Is Iranian Economy at the Neighbourhood of Singularity?

Is Iranian Economy at the

Neighbourhood of Singularity?

H. Mansoor

Prelude. A learned friend, having an eye on my paper “The Reverse Dutch Disease: The Case of Iran”[۱] asked if in my view the Iranian economy was in a State of Singularity! The following is a preliminary reply to the question but a more fathoming analysis is needed to be made.

To address the question, the following concepts have to be defined:

• • The Concept of Singularity is borrowed from Astrophysics and refers to a state whereby the Einsteinian Space-time reaches the highest level of curvature whereby the density of the matter is maximized while its volume is minimized, and consequently the laws of General Relativity collapse: this is the state whereby the Big-bang occurred and Space-time was born some 13.7 Billion Years ago; it is also where the matter is swallowed by a Blackhole whereby the laws of Relativity physics cease to operate.
  • The Concept of Neighbourhood refers to a situation whereby the phenomenon under study vacillates around the gravitational state but is not situated in it. Schumpeter uses this concept in describing the “neighbourhood of equilibrium” since he does not consider the equilibrium as a stable state but vibrations around it.
  • The hybrid concept of the Neighbourhood of Singularity bears more affinity to the nature of the economic phenomenon and prescribe a state of things whereby “a blackhole” arises in the space of national economy exerting  strong gravity distorting the normal functioning of economic laws and causing them to dysfunction: under the circumstances, the factors of production -land, labour, capital, and knowhow – are “misguided” and swallowed by the blackhole; the path of development is reversed  and ultimately a civilizational disintegration takes hold.

A) Some economic laws in reversal:

• • • • The paths of GDP and Liquidity growth, dramatically diverge! The volume of GDP in 1977- a normal year before the takeover of the Islamic Republic- grew from 588 billion Tomans of national currency to $1,354 billion by 21^st March 2022 (end of Iranian fiscal year) in constant 1977 currency: i.e.it became 2,30 folds. During the same period the population grew from 33 million to 83.5 million, 2.58 folds, indicating a reduction of per capita GDP. Notwithstanding this reduction, the volume of liquidity grew from 259 billion Tomans to 4,433,440 Billion tomans: 18,658 folds.[2] Thus the anomaly consists in divergence of growth paths of liquidity and GDP whereby the growth in liquidity has only fuelled the recession instead of promoting growth.
      • Administrative Control of Market Forces is not born with the Islamic Republic but it got mingled with a structure of strong interest groups consisting of the “Mixed Forces of Revolution “. Expropriation of billions of Dollars of Industrial and commercial wealth and distributing the spoils among the inner circles of revolution, cemented the structure of the “nouveau riches. Once the existing wealth was acquired, other new leverages were invented for grabbing wealth by means other than the ordinary channels of distribution (wages, profit, rent and interest), among which was the “multiple exchange rates”. The explanation was not sophisticated: to keep import prices low, the “importers” to the country would receive foreign exchange (predominantly US Dollar) at an officially determined rate and sell the imported goods at market prices which had increased about 7 folds and there was no effective mechanism of control to assure that some share of the difference passed to the consumer.“Multiple rates system” produced very strong beneficiaries so much so that the authorities found it “wise” to keep it untouched and established it as an extra-ordinary channel of dividing the Oil Rent among their close adherents:In 18 years ending 2021, the following volumes of $ US were “injected” into “market” to control the open market Exchange Rate, to no effect:
        

        Years	$ US BILLION	Central Banker
        2003-2007	57	Ebrahim SHEIBANI
        2007-2008	30	Tahmasb MAZAHERI
        2009-2013	160	Mahmood BAHMANI
        2014-2018	35	Vali-ollah SEIF
        2019-2022	-1	Nasser HEMMATI
        2003-2022	282

         

        During this period the Consumers Price Index (CPI) index had increased 23.7 folds and the open market dollar rate had gone up by 30 folds.

