Iran’s Economy at the Edge

Iran’s Economy at the Edge

(UPDATE: 10/3/12 – BBC reporting protests in Tehran.)

Months of tightening U.S. sanctions appear to be taking their toll on Iran’s economy. The rial plunged against the dollar (losing 25% in street value in the past week and down some 80% since 2011). Imports, paid for in dollars, have become increasingly expensive. Inflation approached 24% in August alone. Oil exports, a major revenue earner for the regime have plummeted as well. Shrinking dollar reserves make financing whatever remaining trade even more difficult.

These extensive sanctions include all imports, exports and financial transactions with U.S. entities. With Europe’s participation Iran can now barely function in the international banking system.

The main goal, however remain stopping Iran’s nuclear enrichment activities, not destroying the livelihoods of the general population.

Here’s the gambit: Ratchet up non-lethal economic force on Iran while avoiding a military conflict (including keeping Israeli jets on the ground and averting a regional war). This in turn should cause a political crisis that either forces Ahmadinejad to capitulate or a new leader to replace him ready to negotiate. Regime change a la an “Iranian Autumn” of popular discontent might follow, but seems unlikely at the moment and has not been a core objective. Then again stranger things have happened in the Middle East since 2011.

Iran’s nominally “elected” ruler, Ahmadinejad would carry the full blame of his country’s increasing isolation, not the behind-the-scenes clerics who really run the country. His decidedly more sedate tone in a recent UN speech (no tirades against the U.S. and calls for the end of Israel) suggest his popularity has taken a hit. With barely nine months left in his final term of office he might be more ready to negotiate. The deal on the table before this latest round of provocation still gave Iran access to nuclear material for fuel and medical-grade uses.

Unintended consequences in international affairs are a constant risk. Influencing extremely complicated systems, including tens of millions of people reacting to sudden economic hardship and political machinations of theocratic leaders chief among them.

The flip-side of this strategy could include a backlash against the West for causing economic harm, a more radicalized government, and nuclear enrichment accelerating as a result. No one said this was going to be easy. Still since Iran’s economy already faces home-grown problems from years of serious mismanagement current troubles probably won’t radicalize secular Iranians while hard-liners gain one more reason to run riot.

Either way results should be in soon. Israeli Prime Minister Netanyahu, complete with an almost comical bomb illustration during his UN speech, continued to warn of a point of no return and Israel’s readiness to strike. The U.S. meanwhile re-affirmed its commitment to never allow Iran to possess a nuclear bomb, which could take less than a year once a decision to pursue weaponizing had been made. Iran’s economy gets closer to breaking point by the day and sanctions won’t be lifted without a deal while its nuclear race continues. The specter of destruction (economic, political or military) is coming to head in the not-so-distant future. Let’s hope the sanctions gambit pays off.

 

Photo: Wikimedia Commons

 

 

 

 

 

 

 

The Decline of the Rest

The Decline of the Rest

A popular economic theme made the rounds not so long ago that featured prominently in a series of “end of the west, rise of the rest” predictions. It went something like this.

Emerging Asia, now an independent source of world growth driven by their expanding middle class no longer relied on the collective “west” for their economic well being. These countries had struck domestic “gold” freeing them from economic cycles in the rest of the world. It was called decoupling and it was wrong.

The fascination with the idea, if not the fact, of independent economic growth grew from a series of statistics. China had become the world’s second largest economy (by GDP), eclipsing the tech giant nation to their east, Japan. Decades of near double-digit growth meant China would overtake the U.S, and ostensibly the world, in 2020, 2030 or 2040 depending on the study. No end to high-rises, malls and luxury cars was on the horizon. China had become the perpetual growth machine for the ages.

India too was ramping up to break-neck speed. Its tech sector dominated outsourcing and was aiming for indigenous innovation with chip design and software. Bangalore was the new Silicon Valley. Largely untouched by the 2008 financial crisis that sent the U.S. reeling into recession, India’s massive population, natural resources, and increasingly business-minded politicians were about to unleash the second great consumer wave of the 21st century.

