An exchange on the economic costs of Iran’s nuclear program

Djavad Salehi-IsfahaniBy Djavad Salehi-Isfahani

In his December 16, 2013 post on Iran Matters on the macroeconomic cost of Iran’s nuclear program, Nawaf Obaid claims that Iran’s GDP has declined by a whopping 29% in 2013 relative to 2012.  He reports data from a series published by the IMF, which is misleading and needs to be corrected. 

(Nawaf Obaid responds below)

A careful reader would notice that something is wrong with the graph he presents as evidence of decline in Iran’s economy because in it Iran’s GDP keeps rising until 2013, at a fantastic rate of 11% per year! Nothing of the sort happened.  Iran took a big hit in 2012 as sanctions tightened and cut its links to global oil and finance, but the decline was 5.8%, as reported by Iran’s own Central Bank, and not 29%.

What is wrong here is that the series Obaid uses is in current prices, which should never be the basis of GDP comparisons over time because it does not take into account inflation (see the table below).  The same IMF data estimates the real GDP growth rate for Iran at -1.88 and -1.49 for 2012 and 2013.  These negative growth rates also appear in the Purchasing Power Parity (PPP) series that economists use to compare GDP across countries. 

 Iran’s GDP data as reported in the IMF database, October 13 version

2009

2010

2011

2012

2013

GDP, constant rials

511,975

542,174

558,587

548,112

539,974

% change in GDP, constant USD

3.95

5.90

3.03

-1.88

-1.49

GDP, current USD

361

419

496

549

389

Implied PPP conversion rate

4,069

4,598

5,666

6,804

10,319

GDP, PPP USD

879

942

990

988

987

Source: IMF http://www.imf.org/external/data.htm, accessed 12/21/2013.

The unfortunate confusion occurs because the IMF converts the real series into current USD (the third row) using the market exchange rate (which it should not do) and results in the 29% decline that Obaid reports.

There is another exaggerated claim in Obaid’s account about high poverty rates in Iran.  He does not mention his source but it is easy to dismiss his account.  He reports that using an “average poverty line of $170 per month” (the poverty line is just a number) about 50% of urban Iranians are poor.  Evidence for poverty comes from Iran’s Expenditure and Income Surveys, which for 2012/2013, the year the GDP declined by nearly 6%, shows a median income of about 2.6 million rials per person per day.  This is about 256 in USD PPP using IMF’s own conversion factor (also in the table).  So, to start half of all Iranians cannot live below $170 because the median is 50% higher. Furthermore, the percentage living below Obaid’s $5.60 per day is actually 12.8% and not 50%.  

Iran’s poverty rate is high for my taste but it is in line with those of other middle income countries in the region, especially considering that most international poverty reporting uses poverty lines around half the value used by Obaid’s source.  The comparisons in Obaid’s article with Saudi Arabia and the UAE are meaningless because Iran’s oil revenue per has rarely exceeded $1000 per person per year, which is a fraction of what these countries earn in rent from oil.

The larger point of Obaid, which is that Iran has paid a high cost to be able to develop its nuclear enrichment program, is well taken.  However, the numbers he presents are way off and need correction.  Exaggerating the extent of Iran’s economic problems, which is quite an industry in Washington, is a disservice to US policy makers because it denies them a realistic basis from which to negotiate with Iran.  As such it can become a hindrance for effective diplomacy by making the adversary look weaker than it actually is.

Djavad Salehi-Isfahani is professor of economics at Virginia Tech, nonresident senior fellow at the Brookings Institution, and Kuwait Foundation visiting scholar at the Harvard Belfer Center's Middle East Initiative.

Nawaf Obaid Responds:

I am grateful to Professor Djavad Salehi-Isfahani for having taken the time to comment on my piece. We seem to agree on the economic troubles that Iran is in, but not on the magnitude of it. Using PPP projections to assert that Iran's troubles are not as dire as I suggest is very misleading. Using this PPP methodology, Iran would have a $1 Trillion economy and that is a fanciful and delusional reality.

We can disagree on percentages and data, but the overall picture is clear - a deep economic and financial malaise is gripping Iran. And the main reason why the Iranians have finally decided to come to the table and seriously negotiate to get some sanctions reprieve is the desperate situation Rouhani inherited from Ahmadinejad.

Attempting to make a case that the economic conditions are not as bad as is widely believed in and outside Iran is counterproductive to the entire debate on the future of Iran's nuclear program.

Nawaf Obaid is senior fellow at the King Faisal Center in Riyadh, Saudi Arabia and visiting fellow at the Belfer Center for Science and International Affairs at Harvard Kennedy School.