Topic: International Economics and Development

Iran: From Hyperinflation to Stability?

With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30000 IRR/USD on Saturday November 23rd to 29000 IRR/USD on Sunday November 24th. A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that Iran experienced a period of hyperinflation (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3rd, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black-market IRR/USD exchange rate, which

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that Iran’s economy has proved remarkably “elastic” – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the Troubled Currencies Project. For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black-market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black-market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era. 

The Aftermath of Chile’s Election

Chile went to the polls yesterday in what was perhaps the most important presidential election since the return of democracy in 1990. Many foreign observers focused on the curiosity that the two leading candidates were both daughters of Air Force generals who chose opposing sides during the military coup that toppled socialist president Salvador Allende in 1973. But what is at stake in this election wasn’t Chile’s past, but its future.

Let’s first recapitulate where Chile stands today: Thanks to the free market reforms implemented since 1975 by the military government of Augusto Pinochet – that were subsequently deepened by the democratic center-left governments that ruled the country since 1990 – Chile can boast the following accomplishments:

  • It’s the freest economy in Latin America and it stands 11th in the world (ahead of the United States) in the Economic Freedom of the World report.
  • It has more than tripled its income per capita since 1990 to $19,100 (PPP), which is the highest in Latin America.
  • According to the IMF, by 2017 Chile will reach an income per capita of $23,800, which is the official threshold to become a developed country.
  • According to the UN Economic Commission on Latin America and the Caribbean (ECLAC), Chile has the most impressive poverty reduction record in Latin America in the last two decades. The poverty rate went down from 45% in the mid-1980s to 11% in 2011, the lowest in the region.
  • It has the strongest democratic institutions of Latin America according to the Rule of Law Index of the World Justice Project.
  • It’s the least corrupt country in Latin America according to Transparency International.
  • Along with Costa Rica and Uruguay, it has the best record in Latin America on political rights and civil liberties, according to Freedom House.
  • High income inequality, which has always been a sore in the eyes of many, has decreased in the last decade.

With such an impressive record, it’s quite puzzling that the leading candidate, former president Michelle Bachelet, is running again under a platform calling for changes that would significantly alter the Chilean model by increasing the role of the government in the economy. In particular, Bachelet is proposing free higher education to everyone, the abolition of for-profit private schools and universities, the introduction of a state-owned pension fund in the country’s private pension system, higher taxes on businesses and professionals, and even a new constitution.

Bans on Child Labor

Only a heartless libertarian could possibly object to bans on child labor, right? After all, no one wants to live in some Dickensian dystopia in which children toil endlessly under brutal conditions.

Unless, of course, bans harm, rather than help, both children and their families. And in a new working paper, economists Prashant Bharadwaj (UCSD), Leah Lakdawala (Michigan State), and Nicholas Li (Toronto), find just that.  They

… examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. … [and] show that child wages decrease and child labor increases after the ban. These results are consistent with a theoretical model … in which families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor. The increase in child labor comes at the expense of reduced school enrollment.

And it gets worse.  The authors

… also examine the effects of the ban at the household level. Using linked consumption and expenditure data, [they] find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban.

Good intentions are just that; intentions, not results.  The law of unintended consequences should never be ignored.

Venezuela’s House of Cards

The story of the Venezuelan economy and its troubled currency, the bolivar, can be summed up with the following phrase: “From bad to worse”—over and over again. Yes, the ever deteriorating situation in Venezuela has taken yet another turn for the worse.

In a panicked, misguided response to the country’s economic woes, Venezuelan president Nicolas Maduro has requested emergency powers over the economy. And the Maduro government recently announced plans to institute a new exchange rate for tourists in an attempt to quash arbitrage-driven currency smuggling.

These measures will likely prove too little, too late for the Venezuelan economy and its troubled currency, the bolivar. Indeed, the country’s economy has been in decline since Hugo Chavez imposed his unique brand of socialism on Venezuela.

For years, Venezuela has sustained a massive social spending program, combined with costly price and labor controls, as well as an aggressive annual foreign aid strategy. This fiscal house of cards has been kept afloat—barely—by oil revenues.

But as the price tag of the Chavez/Maduro regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and (increasingly) the country’s central bank.

