and food prices

Note: Iran’s inflation in based on the urban CPI published by the Central Bank of Iran.

What does it mean for policy to say that Iran’s inflation has external origins?  Of course, it does not mean that internal reasons are not important or are of secondary importance.  Clearly,  the high last four years had a lot to do with the energy price reform, stifled inflation due to financial repression and overvaluation of rial in the previous ten years, as well as international sanctions.  Some of blame for high inflation of the recent past should surely go to bad polices of the Ahmadinejad administration, chief among them the financing of cash transfers and public housing by borrowing form the Central Bank.  But putting all the blame on the growth of money supply, as many pundits in Iran do, is to ignore the part due to external factors, themselves related to the reality of rigid prices.  A partial diagnosis of the past inflation means that the country is vulnerable to future external inflationary shocks.

The lesson to draw from looking at external factors is to realize that in the face of rising global oil and food prices, fighting inflation can be costly in terms of jobs.  Yes, the Central Bank can keep liquidity from increasing, and force a real appreciation through decrease in tradable prices, but the deflationary pressure needed to do so will do serious harm to the economy.  Monetary policy would have a hard time stopping wages from rising as food prices rise and rising government expenditure of oil revenues increase demand for labor.  This unfortunate scenario will continue to repeat itself as long as the source of economic growth in Iran is rising price of oil instead of productivity.

Unless we draw the right lessons from past experience, we will not be ready when food and oil prices rise again — perhaps several years from now — and  the scenario of the last decade will play again.  Despite rising food prices and wages, Iran’s exchange rate would stay the same because there would be no compelling reason to devalue the rial when foreign exchange is pouring in.   Domestic production becomes less competitive, setting the stage for another round of inflation when the overvalued rial is no longer sustainable.  The currency will collapse and prices shoot up.  Who and what will get the blame that time around?

Fearing privatization, Iranian mine workers strike

Workers assemble parts for engines at the Iran Khodro automobile manufacturing plant, west of Tehran, Jan. 28, 2009. (photo by REUTERS/Caren Firouz)

In recent months, an increasing wave of worker strikes in Iran has challenged President Hassan Rouhani and his administration. Workers have gone on strike for several reasons, mostly due to the failure to pay back-payments, at the Haft-Tappe sugar factory, Bandar Imam Petrochemicals, Gilana tile factory and the Assaluyeh natural gas company. The miners‘ strike at Bafgh in central Iran, however, appears to be a special case.

At Bafgh, 5,000 workers have gone on strike twice. Several workers have been arrested, and the presence of the police indicates that these strikes have become a serious issue, only resolved with the government’s retreat. Yet, these strikes also reveal workers‘ fears over privatization.

The miners initiated the strike on May 17 in opposition to the transfer of 28% of the mine’s shares to the private sector. This transfer followed the decision of Iran’s minister of industry, mines and trade, Mohammadreza Nematzadeh, to gradually transfer the control of the mines to private entities. Since 2000, more than 70% of this mine’s shares had been sold to private investors, so the announcement regarding the remaining 28% angered the workers. The strike lasted until June 24 and only ended after issuing the government a two-month ultimatum to reconsider its position.

However, toward the end of August, just before the end of the ultimatum period, arrest warrants were issued for 18 workers, with some being taken into custody. On Aug. 19, the miners staged a second striketo protest the arrest of two of their comrades, Ali Sabri and Amirhossein Kargaran.

Intelligence officers had planned to arrest six more people, including the head of the Bafgh city council, but they were unsuccessful. The next day, police special forces came to the mine and the situation became more dire. With the continuation of the strike, the special forces left the mine, but a few days later, five people — including Hossein Tashakkori, the head of the city council — were arrested. The protests continued, and the families of those arrested staged a mass sit-in in front of the Bafgh district administrative offices.

Finally, on Aug. 31, a political-intelligence mission representing the government entered Bafgh to negotiate with the workers. Three days later, after the release of the arrested workers and the cancelation of theprivate-sector transfer, the strike ended. The strike enjoyed the full support of the people and the local government officials, including the city council and even the Friday imam — support that was crucial for its success.

But, the question remains, why were the workers opposed to the privatization of the mine?

Privatization is not new in Iran. The history of privatization goes back to the administration of Ayatollah Hashemi Rafsanjani and has been a part of every administration since. Even the administration of Mahmoud Ahmadinejad, which claimed to operate according to a doctrine of “social justice,” was no exception.

