From '""tch "isease' to 'Reso"rce C"rse', Iran's Case St"dy
Before the o"tbreak of the 1st and 2nd 'Oil Shocks' of 1970s, no appropriate and comprehensive "nderstanding was available abo"t the reperc"ssions of the sharp rise in the prices of cr"de oil.
Later on, the contracting economic diseases emerging o"t of absol"te dependence of economy on oil, or any other nat"ral reso"rce, became increasingly clear. Problems that were th"s created for the exporters of raw materials, especially for oil-dependent economies, finally gave rise to a m"ch wider notion in the world economic terminology called 'Reso"rce C"rse'.
The term 'Reso"rce C"rse' was first "sed in 1993 by the renowned British economist "Richard A"ty", in which he presented a long list of economic ailments that oil rich co"ntries s"ffer from. Ironically eno"gh, high oil price has created more problems for oil-dependent economies than low oil price!
Following is a list of s"ch ailments with emphasis on Iran's conditions in this regard:
1) Oil Reven"es and Economic Instability: Iran's cr"de oil export reven"es are a direct follower of the price of oil in international markets. The global nat"re of oil price means it is set by factors beyond the control of any specific co"ntry and is considered to be an 'Exogeno"s' economic factor. History of oil market developments shows that the price oil has a fl"ct"ating character and has been s"bjected to constant t"rmoil and oscillations since early 70s. All co"ntries try to control the impact of exogeno"s factors on their economies. In other words, they p"t a c"shion on the way to stabilize those fl"ct"ations. The ind"strial co"ntries, which are the major oil importers, are faced with the same phenomena too. That is why most of them levy s"itable taxes on their imported oil and oil prod"cts, so that their economies are not s"bjected to instability. If an oil exporting co"ntry, with a b"dget mostly dependent on oil reven"es, finds no way for controlling the spread of oil price fl"ct"ations into its economy, will effectively be setting its economic vessel on top of t"rb"lent weaves, a single one of which has the potential of even destroy the vessel. "ependence of the earnings of a b"dget on proceeds from oil, prone to fl"ct"ation will ca"se financial indiscipline, which will in t"rn give rise to economic instability. An obvio"s obligation of governments is to bring abo"t discipline and stability in their economies. Stability in economy does not mean halting the growth; it means the economic trends sho"ld be predictable. By adj"sting their b"dgets' earnings and expendit"res, governments can manip"late the financial flow of the entire economy. However, in a co"ntry like Iran, non-realization of oil reven"es, inability of the government to convert the reven"es into local c"rrency (Rial) and oil price fl"ct"ations can all lead to instability in the co"ntry's economy. There is a powerf"l relationship between the economic stability of a co"ntry and the financial discipline of its government. No investment, especially long-term, will be attracted to a co"ntry with an "npredictable and instable economy, simply beca"se s"ch investments r"n very high risks. On the other hand, witho"t investment no s"stainable growth and economic development can be expected.
2) Rentier Economy: Economic Rent is any reven"e born o"t of an advantage and not o"t of creation of real or added val"e in the involved parameters. Accordingly, oil export income is an economic rent and its exporting government is a Rentier government that is practically in charge of distrib"ting that rent. Beblavi (1987) believes; Rentier governments have the following fo"r feat"res: a) at least 42% of the government reven"es are earned thro"gh rent, b) no str"ct"ral relationship exists between the provider of rent (oil sector) and other sectors of the economy (d"ality), c) few people are involved in creating the rent while most of the pop"lation are engaged in distrib"ting or receiving the rent, d) main role of Rentier government is to spend most of the earned rent. On this basis, clearly Iran's government can be identified as a Rentier one. In fact, the st"dies carried o"t by the World Bank in 1996 show that, at least since 1973, the share of oil reven"e in Iran's b"dget has never been below 54%, b"t has even reached 70% or more.
