Sunday, September 27, 2009

Making Sense of Iran: A Political Economy in Transition

The Islamic Republic of Iran shares many of the same problems facing other countries in the global South. The economy is largely underdeveloped, highly dependent on one export commodity, and the state is unable to meet many of the lingering demands of the population. These contradictions in the political economy of development in Iran serve as the backdrop of the ongoing nuclear debate, the controversial re-election of President Mahmoud Ahmadinejad and relationship with the rest of the Muslim world.

The historical origins of Iran's current development process began before the Islamic regime existed. Mohammad Rezā Shāh Pahlavi was the Western-backed ruler of Iran whose legendary mis-management of Iranian society and economy led to the Iranian revolution of 1979. He was the last monarch of the House of Pahlavi of the Iranian monarchy. The shah of Iran initiated a series of economic and social reforms that modernized the country and set a new course for full integration into the world-economy.

But the shah also widened class-lines and sharply divided Iran into a dual society characterized by structural inequalities between the rich and poor. On the one hand were elites with close linkages with the oil industry and on the other religious clergy, rural masses, and the middle-class. This contradiction caused Iran to be dependent on oil exports and imports of expensive manufactured products. Iranians viewed the shah as largely corrupt and unable to provide basic services in education, health care and housing. The shah purchased billions of dollars in US arms building up a level of regional military might to control vital oil lifelines and exert influence in the region. Economically, the US used Iran as an economic proxy and supplier of a cheap flow of oil to the Western world. A US intelligence official once remarked,
"Iran in the 1970's was widely regarded as a significant regional if not global, power. The United States relied on it, implicitly if not explicitly, to ensure the security and stability of the Persian Gulf sector and the flow of oil from the region to the industrialized Western world on Japan, Europe, and the United States, as well as to lesser powers elsewhere."
The Iranian revolution of 1979 caused the once reliable proxy for Western influence in the middle-east to delink from the economic order, and carve out its own autonomous path toward industrialization. The revolution also sought to reverse the dual economy of the shah on behalf of the popular classes of the nation. The Iranian revolution and movement toward socio-economic transformation frightened many business professionals, technocrats and industrialists who fled to countries in the West. Many of these emigrants have been the source of external pressure on the Islamic Regime to reform.

Since coming to power though the Islamic regime has had to face perpetual economic crisis. The causes of the crisis varied from regional war, misdirected state priorities, and economic sabotage by the U.S. In the 20 years following the Iranian revolution, per capita income declined by 45 percent and inflation remained around 20 to 30 percent every year. Unemployment rose to as high as 20 percent as new entrants to the labor force could simply not find jobs in the heavily export-oriented domestic economy. As a result some 3 millions Iranians have emigrated to other countries. The rural to urban migration in Iran rapidly intensified as well with the capital city of Tehran growing from 4.5 million to 12 million people putting an enormous strain of public service delivery.

The Iranian government has continued to collect most of its non-tax revenues from exporting oil to consumer markets around the world. But despite attempts to diversify the economy, Iran has remained vulnerable to price shocks in the international petroleum market. The weakening of demand in wealthier industrialized nations during the current recession has further exposed Iran's dependency on oil to develop. Iran has failed to successfully raise oil production to collect greater state revenues. To raise production the Islamic Republic will need greater capital investment and intensive drilling technologies. In recent years, Iran has sough to improve relations with the European Union as a potential ally in the development of undercapitalized domestic petroleum.

Even with the economic crisis the Islamic regime was able to score some notable achievements of redistribution including public-spending for infrastructure development including roads, schools, and public libraries. Unlike the former shah, the Islamic regime also prioritized rural development extending running water and electricity to more than half of the villages. The regime successfully carried out a popular ambitious agrarian reform agenda confiscating half a million hectares of arable land to peasant farmers.