Ideologically the rising Asia theme also satisfied nationalistic tendencies that saw in their growing wealth, and the supposed decline of the U.S., an historic reversal of fortune. Decades if not centuries of perceived second-nation status had ended. Even capitalism itself had been rendered mute to the alternate, more socialist common cause of Chinese and Indian inspired growth.

In the last several weeks another set of statistics have appeared. Slowing growth is no longer just for the U.S. with a disappointing 1.7% in Q2, along with recession-hit Europe and now Japan. China too has seen a dramatic fall in consumer demand. Overall growth, as a manufactured number itself, will likely fall somewhere between 7.6% – 8.0% for the year, but data out on electricity production, warehouses overflowing with commodities including steel and coal, and a glut of other goods strongly suggest greater slowing, even if not officially admitted.

India’s leading figures are ratcheting down as well, currently to a sub 6.0%. Even in vibrant southeast Asian countries including Vietnam and Thailand face stronger headwinds (though Malaysia and Indonesia continue to buck the trend). The slowdown has now turned truly global. Commodity prices for copper, a key input for any advanced economy, test yearly lows as broad-based demand wanes.

Asia hadn’t built a world-leading growth engine after-all because the middle class continued to face severe restrictions. Income gaps widened and while certainly new consumerism did emerge, it can no longer be maintained absent the institutions of reliable government. That means protecting intellectual property, enforcing tax collection and limiting the corrosive effects of corruption.

In the end emerging Asia isn’t driving world growth, and the collective fortunes of the “west and the rest” are more intertwined than ever. Both developed and developing economies face constrained opportunity going forward. When recovery returns, and eventually it will, both may feel the rising tide together. Until then it’s a long slog through tough economic times.

World Politics Review Article on the Global Middle Class – Part II

World Politics Review Article on the Global Middle Class – Part II

The damage done to the global middle class, while significant, is not irreparable. The solutions are as varied as the countries themselves, but they all share several key features that influence whether a consumer-driven economy will flourish or not.

First and foremost is access to capital for small and medium-sized enterprises. In developed and developing economies alike, funding all but dried up during the economic crisis that began in U.S. and quickly spread around the world. Especially during recessionary periods, start-ups are critical job creators compared to existing firms, which tend to shed employees. During the 1991 and 2002 U.S. recessions, start-ups added nearly 3 million new jobs, while established firms laid off 4 million to 5 million people, according to a Kaufmann Foundation report.

Misguided government regulations have also been thwarting the return of the middle class. Breaking up the excessive influence of conglomerates in emerging economies is another way to create room for the middle class, but doing so often proves to be difficult and controversial. Policymakers, no matter where they are, need to shift their fixation from top-line statistics like GDP growth, which can obscure wealth-gap and purchasing-power problems, and focus more on the health and size of their middle class. Until the world’s middle class recovers, there will be no global recovery.

Full article is available on the World Politics Review website.

Photo: President Barack Obama signs the Middle Class Tax Relief and Job Creation Act of 2012 in the Oval Office, Feb. 22, 2012 (White House photo by Pete Souza).

World Politics Review Article: The Crisis of the Global Middle Class

World Politics Review Article: The Crisis of the Global Middle Class

The Arab Spring uprisings were fueled by the rising expectations of a nascent middle class in the face of opportunity that for too long had been denied. Tunisia’s uprising was in essence a middle class awakening, with the fight for economic opportunity replacing political ideology as the principal force shaping the future of fragile nations. It is a problem that even industrialized countries now face.

If nothing is done to build up the fragile middle class, we run the risk of greater social, economic and political polarization that, at its worst, could lead to a rise in nationalism, xenophobia and a breakdown of a tenuous global order. Historically speaking, that generally does not end well. Fortunately, such an outcome is not inevitable.

Full article is available on the World Politics Review website.

Photo by Wikimedia user Ghassen Bradai, licensed under the Creative Commons Universal Public Domain Dedication.