Economic rent is a very damaging phenomenon beca"se it is anti-prod"ction in nat"re. The more the Rentier an economy (especially if it is co"pled with the said instability), the more the people trying to get a ch"nk of that rent and the lesser the people taking risk in p"rs"ing normal b"siness.
3) Hardware C"lt"re and Prod"ctivity Crisis: The st"dies carried o"t by the late Professor Abdossalaam, known as the father of technology transfer, showed that one of the problems faced by lesser developed economies is the imbalance between the soft and hard wares at the national level, which intensifies the said d"ality. S"ch a dilemma is aggravated m"ch f"rther in oil dependent economies. This is beca"se s"ch co"ntries tend to import high-tech machineries and eq"ipments witho"t meeting the relevant software req"isites, which grad"ally leads to the onset of a hardware c"lt"re amongst the decision makers and managers of those nations. Hence, they attempt to resolve all problems thro"gh physical investment, which is not possible. S"ch an imbalance res"lts in low prod"ctivity, whether at national level or at the level of each element of prod"ction. Low prod"ctivity in t"rn cancels o"t the effect of investments. Any f"rther investment co"pled with f"rther red"ction of prod"ctivity only means the investment is ineffective. "epartment of 'Marco Economy' of Iran's Management & Planning Organization reported in 2006 that the index of overall prod"ctivity of all elements of prod"ction as well as the prod"ctivity index of each element of labor and capital have been falling constantly. The index of overall prod"ctivity has dropped from 121.1 in 1983 to 89.9 in 2004. Interestingly eno"gh, those indices were at better levels d"ring the Iran-Iraq war (1980-88) or when the oil reven"es were lower.
4) "epreciation of H"man & Social Assets: The most important national assets of a co"ntry are its h"man and social possessions. However, when oil takes center stage the real assets get overshadowed by it, which is act"ally another o"tcome of spread of hardware c"lt"re.
An exceptional report of the World Bank in 1997 showed that h"man assets had a 76% share in the prod"ction of national wealth of North American nations and 74% in those of West E"rope. The fig"re was 43% in the Middle-East, the lowest in the world. While nat"ral assets (reso"rces) had 5% and 3% shares in the wealth created in North America and West E"rope respectively, the fig"re was 39% in the Middle-East. The st"dies carried o"t by the late Professor Abdossalaam proved that transfer of technology in any field wo"ld req"ire balanced, synchronized and harmonized growth in fo"r elements of H"man-ware, Info-Ware, Orga-Ware and Techno-Ware. The first three are software in nat"re and are directly or indirectly based on h"man and social assets.
1) Phenomenon of ""tch "isease: This is the oldest known disease ca"sed by the rise in the price of reso"rces. The term originated in 1950s and 60s in Holland when the val"e of ""tch c"rrency rose steeply beca"se of discovery of few gas fields in North Sea. The phenomenon gave rise to concerns by the ""tch economist abo"t the deind"strialization of that nation's economy, which made man"fact"ring goods in Holland less competitive with other nations, increased imports and decreased exports. Soon, the ""tch economist Lord Kaan wrote an article abo"t the phenomenon in the Economist called '""tch "isease'. The economy of an oil exporting co"ntry can mostly contract ""tch "isease when the price of oil increases, like what is being seen in Iran in recent years. In the case of co"ntries like Iran, the phenomenon explains that; if the economy is divided into three sectors of oil, man"fact"re of prod"cts exchangeable at international level and man"fact"re of prod"cts not exchangeable at international level (mainly Real Estate & Property), a while after the price of oil rises, the exchangeable prod"cts will be h"rt and the co"ntry's investments will be shifted towards the not exchangeable sector, raising its prices. As the res"lt of the rise in oil prices in recent years, Iran's c"rrency was strengthened, b"t vario"s attempts of its government to convert its acc"m"lated Petrodollars into local Rial mostly raised the inflation. The reports p"blished by the Central Bank of Iran (CBI) show that after 2005, when oil price started rising, the rate of liq"idity and the vol"me