Most recently the administration of President Ahmadinijad has generated support from many due to his populist distributional policies within Iran. In response to energy shortages, Ahmadinejad began rationing fuel, and increasing state subsidies for items like sugar and cooking oil. During the first-term President Ahmadinejad, the Iranian government also radically increased the amount of public spending on construction. All of the increased spending kept the economy from total collapse but never tackled the profound level of dependency on oil and created a high level of inflation. Both of these problems are root concerns of the liberal opposition movement.

Reformist rivals of Mahmoud Ahmadinejad saw the last two presidential election cycles as opportunities to reverse the past statist economic policies of the government. These opponents had expected the Islamic regime to phase out public subsidies and liberalize the Iranian economy for the first time since the 1979 revolution. The president before Ahmadinejad, Muhammad Khatami was supported by the disaffected urban middle-classes, college educated professionals and labor movement who were looking for a change of course. The reformers were distraught at the landslide run-off election which elected Ahmadinejad in 2005. President Ahmadinejad's support from some ultra-conservative Iranian political parties and the poor led to a resounding mandate and presented a major setback to the reformist movement. The recent 2009 elections were seen as fraudulent by the reformists who looked forward to regaining their momentum.

Despite the television images of political repression of protests there is some support within the Islamic regime for liberal change. The reformist movement in Iran also consists of high-level clerics and many of their aims were supported by the Supreme Leader himself. In 2006, Ayatollah Ali Khamenei ordered the government to sell 80 percent of all state-owned enterprises in order to increase economic efficiency. Most clerics in Iran actually favor the conventional capitalist model of economic development. They widely support privatization of state-industries, and the development of the private sector.

However, others view such economic liberalization as an attack against the fundamental character of the Islamic revolution. These so called "hardliners" believe that maintaining tight economic control is essential to the political and social continuity of the Islamic regime. Like President Ahmadinejad, they favor central-planning, state industries, national self-reliance and a development agenda that includes poverty eradication, land redistribution, and employment in line with the objectives of the 1979 revolution.

The reformists have explicitly opposed the allocation of scarce resources to support militant Islamist forces throughout the middle-east. Groups such as Hezbollah in Lebanon and Hamas in Palestine have all been sponsored by the Islamic regime in Iran. One of the most influential moves by Iran to support such groups was the creation of the infamous al-Quds force, a highly specialized unit of Iran's military which organizes, trains, and finances Islamic revolutionary movements. The United States military has waged a series of intense counter-operations in order to neutralize key leaders within the organization and slow-down their operations.

The al-Quds Day – literally Jerusalem Day – was created by Ayatollah Ruhollah Khomeini,at the founding of the Islamic regime, and is commemorated on the last Friday of Ramadan in solidarity with the Palestinian struggle for national liberation. During the last weeks events the "Green Movement" of reformists marched through the streets chanting "Not Gaza, Not Lebanon. We are ready to die for Iran," in a direct challenge to the purpose of the gathering its self. There have been previous chants of "Death to Russia" by the reformists as well indicating a deep suspicion of the strategically close relationship between Russia and Iran. The reformists would rather see the Islamic regime focus on domestic economic and political reform than seeking to play spoiler to US hegemony in the middle-east. Many reformists believe that Iran's counter-hegemonical posture has isolated it economically and are convinced that a softening of the country's posture in the eyes of the US could help the economy.

The evolving political saga in Iran signals an intensification of a debate surrounding the nation's distributional policies. The reformists major aim was not to overthrow the Islamic regime, nor to challenge its fundamental structure. Rather the reform movement is mostly seeking to liberalize the political economy of Iran, improve ties with the United States and end financial support for resistance movements in the middle-east. The response of the Islamic regime to these internal pressures for reform will likely define Iran's development path moving forward. In the final analysis, the success or failure at which the Iranian government manages the national economy could be the most important determiner of the country's future.

Friday, September 25, 2009

Missing the Point on Zimbabwe

After years of bitter controversy, Africa's most demonized leader is showing no signs of changing course. Agree or disagree with the politics of Robert Mugabe, it is absolutely clear that the West seriously overestimated its ability to manipulate the internal political saga within Zimbabwe. The meaningless exchanges in name calling, accusations of incompetence, and symbolic non-cooperation by the US and UK did not advance the strategic aims of either country, nor did they help transform Zimbabwean society. Both Mugabe and his Western detractors have largely missed the point about the crisis in Zimbabwe.

Robert Mugabe is coming fresh off the heels of a rousing speech before the United Nations in which he accurately accused Western countries of intentionally undermining a power-sharing deal between his party and the opposition MDC. The agreement came after months of accusations of election fraud, political violence and a sudden outbreak of Cholera that took the lives of hundreds of Zimbabweans. The power-sharing agreement in Zimbabwe was designed with very little influence from either the United States or United Kingdom. The principal actors were the two political parties and the Southern African Development Community led by neighboring South Africa. There is no doubt that both the US and UK had hoped the agreement would fail. The apparent success of the South African arbitration signals the loss of a significant amount of political leverage over the situation in Zimbabwe by Western powers.

Regime change in Zimbabwe has been an explicit goal of both the United States and United Kingdom. The US had expected that record hyper-inflation in 2007 would force political change in Zimbabwe removing Robert Mugabe and his party from power. These calculations were wrong. The hyper-inflation also became a primary target of Mugabe who blamed the ailing economy on foreign interference and economic sabotage. The ZANU-PF was able to galvanize the military veterans from the national liberation struggle and the rural poor of the country while painting the opposition party as collaborators with the UK in the lead up to the disputed presidential run-off elections.

Even as Mugabe and his opposition counterpart Morgan Tsvangirai finally united to resolve long-standing political disputes and jump start the economy, the West has to date refused to remove sanctions. The result has been the vindication of Mugabe's criticisms as the African Union and SADC unanimously condemned all existing sanctions against the unity government. There is evidence to suggest that Zimbabwe will continue re-allocating lands from white land-owners to black farmers. Zimbabwean President Robert Mugabe spoke with CNN correspondent Christina Amanpour about the controversial land redistribution act which critics allege is the root cause of the nation's current economic turmoil. 10.8 million hectares, have been seized by the state over the past nine years from whites and given to black Zimbabweans.

So far, it is the most radical agrarian reform program ever in post-colonial Southern Africa. Acute inequality between black and white land-ownership is one of the unresolved issues in the region. In the televised interview, Mugabe made no apologies for the land seizures and restated his belief that he was acting in the national interests of his countrymen.

The international politics of Zimbabwe often obscure the principal contradictions causing underdevelopment within the country and the immediate need for both economic recovery and transformation. Zimbabwe was once one of the industrial giants of Africa. Decades of emphasis on primary commodity exports and Structural Adjustment Programs implemented after the fall of colonialism have contributed to a widely uneven economic development model in the country that have left it vulnerable to internal mismanagement, external price shocks and manipulation.

Zimbabwe's agricultural sector is the principal source of export revenue in the country. Decades of liberalization under the leadership of the ZANU-PF de-emphasized industrial development and contributed to lingering unemployment, lack of energy and poverty in urban areas. Now the country faces extreme shortages in both fuel and essential machine tools and technologies needed for manufacturing. The impact of these shortages have even caused Zimbabwe's highly dependent agricultural sector to suffer.

Neither Robert Mugabe nor Morgan Tsvangarai appear to have any idea how to resolve fundamental contradictions within the political economy of Zimbabwe. For example, both parties continue to overemphasize foreign investment rather than organize a coherent vision for industrial policy. Paradoxically, the rebel Robert Mugabe has been in the forefront of the unity government groveling for foreign investment into the Zimbabwean economy. The IMF originally offered over 400 millions dollars in unconditional support to Zimbabwe, a sharp reversal of the bank's previous refusal to lend funds to the former regime. But the funds have already heightened existing tensions within the unity government over how to spend the money and the IMF reversed course delaying payment of the funds.

The crisis in Zimbabwe is that the country is severely underdeveloped, the politicians have no unifying vision to move forward, and external actors have a vested interest in maintaining the uneven framework of the country's development. Emotional speeches and sanctions aside, the Zimbabwean people deserve better than the status-quo.

Sunday, September 13, 2009

The Limitations of Representative Democracy in Kenya (Africa)

Democracy versus Authoritarianism is one of the major debates in the comparative political economy of development. The conventional view is that representative democratic systems are more responsive to the material demands of citizens than authoritarian systems. For example, development economist Amartya Sen has previously observed that famine only occurs in authoritarian regimes. Democracy, according to Sen was more responsive to citizens needs and thus able to prevent famine from occurring. So what conclusions are we to draw from nominally democratic systems in Africa, that clearly lack the ability to respond to the wishes and opinions of their citizens?

Kenya has a representative, multiparty, electoral democracy and embraces a model of capitalism defined by economic liberalization. Kenya has both a market economy and open society complete with scores of foreign aid agencies, missionaries and non-governmental organizations. The Freedom in the World Report ranks countries according to the amount of political rights and civil liberties, thru which countries are classified as “Free”, “Partly Free” and “Not Free.” According to Freedom House, Kenya is "Partly Free", ranking more favorably than countries like Zimbabwe, Libya, or Eritrea (countries considered authoritarian in the West). While there are still challenges, civil liberties and political rights are relatively well recognized in Kenya. Yet, the East African nation of Kenya is on the verge of an expansive famine that is threatening the lives of millions.

The New York Times reports,
"A devastating drought is sweeping across Kenya, killing livestock, crops and children. It is stirring up tensions in the ramshackle slums where the water taps have run dry, and spawning ethnic conflict in the hinterland as communities fight over the last remaining pieces of fertile grazing land."

The New York Times has stopped short of calling the current drought a famine, but facts on the ground suggest the same characterizing features---extreme scarcity of food. The real culprit in this case is typical of other recent converts to representative democracy in Africa. Politicians in Kenya are more concerned with being elected to representative seats in parliament than performing the necessary duties of public service. Worse yet, voters elect politicians with whom they share ethnic or familial ties instead of choosing candidates on the basis of their competence and vision for the poorest sectors of society. The images of ethnic violence after claims of voter fraud in 2007, were terrifying. Perhaps just as tragic has been the general incompetence and elitism of the resulting power-sharing coalition in Kenya.

Like other young democracies in Africa with significant cultures of nepotism, another of Kenya's great hurtles is the lack of political education among citizens. Very few are aware that as citizens they are entitled to certain basic inalienable rights, not limited to civil liberties only, but also freedom from fear and want. When State institutions fail to deliver social protection, people trend toward ethnic violence rather than organized demands for greater responsiveness from the State.

Kenya is a perfect case-study of the ineffectiveness of State consolidation in parts of Africa after the fall of colonialism, but also the tremendous shortcomings of 21st century identity politics. Kenyan author Ngugi Wa Thiong'o best summarized, in his analysis of the 2007 general elections, the ridiculousness of identity politics in Kenya and the need for a real agenda for development.
"I am not a member of any of the contesting parties. They don’t adequately embody the vision of the unity of the small farmer, the worker, the jobless and landless Kenyans across all the regions of their birth and residence. They don’t seem to recognize sufficiently that Kenya like Africa as a whole has only two tribes: the haves and the have-nots."
The widespread incapability of the State to promote the welfare of citizens in Kenya can not be blamed on the Kenyan government alone. Most recently, Western aid agencies and governments have played directly into the hands of ineffective politicians by perpetuating the myth that the fundamental responsibility to help protect the physical and material well-being of people in need lies with Western NGO's rather than the government. External social engineering in Kenya has subversively redefined the role of government to exclude the provision of basic necessities to focus instead on liberal institutional reforms.

The reason, according to the New York Times, that donors have been slow to assist Kenyan's during the crisis is because of aid conditionalities tied to such reforms!
"Part of the reason may be the growing disappointment with Kenya's leaders.They have been poked and prodded by Western ambassadors---and their own citizens---to overhaul the justice system, the police force and the electoral commission."
In the midst of a human catastrophe, the aid agencies are digging in their heals in the fight against corrupt behavior, but few have addressed the deeper structural issue in Kenya. The inability of the Kenyan State to fulfill its fundamental responsibilities of social protection had left poor Kenyan's without basic provisions of food, health care, housing, education, and meaningful employment well before the current drought. The failure of welfare provision in Kenya is the very reason for the existence of so many external aid agencies there in the first place. No wonder NGO's are slow to address this point. Globalization is no substitute for responsive governance.

In Africa, there are frequent campaigns for regime change against alleged authoritarian strongmen whose exploits lead to economic inefficiencies or social failures. Should the grounds for regime change in cases of authoritarianism apply for nominal democracies in Africa as well? Do Kenyan citizens for example have a legitimate case for regime change in their country when the regime is non-responsive to their needs? The very suggestion would be opposed by most liberals but the search for answers among the popular classes of Kenya is inevitable.

Tuesday, September 8, 2009

Still Confused About the Economic Crisis? Economists Are Too

As the economic crisis reaches its one year anniversary, mixed messages continue coming from the economic "experts" about what exactly is happening in the global economy and for how much longer. Dominique Strauss Kahn, Managing Director of the IMF, claimed recently in a Italian newspaper that economic recovery could come a full quarter earlier than expected.
"For the (global) economy, we have been saying for a year that the recovery will come in the first half of 2010. It might even be a quarter ahead and that would be a good thing,"
UNCTAD on the other hand has warned recovery is not around the corner and called for the creation of a an alternative world reserve system that would replace the supremacy of the US dollar with several currencies. UNCTAD also called for tighter controls on global financial flows.
''Tumbling profits in the real economy, previous over-investment in real estate and rising unemployment will continue to constrain private consumption and investment for the foreseeable future,''
What accounts for the two very different diagnostics on the global economic crisis? There is little consensus among economists on the health of the global economy, namely because they can't agree on any complete diagnosis of the disease. How international economists forecast our economic future depends on whether or not they believe the global recession is primarily financial in nature or a much deeper structural crisis in production, and consumption of goods and services.

Governments are being asked to choose between two significantly differing views about how the global economy is functioning and therefore what sets of policies to implement to navigate the storm. Though economists love to claim complete empirical objectivity when providing policy advice, the two alternative paradigms on the "Great Recession" highlights the all important role that politics and ideology play in shaping macroeconomic change. Paul Krugman's recent analysis on the forecasting of macroeconomists is on point. The crisis in the economics profession may be just as great if not greater than the crisis in the real or financial economy---depending on your point-of-view.

Monday, September 7, 2009

Import Substitution in Modern China

I have been fascinated the last few days with a timely IMF working paper that argues rebalancing economic development in China will mean rapidly stimulating domestic demand and entering new non-tradable industries, even requiring some degree import- substitution. The paper is an ironic testament of these desperate economic times, considering the pervasive but wrong assertion among liberal economists that import-substitution failed in the 20th century. Besides ignoring the near complete decimation of important sectors within several developing national economies, the apologists for unfettered external export continue to pretend countries pursuing variations of import-substitution performed horribly. They didn't.

A blog post by Harvard economist, Dani Rodrik could not make this point much clearer. ISI "had a more-than-respectable productivity record" in the middle of the 20th century. So what are the prospects of the industrialization strategy making a comeback in the 21st? They could be greater than many care to admit.

Sunday, September 6, 2009

The End of Global Free Trade? Not Quite

In the past, globalized "free-trade" has generated enormous hostility and intense social protests between the poor and the intergovernmental organizations who they perceive as primarily serving the interests of elites and multinational corporations. These protests have only increased during the current economic crisis. But is the global free-trade regime in any significant danger? The masters of the free-trade universe are already in panic-mode.

In the name of "ensuring that trade flows as smoothly and freely as possible" among countries, organizations like the WTO and OECD seek to prevent governments from implementing policies that regulate trade to promote national interests or benefit vulnerable citizens (workers, farmers, etc). The OECD has recently released a report called, Trade-Separating Fact from Fiction, in which the organization warns against widespread questioning of the benefits of trade and free markets during the current crisis.

Freer flows of trade are part of the solution to the current economic crisis... Still, there are calls from some to protect industries and workers against imports by raising tariffs, imposing quotas or resorting to various non-tariff barriers. We would all pay a high price for heeding such calls.

The WTO is making a similar case for continued faith in globalized free-trade, warning governments not to make "protectionist" trade policy changes in response to greater unemployment. Governments risk catastrophic social unrest if they fail to offer some relief to constituents who are most vulnerable to shocks in the global trading system. In the so called BRIC countries such as India, China, and Brazil popular outrage about increasing pauperization, unemployment, and social service cuts are challenging the stability of their societies. Over 50,000 Indian farmers for example have mobilized in recent days against the WTO and demanded that the Indian government offer more defense against the organization's dictates.

For now, many developing countries are locked in a delicate balancing act between meeting the immediate needs of their citizens, and opening new markets for their exports in wealthier nations. The contradiction between dependency on external markets for exports and meeting domestic needs suggests that there is a significant trade-off under the current economic development strategy pursued by emerging economies. A structural shift among the largest emerging economies would appear to be highly unlikely in the near future.

I predict that ultimately, the BRIC nations will side with their pocket-books and seek to continue the path toward high-speed economic growth under the status-quo in the "Doha Round" WTO deliberations. So far, it appears that BRIC governments are merely paying lip-service to the aspirations of the poor---many of whom have asked for a complete break with the WTO altogether. However, we can expect to see some coordinated push-back against future rulings that explicitly limit freedom of action on trade policy by Brazil, India et al. and while this is not the complete reorganization of the global trading system the poor need, it is a long overdue step in the right direction.

Saturday, September 5, 2009

China's New Statistical Conundrum

Many investors are betting on the continuation of China's remarkable economic growth despite the near complete decimation of the emerging economy's export-oriented development frenzy. Early signs show that the Chinese government will actually retain its extraordinarily high annual growth rate this year, defying cynics who doubted the resilience of the export-oriented industrialization paradigm--- except for one small problem. The economics statistics coming from the Chinese Communist Party don't exactly add- up. The lack of reliable economic statistics coming from China only serve to further complicate efforts at avoiding deeper crises in the real economy.

According to a dispatch in Foreign Policy magazine, local-level Chinese government officials are fudging data on everything from economic growth, unemployment, to retail sales. The reason? Local Chinese officials are under intense scrutiny to meet routine targets and therefore have powerful incentives to cut corners and/or manipulate the harsh realities on the ground to save face. Jordan Calinoff writes for example that,

A look at GDP growth also raises serious questions. China's economy grew at an annualized 6.1 percent rate in the first quarter, and 7.9 percent in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2 percent in the first six months of the year. How could an economy largely dependent on manufacturing grow while its industrial sector shrank? It couldn't; the numbers don't add up.
If China's main export markets in the 'triad' US, Europe, and Japan fail to recover as expected, the nation will undoubtedly face greater unemployment and social unrest among the working- class. The overly optimistic economic forecasts coming from China may obscure the reality that a model champion of export-led industrialization may soon see its reign come to an end; with bang, rather than a whimper.