Until now, Iran’s Central Bank was the official source for inflation reporting, but for the last several months it has not published any numbers and recently one can only see press reports of its numbers.  The last number I have is for Dey 1391 (January 2013).  I was curious how closely the two indices (both for urban areas) follow each other, so I put together a couple of graphs which show not all that closely.  I have put both series on a common base with 2002=100.  The two annual series closely follow each other until 2010 but diverge significantly thereafter.  According the Central Bank of Iran (CBI) data, prices are up 100% since 2010, but 129% according to the Statistical Center (SCI).

Monthly figures show a few divergences here and there, which are hard to understand. For example, in July 2011, according to the SCI index prices rose at a 20% annual rate, whereas according to CBI they hardly increased at all.  The most interesting part of the SCI numbers are for the last two months of the Iranian year that just ended, when CBI numbers is silent, and they show a sharp increase in prices during February (94% annual rate), coming down to 43% annual rate in march.  These price increases are likely affected by the pre-Nowruz shopping, but they also indicate that the Central Bank is still not fully in control of the money supply.

The die-hard critics of Iran’s official inflation data are not likely to be satisfied by the release of these numbers.  People have their own experiences of prices based on what they buy and a national basket will hardly satisfy everyone.  Both CBI and SCI data show that prices for food and medical services on which lower income families depend more heavily have far outpaced other items.  The producers of these data can win greater public trust by publishing more details, such as CPI by region and by decile of income.  Such numbers will very likely show that in recent years the poor have experienced greater inflation because of the much higher share of food in their baskets (about 35% for the lowest decile compared to about 20% for the highest decile).  Regional price levels would also help with measurement of poverty, which is very sensitive to variation in the cost of living by location.  Each month, the SCI samples the prices of about 460 items in stores nationally and the incomes and expenditures of more than 2000 households. It  can produce much more detailed information if it wants to.

Even that might not be enough to stop the so-called experts who keep repeating the same old mantra to the Western press, that actual inflation is twice what it really is.  For an example, see this article in the New York Times earlier this week, which claims that the doubling is because Iranian statisticians do not include the price of imported goods in the index (really?).  Claims that actual inflation is double the official rate is nothing new.  As I have said before, people who make such claims do not know their math.  If you were to double the official inflation rate for the last 7 years of data that I have reproduced here, from 2007-2012, prices in early 2013 would be 10 times as high as in 2007, compared to 3 times according to official figures.  It is easy to see how silly it is to keep saying inflation is twice what official figures say because if you back out prices in 2007 from current prices using expert advice you will get silly numbers.  For example, a cab ride from the airport to downtown Tehran which today cost about 350,000 rials ($10 with the free market price of USD), according to the expert figures would have cost 35000 rials ($3.50 at 10,000 exchange rate prevailing then), which is no one’s recollection.   Or a hamburger that today cost about 50,000 rials would have cost 5000 rials instead of 15000 rials, which is much closer to reality.  Inflation figures are not like unemployment rates, which you can fake for a while and get away with it if the economy improves.  The price level is there for everyone to see and will have implications long after a particular inflation episode has passed.   Running a state and an economy with fake numbers is more difficult than the experts who advise Western media seem to think — unless it is all politics masquerading as expert advice!

The reason why this is noteworthy is because it indicates that large devaluations are not necessarily followed by runaway inflation.  In a non-oil exporting country, it would have been very difficult for the government to keep money supply growth this far below inflation if its currency were to lose half of its value.  But thanks to oil income, the Iranian government did not have to print money as fast as the currency was losing value after last October’s devaluation.  It chose instead to sell a significant part of its currency at lower rates, which is to say that it decided not to  monetize its foreign exchange reserves at the free market exchange rate.  Thus oil income helped keep the growth of money supply from exploding.  It was missing this point that led to the widespread speculation about hyperinflation.

The charts below show how erratic the growth rates of money supply and CPI have been in recent years.  The annualized inflation rates in Figure 1 show clearly the impact of three separate events on inflation (marked by vertical lines) — subsidy reform in December 2010, US financial sanctions in December 2011, and the collapse of the rial in October 2012.  Each time prices spike but then they resume their normal pace of growth.

Putting inflation and growth of liquidity together in the second chart you notice that money supply, too, spiked after the first two events (2010Q4 and 2011Q4) but it did not after the devaluation shock.  This time, the Central Bank seems to have put more emphasis controlling inflation.  It chose to keep the growth of money supply steady, though not contracting, at about 32% per year. Those who blame inflation in 2013 on subsidy reform two years earlier should take a close look at how money supply and prices have behaved after 2010.  The impact of subsidy reform on prices had largely dissipated by the end of 2010 when sanctions struck.

Figure 1.  Annualized rates of inflation based on monthly CPI data (Source: The Central Bank of Iran).

Figure 2.  Liquidity and inflation based on quarterly data (Source: The Central Bank of Iran).