      • The Reversed Dutch Disease.
        • Two economists, Max Cordon and Peter Neary, discovered a disease in Holland of 1982 which later became renowned as The Dutch Disease. The story was -in substance-as the following: Holland had discovered huge Gas reserves in the North Sea in 1959. In 1960s the foreign exchange receipts by the country were spent on Health and Social services; Thus, the standard of living improved and the public demand for goods increased. Injecting the Foreign exchange receipts in the monetary base of the country improved the exchange rate of Dutch currency the This made Dutch “exportable” goods dearer for the foreigners and thus dampened their demand: on the contrary the demand of Dutch citizens for foreign goods increased in line with enhanced exchange rate.  Consequently, the Non-gas sector of Dutch economy became weaker and the Dutch consumption of foreign goods increased.  The mechanism worked as the following:

          *Mineral are exported and Foreign Exchange flows into the country;

          *The foreign exchange receipt is injected in the monetary base and national currencygets stronger, which dampens foreigners demand of Dutch goods;

          *Public standard of living improves and with it the aggregate demand rises;

          * Improvement of the purchase power of national currency helps increase thedemand for foreign goods;

          *Sectors of national economy suffers and the country becomes the consumer offoreign goods, while domestic production weakens.

        • In Iran the Process was Reversed!
          Contrary to the Dutch Disease where the injection of foreign exchange in the monetary Base increased the exchange rate making the home currency more expensive for foreigners and adversely affected the foreign trade: reducing the exports and increasing the imports, in the Islamic Republic, the exchange rate was administratively fixed to keep the foreign exchange cheaper causing reduction of home county exports and increasing foreign imports; bankrupting the industrial base of the country;  paying subsidies for exporters to Iran and the “importers” of foreign good into home-land. The following data calculated from the data produced by the central Bank attests to the narrative:During 1979-1991 the market rate of dollar had increased 18.75 folds while the revolutionary government kept providing billion of dollars to the importers at the rate prevailing in 1979; the rationale for this low rate for forex was said to be control  of basic goods prices! However, the general price level had increased  by 8.67 folds! Hence the evidence for the effect (or lack of it) of the administratively determined low exchange rates on inflation!Multiple forex rates applied to different categories of imports and the number of these rates was at a time, counted up to 18! Thus tens of billions of Dollars were distributed at artificially low rates while there was -and there could be- no effective control of the sales prices for importers benefitting from low- cost foreign reserves.In 1992 the government declared the first policy of Unification of Exchange Rates thus aligning its administrative rates -albeit temporarily -with the market rates but in the meantime FIXED the new aligned rate for myriad of importers. By 2001 the market rate had become 4.5 times the fixed rate assigned for “importers”.As a result of this “reserve-management” hundred of billions of dollars were handed out to the “affiliated importers”; subsidized the foreign exporters to the country, bankrupted hundreds of domestic industries and opened the market for low quality imports from less competent economies.
      • No doubt the Central Banking is one of the most potent institutions of modern ages: it (along with the commercial banking sector subordinated to it) manages the NOMINAL economy which is the mirror image of the Real Economy (Goods and Services). Therefore, the power which controls the money has the potency of affecting the REAL economy and thus affecting the general price level, the purchase power of money, the wealth and poverty of social strata; the employees, workers, the military and the clergy, the merchants and the elite, etc. It wields the power of social engineering, i.e. dislocating the social groups within the stratification. In brief: it controls the wealth and poverty of the different layers of society.
        The main function of the Central Bank is ISSUING base money. It determines the volume of money representing a standard BASKET of goods within the economy and attaches a NAME to it, Rial, Dinar, Dollar etc (Nomination). The volume of money representing a basket determines the purchase power of money. If this volume doubles, for whatever reason, while ceteris paribus (all other factors remaining unchanged), the purchase-power of the unit of money halves!But what happens when the monies of two countries meet? In other words, how is the exchange rate between two monies determined? In the long-run and under free-trade conditions, the exchange rate converges to a point where the imports of the country equal it exports, i.e. the rate by which the foreign trade is balanced.In Iran of 1979, seven units of Iranian currency exchanged against one $ US. The question then was “ is this rate the one to balance the foreign trade?” in other words, was the rate the trade-equilibrating one? One could argue for or against it! The fact being that the government of the time had a policy of keeping the price of intermediate industrial goods low to promote country’s economic growth and hence “had pegged” Iranian currency to Dollar at a rate to encourage imports of western technology. Thus, some economists argued that the “correct” rate should have been 10 (rather than 7) Iranian Tomans to equal $1 US.In the period 1979-2022, Iranian Toman, was inflated 6800 times meaning 1 Toman of 1979 had the purchase power of 6800 Tomans of 2022. When the price-level rises 6800 times and earning levels, for a around 70 % of population,  rise around an average of 5000 times, this implies absolute immiseration.  In tandem with this diminution of currency’s purchase power, the exchange rate between Toman and Dollar was also changed from 7 Tomans= Dollar, to 46,000 Tomans=Dollar.In short, the potent institution of manging the Nominal Economy, The Central Bank, constituted a powerful instrument for impoverishment of the nation instead of preserving the purchase power of national currency which, by definition, is the main job expected of it.As of yet, the Islamic Republic, sees it fit to use “Multiple Rates” to dupe the world opinion and to “mislead” the international economic institutions like, the International Monetary Fund (IMF), The World Bank (WB), The United Nations National Accounts Bureau, and the  London Economist by converting the inflated GDP figures through an “official” (an artificial) exchange rate of 4200 Tomans=$1 US -which has no relevance to any market, and produce unrealistically exaggerated figures of GDP for its International reporting: thus the current GDP for 2021 of 6,677,450 Billions Tomans becomes $1,590 Billion, instead of being around $200 Billion on the market rate of 32,000 Tomans=1 $ US! And thus, Iran stands the economy number 18 of the world!
      • Productivity, the missing link! The lack-lustre performance of Iranian economy during 1979-2022, reducing the GDP per capital to 80-85% of 1977, stands in a sharp contrast to a longer than a decade of 11.5% annual growth, which increased the aggregate GDP by 5 folds and -given the rise of population- the   GDP per capita of 3.5 folds according to the Central Bank Statistics. The answer to the mystery lies in stagnating productivity. The following table comes from a paper produced by the author on comparative productivities[3]:
        Comparative productivities measurement where figures show multiples of Iran