Davoud Razavi, a member of the governing council of the Municipal Transportation Company Workers, told Al-Monitor that privatization in Iran is more like “nepotization.” He said, “Privatization decreases the government’s costs and forces them onto the workers. Iranian workers generally have a bad memory of privatization. In many cases, after the privatization of factories, the new owner has sold it and cuts the plants into smaller ones, using the land to build residential units. [This] has generally led to closure and the loss of jobs for workers. In addition, job security has basically disappeared in the private sector. Today, the workers don’t even have long-term contracts.”

He called the Bafgh strikes “unprecedented” because most strikes in recent years have protested back-payments and late wages, while this one was aimed at stopping privatization.

In an interview with Al-Monitor, Hamid Haj-Esmaili, an analyst of labor issues, argued that privatization, in essence, shouldn’t be opposed to workers’ demands. “In developed countries, workers unions are strong, and the private sector is also very present,” he said. “But what has happened here is that we have so far failed to explain our privatization methods.”

The government has no way out, according to Haj-Esmaili, due to international sanctions on its nuclear program. Iran is going through “post-embargo economic restructuring.” He said, “The government has tried to stabilize the labor market. It is expected that in the next year the labor market will be reinvigorated.” He believes that the workers should refrain from politicizing their cause and act within unionization. “We are expecting that in the reform of the labor law, labor collectives are replaced by labor unions. The government has also accepted this path.”

This argument has been rejected by a number of labor rights activists. Razavi said, “These arguments are set up to distract attention from the main issue. The government has high expenditures, which it can cut down by itself without forcing it on the workers. All this economic corruption cannot be controlled because there are no watchdogs.”

In addition to the corruption and the decline in workers‘ rights under the previous administration, factory workers face many other challenges. Iran imports a great deal from China, which has led to economic prosperity for only certain people. All the while, despite promises to do so, the government does not support domestic production, leading to the impoverishment of the workers.

Source: AL-Monitor

Navy exercises bring Iran, China closer

Iran’s navy commander Habibollah Sayyari (C) points while standing on a naval ship during Velayat-90 war game on Sea of Oman near the Strait of Hormuz in southern Iran, Jan. 1, 2012. (photo by REUTERS/Fars News/Hamed Jafarnejad)

As global media keep their focus on the Islamic State (IS) and the US airstrikes in Syria and Iraq, other notable, potentially headline-making events are being missed.

On Sept. 20, China dispatched ships to the Persian Gulf for a joint exercise with the Iranian navy — the first time that Chinese warships have ever sailed in the Gulf. The Chinese missile destroyer Changchun and missile frigate Changzhou of the17th Naval Fleet took part in a five-day joint training drill, the aim of which was „establishing peace, stability, tranquility and multilateral and mutual cooperation,“ according to Adm. Amir Hossein Azad, commander of Iran’s First Naval Zone.

In understanding the move by China and Iran, one must keep three things in mind. First, it is the first time China, a US rival that does not border the Gulf, has ever sailed warships in the Gulf. Second, these exercises signal a boost in Iran’s position in the Gulf and the region. Third, the move cannot be viewed outside China’s response to the US foreign policy concept of „Pivot to Asia,“ which signaled a US plan to shift focus and resources to Asia in response to China’s growing power and influence — a move that China saw as an attempt to contain it.

The Gulf is a globally important strategic location — an area that the United States is willing to spend „blood and iron“ to keep under its influence or, practically, its control. For the Gulf to be approached by China, it would — or should — make the United States take notice.

Boost for Iran

In the past, Iran has threatened to close the Strait of Hormuz if it were to come under attack by the United States or Israel for its nuclear program. If Iran were to act on that threat, oil prices would skyrocket. Iran has also expressed discomfort at foreign navy ships sailing in the Gulf.

On April 6, 2012, Iran’s navy saved a Chinese cargo ship from Somali pirates. It has also prevented other pirate attacks on various occasions. It seems there is no need for an external presence in the Gulf since Iran is competent and not in need of China to protect its ships in the Gulf, though Iran would likely welcome the move since China is a close ally. Iran, however, finds it inexcusable that hostile ships from other countries roam the Gulf under the pretext of carrying out anti-piracy or anti-terrorism operations.