If you want to trace inflation further back to 2008, when the Great Recession in the industrialized world began and oil prices fell to $40 per barrel, follow the charts in Figure 2.  The chart to the left in this figure shows the annual rates of growth of liquidity (M2) and the CPI (inflation), and the one to the right shows the levels of these variables.   The first burst in money supply came in the last quarter of 2008, when the Great Recession hit Iran in the form of lost oil revenue, to which the government reacted by expanding money supply.  At this time, inflation was still below 10% per year, and would take a full two years of expansion well ahead of inflation before the subsidy reform would push prices up.

This chart marks the four critical events since 2008 (oil price collapse, subsidy reform, US financial sanctions, and devaluation) and  shows that after each event, money supply increased, except for the last one.  It shows clearly that the high inflation that afflicted the economy in 2011-12 had its origins in earlier years.  The mounting pressures on prices accumulating since late 2008 were suppressed by large inflows of foreign exchange that kept the rial highly overvalued.  This is what I have elsewhere referred to as suppressed inflation, which devaluation unleashed. (Incidentally, if you want to see how silly some of the recent discussions about  Iran’s economy have been, compare the money supply depicted in these charts with this strange graph of Iran’s money supply).

How long Iran’s monetary authorities will be able to hold the line on money supply is anybody’s guess.  With mounting challenges to Ahmadinejad power, the Central Bank may be able to act independently enough to prevent more government spending  from further destabilizing the economy.   But, with serious talk this week of giving every Iranian 200,000 toomans (about $130 PPP) this March as a Nowruz gift, and inflation seemingly under control, chances are good that the parliament would authorize Mr. Ahmadinejad’s last populist injection of money into the economy.

The net result is that prices in Iran in the last three months since devaluation have not behaved anything like in hyperinflation.   Here is how inflation has been behaving in the last 30 months:

True, the last three months have seen very high inflation, though not as high as in winter 1995, but the latest data, for the month ending December 20, 2012, indicate that inflation has decreased substantially — down to 2.5% per month from 4.5%.  If inflation remains at the latter rate, the average rate for the year will reach above 30%, which is three time the rate of inflation just two years ago.  There is a good chance that it might stay on the low side.  Thanks to the strength of the salaried middle class and president Ahmadinejad’s free spending habits, awareness of inflation has heightened in all decision making circles in Iran.

A final point about the hyperinflation myth that is worth emphasizing is how little the US media says about a hyped story that turned out not to be true.  (Contrast this with the hoax about the death of the fake girlfriend of a college football player that has been all over the US media this past week.)  If this were a story about the economy of China, India, or Brazil, commentators from these countries would have been all over the guy who published the original flawed analysis and the reporters who reported it without questioning his assumptions.  As I point out in my Al Monitor piece, the hype was not without potential serious consequence — it could have persuaded Obama to harden his position on Iran’s nuclear negotiations, tying his own hands post-election and bringing the US closer to the path of war with Iran.   Such is the state of Iran’s international intellectual isolation in matters economic.

But such moderation in inflation, if it happens, will not keep the inflation rate for the year (1391 = 2012/2013) to below 30%.  If in the next three months prices continue to rise at the same rate as they have in Azar, the inflation for the year will stay below the 40%, but not by much.  This is a bit higher than the inflation rate that I assumed in my previous post, but below the record set in 1995, when prices rose by 50% (and a whopping 144% annual rate in the month of Bahman).  The 1995 inflationary period also started with a botched devaluation and as followed by two years of zero economic growth.  The prospects for this year of high inflation are worse because sanctions are preventing the supply side (both imports and domestic production) from moderating increases in prices, so it is harder now to control inflation than in 1995, and for the same reason the cost in terms of unemployment will be higher.

Sanctions are only part of the reason for high inflation; domestic policy is the other.  Two policies in particular have contributed to inflation: subsidy reform and maskan mehr (a low cost housing program).  Both have entailed borrowing from the Central Bank, which expands liquidity and fuels inflation, because they were not self-financing.  Subsidy reform was inflationary because it was undoing decades of price controls, but it did not have to be deficit expanding if the cash payments were in line with the money from higher energy prices.  These are the signature programs that will likely define Mr. Ahmadinejad presidency, so he may not be willing to scale them back in the last six months of his last term.  But if he prefers his legacy to be also about leaving a stable economy behind, there steps he can take.

The hole in the subsidy reform, some $15 billion, is easier to fill than the larger one left open by the low-cost housing program.  To fill this hole all the government has to do is raise energy prices while keeping the total cash transfers to consumers constant.  It can do this the easy way, by keeping the transfers at their current level of 450,000 rial per person per month, or he can do it the hard way, by limiting payments to the poorer two-thirds of the population only, which would allow individual transfers to go up to 600,000 rials.  Either way, the government would be able to bring into balance the money it collects from energy consumers and what it pays back to households as cash payments.  At this point the parliament is steadfast against continuation of the subsidy reform in any form or shape, but it may reconsider if the President were willing to offer a balanced plan that would not entail borrowing from the Central Bank.