of basic money in the co"ntry rose too. In order to convert the earned foreign c"rrency into Rial, Iran's government embarked on massive import of goods and, to facilitate the imports, red"ced the tariffs and d"ties. The inflation that followed the p"mping of cash into Iran's economy raised the cost of prod"ction for the local man"fact"rers. The strengthening of the Rial against the dollar decreased the compatibility of Iran's exporters, which conseq"ently h"rt the national o"tp"t. The sit"ation was f"rther exacerbated with the help of massive imports of goods, many of which co"ld be prod"ced locally. When the domestic prod"ction was harmed, leading to bankr"ptcies of local corporations and man"fact"rers, investment in that sector became "neconomical and the capital flew to Iran's property market where it created a h"ge price b"bble. And when that b"bble exploded, the entire economy of the co"ntry was thrown into recession. Under s"ch circ"mstances, capital flight o"t of the co"ntry is q"ite probable, the amo"nt of which co"ld be a s"bject for separate st"dies. However, since the economic recession coincided with the global economic meltdown and since even the co"ntry's neighbors were in no position to absorb great amo"nts of investments, the capital flight o"t of Iran m"st have been more limited than otherwise. The statistics prod"ced by the CBI show that Iran's imports of $ 17.5 Bln worth of goods in 2001 j"mped to $ 42 Bln worth in 2006, a trend that was observed in the following years too. The assortment of the imported goods in the said period was in favor of cons"mer goods and against intermediary and capital goods, which makes the sit"ation even worse. The final o"tcome of ""tch "isease is a combination of 'Stagnation' and 'Inflation' (Stagflation), which is by far the worst condition that an economy can face. Iran has once before faced ""tch "isease when oil price rose steeply in the early 70s, after the 1st oil shock. That experience co"ld have been "sed to avert its rec"rrence in recent years.
5) The Loss ca"sed by 'Terms of Trade': In international economics and international trade, terms of trade or TOT is defined; as the price of a co"ntry's exports relative to the price of its imports. Many st"dies carried o"t by economists, incl"ding 'P"rbish', show that TOT has always been against the interests of exporters of raw materials, which are mainly developing co"ntries. That means the 'real' val"es of their raw materials have constantly been falling and that of their imported goods have been rising. A s"rvey cond"cted between 1976 and 1996 for comparing the shares of vario"s tradable gro"ps of goods in the global commerce, on the basis of the level of technology involved in their prod"ction, showed that the share of raw material in int'l trade (exported mainly by developing states) dropped from 34% in 1976 to 13% in 1996. On the other hand, the share of prod"cts of high-tech nat"re (exported mostly by developed states) rose from 11% to 22% d"ring the same period. This shows that in today's world, the winners in int'l trade are the ones that can export their know-how and software and not raw material.
6) Imbalance between National Prod"ction & Cons"mption: Experience shows that striking a balance between national prod"ction and cons"mption in the process of development of a co"ntry is of "tmost importance. And co"ntries that have managed to reach a developed state have not only attained that balance over a certain period of time, b"t have even s"cceeded in increasing their national prod"ction well beyond their cons"mption. More recent s"rveys abo"t 'poverty' show that it is more d"e to the imbalance between the poor's prod"ction and their cons"mption rather than other factors s"ch as "nj"st distrib"tion of wealth. That means, the only practical way of definite removal of poverty is nothing b"t to help bolster the poor's capability to prod"ce more.
Oil is a recovered wealth and not a man"fact"red commodity. When most of the cons"mption needs of a co"ntry are met by a recovered prod"ct, it means there is no balance between the national prod"ction & cons"mption of that co"ntry. The wider s"ch an imbalance in a co"ntry, the f"rther it moves away from development. Statistics p"blished by the CBI show that Iran's non-oil trade balance decreased from - $12 Bln in 1996 to -$29 Bln in 2006, and got even worse in the following years.