In a 2012 interview following the Somali pirate incident, Adm. Habibollah Sayyari, commander of Iran’s navy, said in an interview: „With coordination and cooperation, we can easily provide security in the region because we have mutual interests, and only those with mutual and legitimate interests can truly cooperate. So, two or more countries can easily handle this. That’s why we stress there is no need for the presence of foreign troops.“

Having the support of the Chinese navy puts Iran in a stronger position in the Gulf, even if just symbolically, as the US Navy presence in the Gulf by far outmatches its rivals. The United States, however, might reconsider making moves that would potentially anger China, as the two countries possess plenty of mutual interests.

The governments of China and Iran plan for trade between the two countries to reach $200 billion in 10 years. Furthermore, Iran is the third-largest supplier of oil to China, providing for 12% of China’s annual consumption. Therefore, China would want to protect its interests in Iran, as the United States is doing the same in the Gulf. The recent joint navy drills are a push in this regard.

Chinese interests

In mid-September, Chinese President Xi Jinping visited Sri Lanka and the Maldives. The themes of the visits were similar, as China was assisting both countries in economic development, which would in turn provide economic opportunities for China. More important, the countries are part of China’s 21st Century Maritime Silk Road initiative. Xi promised to cooperate with the Maldives and Sri Lanka on „peace, stability and prosperity,“ as well as „port construction and operation, maritime economy and security, and the construction of a maritime transportation center in the Indian Ocean.“ These initiatives bring China closer to the Middle East and within better reach of Iran, and show that the recent navy drills are part of a greater Chinese foreign policy.

China is obviously trying to counterbalance the US „Pivot to Asia“ policy. China is already experiencing plenty of tensions in the South China Sea, with conflicts over islands and maritime issues with neighboring countries. The United States is exploiting such tensions and concerns among China’s neighbors. For example, Gen. Martin Dempsey, chairman of the US Joint Chiefs of Staff, visited Vietnam in August, making him the highest-ranking US military officer to visit Vietnam since 1971.

Dempsey’s recent visit comes only a few months after tensions increased between Vietnam and China, as Chinese vessels and Vietnamese navy ships collided in the South China Sea. The Chinese vessels were setting up an oil rig in an area claimed by both countries. In his visit, Dempsey spoke about the possibility of lifting the ban on sales of lethal weapons to Vietnam that has been in place since the Vietnam War. He also mentioned in his visit maritime common security interests, referring to the common rival of China.

With the recent exercises, China aims to break free from the containment and strengthen its alliances and capabilities in the Middle East. Perhaps China also has future plans for a permanent presence in the Gulf, or near it, as the United States has done in the South China Sea. The aims of the drills are similar for Iran, as it wants to strengthen its regional position. Yet, China and Iran cannot compete with the more powerful US Navy. Still, China’s ambitions don’t seem short-sighted; it is clearly planning ahead to better secure its trading routes between Southeast Asia and the Middle East.

The Chinese navy’s visit to the city of Bandar Abbas is unlikely to be the last. It is a reflection of good relations between China and Iran, and the Maritime Silk Road initiative. Should China in the future strengthen its presence in the Gulf and its Maritime Silk Road, the Chinese warships that docked at Bandar Abbas will always be remembered as a turning point.



The Rouhani Meter is an attempt to monitor the performance of the recently elected president Rouhani by documenting what has been achieved as opposed to his promises.

Klicke, um auf RM-Infographics-English-1.pdf zuzugreifen

73 Recorded Promises to Date

Socio-Cultural (23)

Domestic-Policy (20)
Economy (24)
Foreign Policy (6)

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Rouhani: Rival Constituencies

Alireza Nader

Hassan Rouhani now faces the hard part. Iran’s president-elect won a decisive and surprising victory because he appealed to three conflicting constituencies— conservatives, reformists exiled from the political system, and Iranians dissatisfied with the status quo. Now his ability to govern will depend on satisfying disparate factions. Each has its own set of expectations—and each is also intent on coming out on top.
      Rouhani may be able to deliver results precisely because he is an insider. Since the 1979 revolution, he has served in some of the Islamic Republic’s highest positions. Before his 2013 election, Rouhani was Iran’s national security advisor for 16 years and then head of a government think tank. So he has close ties to Iran’s military and national security establishment. Rouhani has also been a deputy speaker of parliament and a member of the Assembly of Experts ― the only constitutional body with the authority to appoint and dismiss the supreme leader. Among 686 candidates who registered, he was one of only eight allowed to run for the presidency. Lies den Rest dieses Beitrags

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