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August 03, 2003

Is Iran rich?!
Borghan Nezami  [info|posts]

coin.jpgI was brought up believing that Iran is a rich country, and by rich I meant it has all different sorts of economic resources. I cannot provide statistics but I think most of the Iranian youngsters still believe so.

In the second year of high school, maybe for the first time in my life, I learned about the Gross National Production (GNP), and the fact that what Iranian people production and consumption per capita is less than what people of more than 100 other countries produce and consume (In 2001 Iran's GNP per capita was $1,680, the 112th country in the world! Look at here).

Then I was obsessed with the idea of corruption and inefficiency in Iranian government for a while. If our government decides to manage Iran's economy efficiently, having enough resources and being a rich country, in a couple of years the average Iranian will produce and consume $35,000 per year like a Japanese; after all Japan does not even have oil. Nice dreams yeah! But I think most of Iranians are still obsessed with this dream. Some conspiracy theories sparked in my mind, just like lots of other Iranians: Maybe some foreign powers do not let us grow, or maybe they are exhausting our wealth while not letting us spend it! Thanks to my desire for trying to see the story in a causal way (which I believe is casual as well) rather than a Godfather-lover's way, I didn't fall in love with the conspiracy ideas, but still the question was there: Being a rich country, why does Iran produce so little?

During my undergraduate years, the picture became a little more clear: I learned that a tiny fraction of the value of what I consume comes from nature, and most of its value has been added by the labor and machine work (and by value I mean exactly the price I pay). More essentially, I learned that despite being %76 of Iranian export, Oil and Gas production (the major wealth of rich Iran) accounts for less than %15 of the GNP. (Figures are for 1998)

Coming to the US for my graduate study, on my flight over Europe, I saw a green continent full of cities. Having in mind an image of the vast, usually dried, area between the cities on most of my trips in Iran, I recalled that I cannot name any developed country which is not green! And finally in the US, I realized that capital, in both human and physical forms, is produced by acuumulation; I realized that it has taken so many years for developed countries to accumulate what they have today, and maybe because all of them have very fertile lands, they have managed to accumulate long before us: when the agriculture was the dominant production method.

I used to think the richness is what “the mother nature” has put “under the ground” of the countries, but I realized it is what “the ancestors” have accumulated “on the ground” for their successors. I used to think Iran is rich, but I realized it is poor. It may become rich some ime in the future, but it is a long way to go; of course, for Iranians not for Iran.

P.S. The importance of agriculture in the development of the West should not be underestimated. Going over Adam Smith and Ricardo's works (founders of Economics discipline) will be enough to show how much of their concern was about agriculture which was counted for more than half of the overall British GDP at their time. West Europe may import wheat now, but I'm absolutely sure it didn't in the 18th century. Obviously, no one can ignore the role of Colonization and Industrialization in the “Rise of the West”, but we shouldn't forget both of them need accumulated capital, which the West had and the East did not. Apparently, development is a sophisticated topic (at the end of the day, it's an active branch of Economics!) and discussions are still on the table. I'll try to write more about them.

Grand Vizier at August 4, 2003 10:48 AM [permalink]:

The fact that oil money is only a small part of Iran's economic production, is very interesting. If one considers the gross prices that are paid in Tehran's real estate market, one tends to wonder, where all this money comes from? From the point of view of the wealthy, there's not a real difference between Iran and say Dubai in terms of their buying power and availability.

I am not sure if agriculture is special in its role in the history of economic growth of the West. One cannot simply ignore other very important factors: colonization, industrialization and modern wars. It remains a fact that most of Europe is/will/and always used to import wheat.

Nonetheless I agree with Borghan's point: Iran doesn't look rich to me either.

yahya at August 4, 2003 01:51 PM [permalink]:

Does anyone of you have the data on disparity between the poor and the rich in Iran?

West-Ender at August 4, 2003 05:26 PM [permalink]:

In Iran difference in community layers are big, this is a sad fact about todays' Iran. There is a small class with huge incomes and royal life-style, a mid-size middle-class and finally a big poor layer. That's why in average the GNP per capita is low.

Alireza Ajdari at August 4, 2003 05:38 PM [permalink]:

Dear Friend,
The question of being poor or rich of a country like iran depends on so many factors ,you should have known better that we are observed as a sort of energy source ,if at least not a brain export region,exporting 400,000 fresh brains per year. Oil has a sort of exchange value in contrast to production value. The Rate of exchange value is defined not by the producer , but the West, a coalition of oil companies and their representatives in Government. It is true that our oil is very precious . but the price of this energy per barrel is lower than Evian Mineral Water or Coca Cola per barrel ! Why ? I do estimate that in Iran we are going to export oil and import water because 80% of our cities are built where they should provide us with agricultural products and water. Even to further,all these countries are defined by oil territories,not by real identities. There is no identity at all , unless it could faciliate distribution of oil fields to be controlled.If all of them are controlled by one system, it could be dangerous.Wars for these identities have kept these countries poor as well

Shervin Farigam at August 7, 2003 08:05 PM [permalink]:

Have you ever heard about PPP?"Purchase Power Parity"

Grand Vizier at August 7, 2003 09:34 PM [permalink]:

Google has spoken on the "Putchase Power Parity":

This theory is based the assumption that exchange rates are determined by the up and down movement of a basket of goods.