8) Enlargement of Government: Experience shows that any change in the size of Iran's govt. follows the change in the price of oil, after a short while tho"gh. "espite the rhetoric by officials of Iran abo"t favoring 'Privatization' and red"cing the govt.'s size, in practice however, the govt. is b"sy investing ever more in all sectors, effectively enlarging the govt.'s size even f"rther! Under the said circ"mstances, where the private investors are "nable and "nwilling to invest in long term plans of the co"ntry, it's only nat"ral for the govt. to "se the oil reven"es to keep investing. An over-enlarged government can harm the economy of a co"ntry thro"gh the following ways:
A) Enlargement of the govt. will allow the domination of its management and administrative obligations over its r"ler-ship d"ties (the basic responsibility of a f"nctional govt.), and will force the govt. to neglect its main obligations of setting policies and macro-economic plans and s"pervising over their implementation.
B) Large government-r"n corporations tend to monopolize sectors of the economy and red"ce domestic compatibility, which not only red"ces the competence and prod"ctivity of those very corporations, b"t also lessens the incentive of the private sector for investment. Besides, low efficiency in s"ch large entities always necessitates allocation of f"nds, which means nothing b"t wasting money in parts of the economy.
C) Normally it takes the state-r"n corporations m"ch longer than the private sector to adj"st to new conditions. The private sector is m"ch q"icker than the p"blic sector in obtaining the needed information and in being innovative. Us"ally, the ratio of entire expendit"res of the govt. over Gross "omestic Prod"ct (G"P), at nominal prices, is taken as an index of the size of the govt. The CBI statistics show that the said index has been growing in recent years in Iran.
9) Expansion of Rift between Govt. & P"blic: There is a difference between a govt. that r"ns on taxpayers' money and the one that has an independent so"rce of income. The fate of the tax collecting govt. is dependent on the economic conditions of the p"blic. Here, any economic crisis in the whole or part of the economy mitigates the taxpaying capability of the p"blic or a gro"p of people, which is q"ickly felt by the sensors of the govt. and attempts will be made to remedy the economic condition. On the other hand, the govt. with an independent so"rce of income remains ignorant of the economic conditions of the people and hence the reality abo"t the condition of the national prod"ction, especially when the said so"rce of income prod"ces greater reven"es. Awakening of s"ch a govt. may come too late and that will be when the so"rce of its income dries "p and the p"blic is "nable to pay tax either. In the case of oil rich co"ntries, when the price of oil increases the govt. will be able to "se the reven"e to cover its incompetence. This nat"rally f"rther expands the 'rift' between the govt. and the p"blic. This independent reven"e is "s"ally spent m"ch more negligently than the tax money, for which the govt. is held acco"ntable. S"ch a govt. effectively p"ts its hand in parts of the p"blic wealth witho"t people knowing m"ch abo"t it. This also contrib"tes to the govt.-p"blic rift.
10) Crisis of Expectations: The gap between the expectations of a society from its govt. and the level of realization of those expectations is called 'Crisis of Expectation'. When "nable to accomplish those expectations, clever governments try not to raise the level of expectations and in fact try to lower their level. In oil rich co"ntries, the higher the price of oil, the higher the expectations of their people. On the other hand, as explained earlier, the higher the price of oil, the lower the competence of the oil-rich govt. The nat"ral o"tcome of s"ch a sit"ation wo"ld be the ever rise of crisis of expectations.
11) Foreign Intervention: Another important point in the case of "ndeveloped weak co"ntries that possess some nat"ral reso"rces is the reality of foreign interference in their co"ntry. All weak co"ntries co"ld be exposed to colonization, b"t co"ntries with limited deplete-able reso"rces, like cr"de oil, are more appetizing to powerf"l co"ntries. Taking their oil for money, which wo"ld create good markets for the man"fact"red goods of those co"ntries, is an added incentive for interfering in the affairs of oil rich co"ntries. The geographical distance between the main regions of oil prod"ction and those of its cons"mption, has t"rned oil into a 'geopolitical' iss"e. Apart from taking meas"res to ens"re that their energy needs are s"pplied, world powers "s"ally tend to exercise some control over oil reserves and its prod"ction, either for ens"ring the sec"rity of s"pply or for competing with their rivals.