Blog Series: The Middle Class – Engine of Innovation

Blog Series: The Middle Class – Engine of Innovation

Consider this: The greatest inventions of the modern age— from the light bulb and the telephone to antibiotics, airplanes and the computer— were all made possible by the purchasing power of the middle class. Without this market much of what has redefined the way people live today would never have been successfully developed.

While early adopters fund initial inventions (one of the first home computers cost thousands of dollars in the 1970’s),  mass market appeal keeps the innovation engine humming. Energy, automobiles, communications, pharmaceuticals, electronics and retail make up the vast majority of the world’s 500 largest companies. Commercial financial institutions account for only 19% of the total.

When executives sit down to plot out what new products they’re going to pursue they inevitably size the market. That’s business 101. None of today’s global companies would even exist if it weren’t for the mass middle market. And when that market begins to shrink real consequences follow.

Investments in nascent and emerging businesses are no longer growing like they once did. Venture capital fundraising, one of the main financial sources for start-ups and fast growth young companies has yet to recover from its 2008 high water mark of $25 billion, plummeting to under $14 billion in 2010. Results for 2012 remain cautiously optimistic. Reuters and the National Venture Capital Association reported a 10% rise for the first half of 2012 compared to the same period a year ago after a disastrous first quarter drop of 35%. The number of firms raising new capital has shrunk considerably, however.

Start-ups, especially during recessionary periods are critical job creators while existing firms tend to shed employees. During the 1991 and 2002 recessions they added nearly 3 million new jobs while established firms laid off four to five million people according to a Kaufmann Foundation report. Meanwhile corporate research and development funding, while growing nominally at about 2.8% in the U.S. remains flat in real terms owing to inflation.

While start-up funding has become more difficult for start-ups a new crowd sourcing platform is emerging. Still in its nascent stage this has led to millions being raised on kickstarter.com which has grown from an indie creative fundraising outfit to a real source of finance for entrepreneurs. With the passage of the Jumpstart Our Business Startups (JOBS) Act individuals will be able to invest directly in small companies for an equity share within certain limitations.

The “industry” is still finding its way and looking to create a unified set of standards. Fraud concerns are real and need to be addressed (hopefully better than the pervasive fraud on Wall Street these days). Crowd Funding Intermediary Regulatory Advocates (CFIRA) has held events to solicit public input. Crowdsourcing.org has launched an accreditation program. The Securities and Exchange Committee has scheduled an Aug. hearing on lifting advertising bans on securities. New rules on crowdfunding up to $1 million in equity are expected by the end of this year.

New approaches to small business support will go only part of the way to rebuilding a middle class. Much broader efforts need to be implemented to save the middle from truly hollowing out and innovation grinding to a halt. Middle class consumption clearly drives innovation. Their health is the health of a nation. Until they recover, there is no recovery.

Coming up: Middle Class Awakening – when the middle does not hold.

Photo: Tokyo at Night, Brian P. Klein, 2009

Blog Series: Rebuilding the Global Middle

Blog Series: Rebuilding the Global Middle

Part I: Good Times Gone Very, Very Bad –

It seems like a quaint folk tale told to schoolchildren. Study, work hard, and you too can live happily ever after. The American Dream, each generation better off than the last meant true upward mobility. Skills rather than birthright defined success. It’s been the mainstay of popular culture for over a century. Was it too good to last?

There’s a long and generous history of hardworking immigrants establishing themselves in the U.S. Children often gained more education than their parents and either walked into a good manufacturing job after high school, went to a trade school or off to college. Eventually most married, bought a small house, a car, a television and appliances. Maybe they took a vacation to Disneyland or rented a room for a week at the beach each summer.

Suburbs sprouted out of shallow fields and the interstate highway connected a patchwork of states that eventually became part of a global economic, media and politically powerful nation.

Somewhere around the 1970’s the magic of upward mobility soured. Wage growth stalled while the cost of living kept rising. A worker might produce more per hour, especially with the aid of advanced manufacturing and automation, but that didn’t translate into higher take home pay, especially with the bite of inflation. Where one salary supported a family of four in the past, two incomes and credit card debt soon became the norm.

When that failed to keep up with the Joneses next door home equity loans became the fashion. “Free” money paved the way up the increasing slope of superficial prosperity until the road ended in a cliff. That was 2008 and four years after the the worst economic disaster since the Great Depression the U.S. recovery slows to near stall speed. Signs of a prolonged global slowdown point to increasing middle class strain.

At this juncture in economic history it becomes increasingly difficult to imagine how the middle class recovers absent a 1950’s-60’s style manufacturing boom. That pattern can hardly repeat itself considering the outsourcing trend and globalization which, in theory, opens the way for more value-added jobs in the U.S.

The changing structure of work isn’t necessarily a bad thing. Telephone operators that literally connected phone calls with wires and plugs were made obsolete by electric switching. Automobiles replaced horse drawn carriages.

Each leap forward left some destruction in its wake, but there was always another factory, another invention, another job to do.

Lower prices for clothing and shoes to washing machines and televisions made every dollar go further, for the moment. That moment has passed. Borrowing to buy now and retire later in near poverty has become the new reality, not the promise of an almost forgotten dream.

Has the middle class been damaged beyond repair? While this may not be the end of the age of opportunity, some serious surgery is required, and soon.

Next: Middle Class: Engine of Innovation

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Global Economic Downturn Gathers Pace

Wishful thinking aside, the global economy appears more fragile than ever. After promising signs earlier this year of sustained (if not accelerating) U.S. growth, new employment figures continue to disappoint with a mere 80,000 new jobs for June (see “The Jobs Week That Wasn’t” for longer term implications.) The IMF revised growth estimates down to 2.0% from 2.1% for the year while other estimates dip to 1.8%. By any measure there’s little bounce and less resiliency in this post-recession period than most others.

In Europe the debt crisis has only been delayed, not solved. After gaining over 15 percent since the beginning of the year the DAX index has reentered a downward drift, loosing half its gains over the past few months. Commodities are trading at two week lows even after news of China stimulus measures hit global markets.

China unexpectedly reduced bank lending rates (along with European and British central banks) to spur growth. Freeing up money for what type of development remains uncertain. Endless infrastructure projects have proved no panacea. Savings rates also dropped making households worse off longer term. They continue to earn less in interest than inflation takes away each year. Sound familiar?

The goal may have been to induce more spending, but a consumer-driven economy doesn’t suddenly appear overnight because bank deposits earn less interest. Social investments have been so minor, even during the recent boom years, that a household’s desire to save will remain strong. Though wages have been rising faster than inflation mid-career earners are squeezed between the high cost of medical care for their aging parents and high education expenses for their children. Don’t expect any major policy changes ahead of leadership transition in late 2012 despite Premier Wen’s entreaties to take more forceful action.

India has suffered mostly from its own stalled reforms rather than shrinking export markets. Domestic retail, agriculture and continued state dominance of entire industries coupled with runaway corruption have seriously injured growth. No concerted political effort in New Delhi has appeared to counter internal inertia for maintaining the status quo.

Endless promises of emerging markets picking up the slack from western industrialized countries have clearly failed to deliver.

The recent litany of bad economic news only confirms earlier signs of a more serious global slowdown. Unfortunately politicians, at least in the U.S., have eyes only for November elections. As it stands now any major stimulus will come after inauguration day, January 2013. That’s a long wait.

Holding the economy hostage for potential political gain may backfire well before the hundreds of millions of campaign advertising dollars are finally spent. Imagine what good that could do the U.S. were it used to fund start-ups instead.

Welcome to the dog days of summer . . .

 


Related Posts:

June 29, 2012 – Mid-Day Note: Global Economic Data Disappoints

The Week That Was (and Wasn’t)

Walking Backwards into the Future – In a 5-4 Supreme Court ruling upholding President Obama’s healthcare bill the U.S. finally joined the rest of the developed world of 60 years ago with universal coverage. China joined the space world of 50 years ago with a successful orbital docking mission, including a safe return to earth of three astronauts and China’s first woman in space. Read more »

Blinded by the Euro Light – Hopes for a breakthrough on several fronts in the global economy came to naught this week. EU leaders met, and discussed, and discussed some more. Solutions to the spread of financial distress affecting France, Italy, Greece, Spain, and Cyprus appeared at hand. Markets rallied after the European Stabilization Fund was announced which would buy sovereign debt and lend to banks across the EU. The compromise solution avoided the more prickly bailout mechanism of direct loans to financially unstable countries. Have any of the foundational problems changed? Sadly, no. Read more »

Financial Deception, Not Just for Wall Street Anymore – Were the financial mess in Europe not enough to make people wonder about the global economy more banking scandals erupted, this time in the UK. Collusion on bank-to-bank lending rates first discovered at Barclay’s are now suspected across a number of other banks. Not only do these rates directly impact financial performance, they are supposed to be a bell-weather of economic activity. If the instruments of market temperature-taking are faulty then a host of undiscovered ills will erupt yet again in crisis. Read more »

A Tentative Peace, and More War – China and the Philippines withdrew their ships from the Scarborough Shoal after a tense standoff in contested fishing waters. Wars have started over lesser disagreements. There’s no end sight to the cycle of provocation and pushback. ASEAN has failed to act – non-claimant states are loathe to risk their economic relations with China by siding with their southeast Asian counterparts. And China is quick to react to perceived slights using import bans including Norweigan fish after a Dalai Lama visit (no more smoked salmon from you, literally). Philippine fruit was the latest during the recent stand-off. The Chinese government also banned tourist travel (yes, travel agencies still need government approval to organize trips from China to other countries). Read more »

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Blinded by the Euro Light

Hopes for a breakthrough on several fronts in the global economy came to naught this week. EU leaders met, and discussed, and discussed some more. Solutions to the spread of financial distress affecting France, Italy, Greece, Spain, and Cyprus appeared at hand. Markets rallied after the European Stabilization Fund was announced which would buy sovereign debt and lend to banks across the EU. The compromise solution avoided the more prickly bailout mechanism of direct loans to financially unstable countries. Have any of the foundational problems changed? Sadly, no.

Even though the immediate money squeeze has been solved broader concerns remain. How do European countries orient themselves back to growth? Unless they succeed in upping their competitiveness both banks and governments will be in the pauper’s line , hands outstretched for another bailout. Spanish banks avoiding default is welcome, but that’s little solace for the 25% unemployment rate except, for the moment, to keep it from rising further. Will banks start lending to small and medium sized enterprises and stop making bad loans on real estate? Let’s hope so.

Back to “The Week That Was“.

Walking Backwards Into the Future

In a 5-4 Supreme Court ruling upholding President Obama’s healthcare bill the U.S. finally joined the rest of the developed world of 60 years ago with universal coverage. Perhaps Americans can now rest a bit easier knowing that in 2014 they won’t be denied healthcare for pre-existing conditions. The 20-30% annual premium increases may even slowdown once basic medical services for the uninsured kick in. Preventive care can work wonders (think catching a cavity today rather than surgery for an abscess tomorrow). Frontline and the Center for Public Integrity “Dollars and Dentists” laid it all out – “100 million Americans don’t go tot the dentist because they can’t afford it”.

Meanwhile, China joined the space world of 50 years ago with a successful orbital docking mission, including a safe return to earth of three astronauts and China’s first woman in space. While the technology is ancient by today’s standards, China rightly celebrated and pledged some $3 billion for more space programs. Pundits jumped on the decline of the west bandwagon with comments like – maybe NASA can take a lesson from China. A quick look at proposed budgets (even with cuts) shows NASA spending more than double that figure in one year on space exploration activity alone. Extensive Mars programs may not see the light of day or may be delayed, but seriously, a docking mission as a guide for NASA?

There’s no space race going here and pitting the U.S. against China as if it were the old Cold War is useless and counterproductive. Rivalry and divergent interests abound, but constructive engagement remains the wise word of the diplomatic day. Find areas of agreement and manage the difficulties while standing firm on at least some principles.

Sometimes going backwards is going forwards, other times not.

Back to “The Week That Was“.