Since Chavez’s death, this house of cards has begun to collapse, and the black market exchange rate between the bolivar (VEF) and the U.S. dollar (USD) tells the tale. Since Chavez’s death on March 5, 2013, the bolivar has lost 62.36% of its value on the black market, as shown in the chart below the jump.

The Return of the Chimney Sweep

Chimney sweeps are making a comeback in Great Britain. “According to the National Association of Chimney Sweeps,” the Telegraph reports, “Britain is experiencing the largest boom in chimney sweeping since Victorian times. ‘It’s been remarkable,’ said president Martin Glynn. ‘When we started NACS in 1982, there were just 30 members. Today we have 540 members nationally.’” The reason? Gas and electricity prices have risen so high that people prefer to burn wood in their previously unused or underused fireplaces.

Why are the energy prices so high? The British government’s pathological obsession with renewable sources of energy. Converting renewable energy (e.g., wind and solar) is much more expensive than conventional sources of energy (e.g., coal and gas). Since the government mandates that a certain percentage of energy consumption has to consist of renewable sources, energy prices are rising – fast. 

That leads to this amazing paradox: Progressivism started in Victorian England – a time and place of tremendous and unprecedented material and social progress that, nonetheless, also had a darker side. The stories of workers living in freezing and damp dwellings, children chimney sweeps suffocating while on the job, and environmental degradation, were both horrific and true.The evolution of progressivism has come full circle and progressives have turned reactionary: To combat the (highly uncertain) effects of climate change, modern-day progressives have embraced policies that lead to more burning of wood, freezing homes for the poor and vulnerable, and chimney sweeps back at work.

Venezuela Is Spiraling out of Control

As the economic situation rapidly worsens in Venezuela, the government is growing increasingly authoritarian and is now actively undermining the foundations of the country’s already deteriorated social fabric.

On Friday night, President Nicolás Maduro ordered the military to seize the stores of a consumer electronics retail chain and confiscate all the goods in order to sell them at “a fair price.” Soon afterwards large crowds gathered outside appliance stores all over the country, leading in some instances to mass looting. The announcement came one day after the Central Bank reported that the inflation rate in October was 5 percent, leading to an annual rate of 54 percent. However, as our colleague Steve Hanke documents on his Troubled Currencies Project, Venezuela’s implied annual inflation rate is actually 320 percent.

The government claims that runaway inflation and pervasive shortages of basic goods are part of an “economic war” being waged by the United States and the local “parasitic bourgeois class.” Thus, Maduro is now mobilizing his troops against the perceived enemy. The owners of two of the retail chains have been detained under charges of “gouging” and “usury.”

Showing his economic illiteracy, Maduro said that the Central Bank should take note of operations, wondering out loud: “If we are lowering products’ prices by one hundred percent, this should impact the inflation rate, right?” Well, no. As long as the Central Bank continues to print money to finance the government, inflation will continue to rise. However, by actively encouraging outright plunder, the government is deliberately destabilizing Venezuela’s society probably as a means for taking further radical measures.

Last April when Nicolás Maduro officially assumed the presidency after a very questionable victory in the polls, many people speculated that he would be more conciliatory than his predecessor Hugo Chávez. That proved to be wishful thinking. It is clear now that under Maduro the worst has yet to come in Venezuela.

Egypt’s Subsidy Nightmare

If you think that Western welfare states are in a pickle, imagine what they would look like if, instead of transferring money, governments tried to help people by giving all of them free or cheap stuff. One does not need to be an economist to see the inefficiency of in-kind transfers, but many countries use redistribution of stuff – typically in the form of commodity subsidies – as the main tool of redistribution and social assistance.

In Egypt, the government subsidizes the prices of fuels and certain food products at artificially low levels. Obviously, the wealthy – who can afford to consume more of the subsidized commodities – are the largest beneficiaries of the subsidy system. In urban areas of Egypt, for example, the top quintile of the income distribution receives eight times as much in energy subsidies as the bottom quintile.

As I argue in a new Cato Policy Analysis published today, commodity subsidies are behind Egypt’s fiscal meltdown – the country is currently running a deficit of 15 percent of GDP, while being kept afloat only by the inflow of funds from the Gulf countries. To avert a looming fiscal catastrophe, Egyptian policymakers need to act now. The paper, which I also summarize here, provides a list of recommendations about how the reform should be approached: