World-System (1950-2000+) How Does the Iranian Economy Work?

 

According to Google AI, the Economy of Iran is facing "significant challenges" to include international sanctions, inflation, currency devaluation, economic stagnation, corruption/mismanagement, dependence on oil, and brain drain. My forecasts for the Economy of Iran are equally pessimistic (here). On the other hand, if the Economy of Iran were entirely cut out of the World-System (say for twenty years), the World-System would take a big hit (here).

Before we make any conclusions about either qualitative or quantitative forecasts, it would be useful to understand how the Economy of Iran works (HINT: It's an historically driven economy not a Neoclassical Economy). From the perspective of  Systems Theory, the first step is to estimate the state variables (the measurement matrix for the Dynamic Components state space model is presented in the Notes below). There are three state variables (estimated by Principal Components Analysis, PCA): (1) Overall Growth, (2) an Unemployment-Globalization component and (3) an Environmental-Globalization feedback controller that includes unemployment and energy use.

The System Matrix for the DCM model (the first three columns are the three state variables IR1, IR2 and IR3) is unstable (eigenvalues >1) with overall growth being the primary source of instability (essentially, this is a moving average model). The off-diagonal elements (feedback components) are weak (small coefficients) compared to the diagonal elements (growth).

A shock decomposition of the overall growth component (graphic above) shows that a negative shock to growth (left panel) works it's way through the system in about four years. In response to a negative shock, the Unemployment-Globalization component (middle panel) increases but to a low level (the measurement is in standard score units and the delta is about -0.03). A negative shock to growth also increases the Environmental-Globalization controller but also with little effect. In other words, negative growth shocks are not under strong feedback control.

The feedback controllers work a little better in response to their own negative shocks (graphic above).  A negative shock to Unemployment-Globalization, increases Growth (but very slightly, left panel, upper row), takes about four years to work its way through the system (middle panel, top row) and increases the Environmental-Globalization controller (right panel, upper row) very slightly but without much response from unemployment, the Ecological Footprint (EF) or energy use. Finally, a negative shock to the Environmental-Globalization controller (lower row of the graphic above) decreases growth, decreases unemployment and globalization while taking about four years to work through the system.

Historically  (graphic above) the biggest shocks were, understandably, around the Iranian Revolution (1978-1979) (I'll analyze this period in a future post here). For now, notice that events after World War II (the repressive Pahlavi Iran regime and the Iranian Revolution) are still having impacts in the present.

One thing you can see clearly from the plots of IR2 and IR3 above are cyclical periods and damping time. The general effects of oscillations after the shocks of  Pahlavi Iran were about sixty years with a damping time of about a decade. In other words, the oscillations created by shocks to Globalization, Unemployment and the Environment are just about over!

NOTE: the Iranian economy is an historically driven economy not a Neoclassical Economy.

Historical cycles do not appear in a Neoclassical Economy! Paradoxically, this doesn't mean that applying the Neoclassical Model to Iran isn't insightful (here).

For more on data sources and how the DCM models are constructed, see the Boiler Plate here. You can experiment with the IR_LM model here.

Notes

The IR_LM Measurement Model is:

The first state variable (row of the Measurement Matrix, IR1) describes overall growth in the Iranian Economy. The second state variable, IR2, describes  historical periods of Unemployment and Globalization, (IR2 = 0.9091 SL.UEM.TOTL.ZS + 0.335 KOF) and the third state variable, IR3, is an environmental-globalization feedback controller, (IR3 = 0.827 KOF - 0.3878 SL.UEM.TOTL.ZS - 0.258 EF - 0.217 EG.USE.COM.KT.OE), for unemployment, ecological footprint and energy use.

Further reading:

• Iranian Revolution a series of events that culminated in the overthrow of the Pahlavi dynasty in 1979.

• Strait of Hormuz a strait between the Persian Gulf and the Gulf of Oman. It provides the only sea passage from the Persian Gulf to the open ocean and is one of the world's most strategically important choke points.

• Iran-Contra Affair a political scandal in the United States that centered on arms trafficking to Iran between 1981 and 1986, facilitated by senior officials of the Ronald Reagan administration

• Iran Nuclear Program one of the most scrutinized nuclear programs in the world that has sparked intense international concern.

• Pahlavi Iran the Iranian state under the rule of the Pahlavi dynasty. The Pahlavi dynasty was created in 1925 and lasted until 1979 when it was ousted as part of the Iranian Revolution, which ended the Iranian monarchy and established the Islamic Republic of Iran.

• Iran-Iraq War an armed conflict between Iran and Iraq that lasted from September 1980 to August 1988. Active hostilities began with the Iraqi invasion of Iran and lasted for nearly eight years, until the acceptance of United Nations Security Council Resolution 598 by both sides.

• Iranian Economy a mixed, centrally planned economy with a large public sector. It consists of hydrocarbon, agricultural and service sectors, in addition to manufacturing and financial services, with over 40 industries traded on the Tehran Stock Exchange.

• The White Revolution a far-reaching series of reforms to aggressively modernize the Imperial State of Iran launched on 26 January 1963 by the Shah, Mohammad Reza Pahlavi, and ended with his overthrow in 1979.

• Modernization Theory holds that as societies become more economically modernized, wealthier and more educated, their political institutions become increasingly liberal democratic and rationalist (Iran is a notorious counterexample).

• Foreign Policy of the Kennedy Administration The United States foreign policy during the presidency of John F. Kennedy from 1961 to 1963 included diplomatic and military initiatives in Western Europe, Southeast Asia, and Latin America, all conducted amid considerable Cold War tensions with the Soviet Union and its satellite states in Eastern Europe.

Blog Roll:

• Stabilizing the Iranian Economy Easy but not easy!
  
• A Deep Dive into the Iranian State Space Cycles vs. Control.
  
• The Iranian Revolution Still being worked out today.
  
• Will Israel and US Attacks Hurt the World-System? Yes!
  
• How Does the Iranian Economy Work? Not like a Neoclassical, free-market economy.
  
• What was the Impact of the Iranian Revolution? Elimination of Cycles!
• Iranian Globalization and Unemployment Created the discontent that led to the Iranian Revolution.
• Iran as a Neoclassical Economy US Technological domination!