For example, if a DVD in the United States costs $15.00 and the same DVD costs 12.00 pounds in the UK, Purchase Power Parity Theory would expect a GBP/USD exchange rate of 1.2500 ($15/12 = 1.2500 GBP/USD).

If the current spot exchange rate is instead 1.4000 GBP/USD, PPP theorists would say that the Pound is overvalued and the USD undervalued. Furthermore, they would expect the GBP/USD exchange rate to trend toward the 1.2500 equilibrium level.

Looking at the above example, a merchant could buy 10 DVDs for $150 in the United States, and sell them in the UK for 12 pounds each or 120 pounds. Converting the pounds back into dollars at an exchange rate of $1.4000 yields $168.00. The difference between the US buy price and the converted sale price, creates a risk free arbitrage of $18. At 1.2500 GBP/USD exchange rate, the exchange rates are balanced.

yashar at August 8, 2003 02:00 PM [permalink]:

i think that theory would only work (at least the prediction that the exchange rate will tend toward the equilibrium rate) if in those countries the exchange of the national curency to foreign currency is fairly free.

linden at August 8, 2003 04:45 PM [permalink]:

But wasn't agriculture first developed in Iraq? In the Mesopotamia River Valley? Please correct me if I'm wrong.

There's an excellent book by Paul Kennedy that was written in the 80s named The Rise and Fall of the Great Powers: Economic Change and Military Conflict From 1500 to 2000. Some of his conclusions (especially about Japan) have been proven wrong, but a very interesting part of the book deals with how all great powers throughout history have had certain structural similarities. They begin to decline when openness and free expression are limited, when they shut themselves off from the rest of the world. Those are just two of the characteristics though. I don't have the book with me, but that's all I recall at this moment. It discusses how a backwater like Europe could become so dominant after being well... vastly inferior to the Middle East and Asia for so long. Europe's development increased dramatically when the authority of the Catholic Church finally began to recede, etc. I'd highly recommend it.

Grand Vizier at August 8, 2003 07:00 PM [permalink]:

Elementary, my dear Watson. It is called sustainable developement.

BHS at August 8, 2003 10:07 PM [permalink]:

The PPP theory as described by Grand Vizier not only works only if the the currency exchange is fairly free, but seems to have many more requirements as well. In fact, it relies on the kind of transport processes described in Grand Vizier's example and the requirement is, I think, that these processes are allowed, and low-cost. What if there is a high costume tax on importing DVDs into England from the US or it's flat out illegal? What if the shipping costs a hell of a lot?

Zhang Fei at August 8, 2003 11:08 PM [permalink]:

It discusses how a backwater like Europe could become so dominant after being well... vastly inferior to the Middle East and Asia for so long.

Europe was no backwater. Before the Western and Eastern Roman Empires, there was Greek Empire. Even as the Western Roman Empire crumbled, its former colonies in what is now Germany, France, Spain and England gradually made important Roman ideas their own. All adopted the Roman alphabet and significant aspects of Roman rule. By the time the Eastern Roman Empire received its death blow from the Ottomans, Western and Northern Europe had adopted so many of Rome's best ideas that they were in a position to repel Muslim invaders.

Grand Vizier at August 9, 2003 12:20 AM [permalink]:

Zhang Fei reminds me of Guan Yu and Liu Bei.

linden at August 9, 2003 12:23 AM [permalink]:

Europe was no backwater.

When I refer to Europe, I'm not referring to Greece or Rome. Yes, Europe gradually adopted bits and pieces of Roman culture, Greek culture, Muslim, etc. This is what led to its eventual growth and dominance; however, before that time period, there is quite a bit of history. Many places like Germany and the UK were on the outskirts of the Roman and Greek empires. It addresses how incredibly weak Europe was compared to other empires around 1500. The area most definitely lagged behind the rest of the world. The title of the book is probably misleading. The history begins many years earlier with discussion of China. 1500 is considered the cut off point between modern and pre-modern times.

yashar at August 9, 2003 01:46 AM [permalink]:

that's right BHS, it requires an extremely free trade with no extra costs, in other words that the two nations are one practically.

ilham at October 29, 2003 02:06 AM [permalink]:

Iran is a rich country. i belive it.

Stinky at November 12, 2003 12:32 PM [permalink]:

This web site stinks

A Reader at November 12, 2003 12:37 PM [permalink]:

well, it didn't before you showed up. :)