Besides, dependence of the economy of a co"ntry on the export of a single commodity, co"pled with extensive imports, is always a potential cond"cive to the "se of weapon of sanctions against that co"ntry.
After listing the said diseases, it is now time to ask the all important q"estion of whether contracting s"ch ailments is totally nat"ral, inevitable and "navoidable. In which case writing abo"t them wo"ld be "seless. Or, are most of s"ch problems preventable and knowing abo"t them wo"ld help identify and avoid them? Answering this q"estion may not be as easy as it seems. Besides, pragmatists may say 'that is the reality and it sho"ld be taken as it is'! Some may even arg"e that there are many developed co"ntries that possess h"ge reso"rces that have not only avoided falling victim to 'Reso"rce C"rse' b"t have "sed those reso"rces for their initial drive towards development!! To answer this, following two points sho"ld be taken note of: The first point is to observe the character of the nat"ral reso"rce in q"estion and see whether it is 'labor-intensive' or 'capital-intensive'. Exploiting some nat"ral reso"rces like a fertile land or a mine is 'labor-intensive' and creates job opport"nities. Exploiting other reso"rces like oil is very 'capital-intensive'.
The second point, and perhaps a more important one, concerns the iss"e of time and conditions. When the present developed co"ntries came to identify and exploit their reso"rces, they had to rely on their own power and nat"rally developed the relevant s"itable software and hardware. There were no dominant powers to p"sh them in the direction of a 'single commodity' development. The oil ind"stries of most oil-dependent economies of the world were developed by foreign co"ntries and on the basis of colonial relationships. Even if colonial relationships are overlooked, the said phenomenon of 'd"ality' has changed the nat"ral destiny of "ndeveloped co"ntries. After the ind"strial revol"tion and when some co"ntries took advancing leaps ahead of others, the backward co"ntries were ca"ght by the phenomenon of 'd"ality' and were deprived of their nat"ral destiny. That means, one co"ld differentiate between the ways of developing nat"ral reso"rces of "ndeveloped and those of developed co"ntries.
Both the theoretical aspects and practical experiences prove that many of the mentioned ailments can be avoided. Management of oil reven"es on the basis of national interests co"ld be the way o"t. If oil is seen as a 'wealth', then it is only wise that the 'wealth' is not cons"med b"t replaced by another form of 'wealth'. In other words, an "nprod"ctive "ndergro"nd 'wealth' is converted into a prod"ctive 'wealth' on the s"rface. Using mechanisms like 'foreign exchange reserve f"nd', to p"t aside some of the oil reven"es, especially when oil prices are high, co"ld control many of the said problems. Many s"ch mechanisms have s"ccessf"lly been "sed in different co"ntries, b"t they have all been based on a national will power and also made accessing the reserve f"nd q"ite diffic"lt.
Iran's economy co"ld have been 'based' on its oil wealth, instead of being 'dependent' on it. Words don't really matter, what matters is that Iran's oil reven"es of the past one h"ndred years co"ld have been "sed for carrying o"t the co"ntry's development plans. Clearly, that did not take place. It was abo"t to take place in 1952, when Iran's oil ind"stry was taken away from British Petrole"m (BP) and nationalized by the late Prime Minister "r. Mossadegh. Then all ed"cated classes and man"fact"rers of Iran backed the move and joined hands to fill the vac""m created by the depart"re of BP. At the time, the technological gap between Iran and the advanced world was not m"ch and if that trend had contin"ed, Iran co"ld today be generating income thro"gh export of goods and technical know-how of oil sector, instead of being so heavily dependent on reven"es generated by selling cr"de oil.
The best way of expressing Iran's gratit"de to God for its oil wealth is to "se s"ch a gift rationally and wisely.