        Iran	India	Philippines	China	Russia	Turkey	Japan	England	Israel	Sweden	United States
        1	1.7	2.3	5.3	7.18	8.5	22.8	27.7	28.7	33	39.9

         

        The regretful path to withering away of national economy started in 1979 by a whole-sale expropriation of all entrepreneurs who had produced an economic miracle in a decade and a half, whereby at the outset, 53 Industrial Establishment were taken over by revolutionary gangs: 57,000 Commercial and Residential real estate were confiscated by “The revolutionaries” and thus the foundations of creative effort were shaken for a foreseeable future. Then started the infamous Cultural Revolution aimed at uprooting all modern education: within three years, 8,800 Academics were sadly purged from the higher education and 57,000 university students were forced to leave the educational institutions. The managerial class created during decades was deposed and replaced by zealous supporters of the revolution, using “religious jurisprudence” instead of modern laws.  The fight against anything modern became the order of time and grounded the national economy.

      • Economics as the Science of Wealth-creation was unknown to the new rulers: “innovations” such as “the monistic economy, the Islamic economy, Islamic Banking” and likes were floating around. The new ruling class was reckless and lacked modesty intending to re-invent the wheel! Thus, “booties” were taken over and things started from scratch.

     

    Since the advent of Economic Science by An Enquiry into the Nature and Causes  of  Wealth of Nations by Adam Smith (1776) a great body of knowledge and experience was accumulated equipped with techniques, models and methods, totally unknown to the new bosses.

     

    In 1957 Robert Solow the professor of MIT had presented a breakthrough in a paper titled Technical Change and the Aggregate Production Function [4] in which he had shown that during 1909-1949, 87.5% of increased production in the US economy had resulted from what he named “the Technical Change” and only 12.5% from increase in capital. This paper which had led to intensive debate, deservedly gained the Nobel Prize in Economics for the author in 1987. The paper contributed a great deal to the development theory. While what the revolutionary Iran was implementing was the REVERSE, paving the road to the catastrophe.

  • The BLACKHOLE within the National Economy.What explains all dysfunctions is the birth of a blackhole within the national economy, thwarting all creative efforts and frustrating competent methods. It has a resilient fabric whose structure consists of the time-honoured clerical institutions, now equipped with its paramilitary wings and executive, legislative and judiciary apparatus, enriched by expropriated booties and ill-equipped with a Theology of confiscation, intimidation and terror. The apparatus of wealth-creation is thus replaced by two prevailing institutions: a)Revolutionary Expropriation of any wealth or property; and b) a pernicious Banking System to debauch the national currency.

   

   

   

  [1] Published in London Independent in Farsi and reprinted in my site Hassan Mansoor.org.

  [2] All figures extracted from National Account reports of the Central Bank of Islamic Republic 21^st March 2022.

  [3] H.M “Iranian Economy still in grip of the dilapidated concept of AUTARCHY”, London Independent, in Farsi

  [4] American Economic Review, 1957, Pp. 312-320