Bringing the low-cost housing program out of the red is another matter because the collection part is all but over.  Buyers of these units have prepaid a small sum (about 120 million rials) as down payment and are expecting to pay about twice that before they can move in.  These amounts may have been enough a year or two ago when they signed their contracts, but will not cover the cost of their homes now.   They may not easily fork over the extra money that would keep the building contractors busy and prevent the government debt to the Central Bank from ballooning further.

But if anyone can persuade the would-be owners of these low-cost units that paying more for them is not the usual balancing of the budget on the back of the poor, it is Iran’s populist president.  Perhaps implementing a more progressive second phase of the subsidy reform while asking for more contributions for completed housing units from the lower-middle class would convince them that in re-configuring these programs he has their interests at heart.

There are two ways to approach this question. One way is to ask what the rate would be if all, not just part of, Iran’s foreign exchange was sold at the free market.  Surely, it would be less than 30,000.  About a quarter to one-third of Iran’s forex is now selling at 12,260, which is the official rate, and a good chunk (no estimates available) at the rate set at the Exchange Center, about 25,000, and only the rest are traded at 30,000.  Following this logic, last October I estimated that the true rial-dollar parity is closer to 20,000 (which follows from my estimate of the devaluation of about 100%).

A second way is to go by the level of economic activity before and after the devaluation, both evaluated at rials and dollars.  Like the previous method, this one involves some guesswork as well.  Iran has not published details of its GDP since 2008.  The latest summary figures from the Central Bank’s “Current News” series is for the second quarter of 1390 (July 21 Sept 20, 2011) puts the value of the non-oil GDP at 1,265,040 billion rials.  (Non-oil GDP is a good indicator of economic activity and fluctuates less than the total GDP which includes oil.)  In dollar terms this would be about $120 billion (after dividing the rial value by an exchange rate slightly over 10,000).

To arrive at the corresponding number for the quarter that just ended, on December 20, 2012, I assume no real growth in economic activity and an inflation rate of about 40% between 1390-Q2 and 1391-Q3.  Inflation was about 25% annually, quarter on quarter, but during the last quarter (September-December) prices jumped sharply following the October devaluation.   These assumptions put the value of economic activity during Sept 20-Dec. 20, 2012 at 1,771,056 billion rials.

Now, if this number is divided by 30,000 to get its dollar value, non-oil GDP for the quarter would be about $60 billion, which indicates a whopping 50% decline in economic activity in 15 months! Nothing of this order has happened, so the 30,000 number must be wrong.  Unemployment has gone up and industrial production fell, but people still go to work, and agriculture and services, which together account for about 75% of the non-oil GDP, have not collapsed.

What rate would you get if you assumed a flat rate of economic activity for the period? The answer is 1,771,056/120 = 14759 rials.  This is the exchange rate that is consistent with my assumptions of 40% inflation and zero economic growth in the last 15 months.  Even if my numbers are off this way or that, you will be hard pressed to get a parity rate of 30,000 out of these numbers.   Incidentally, the 14759 is very close to the PPP rate that I calculated using my very rough survey of prices in Iran and the US back in November (see my earlier post here).

I think these two methods narrow down the rial-dollar parity rate fairly well, to somewhere between 15,000 to 20,000.  So let’s stop using the free market rate as the exchange rate, and stop saying that the rial has lost 200-300% of its value; the loss is less than 100%.

The PPP is the rate that equalizes the value of the same basket of goods and services, one purchased in Iran and another in the US. For example, if the same basket of food, clothing and rent costs $100 in the US and, say, 2,000,000 rials in Tehran, then the PPP rate would be 20,000. The World Bank calculates these rates for Iran and more than 100 other countries using the differences in inflation rates between that country and the US. Since the Central Bank of Iran is no longer publishing detailed reports on prices, I have been collecting price information on some key items in Iran (mostly Neishabour) when I call friends and family (see table below). These prices help me get a rough idea of what the PPP exchange rate may be these days.

To get your own estimate of the PPP rate, you can average the numbers in the third column (Implicit ER) using whatever weights you think are appropriate for the type of income class you have in mind (such as a basket for the poor). There are lots of important items missing from the table, such as education, services, durables and clothing. It is reasonable to take all the tradable goods, such as TV’s at the 30,000 exchange rate, but non-traded items should get something closer to 20,000 rials per $. So, for example, if a poor person spends most of his money on food (say 40% of his total expenditures), things like bread and chicken with implicit ER’s between 2,500-10,000, then you know that the PPP is much less than the current free market rate of 31,000. Services probably have PPP rates less than 10,000 (for example, the rate for haircut is about 3,000 rials). Let us assume that food and services (including rent), account for 80% of this person’s budget have a PPP of 10,000 rials and the other 20% are goods with a PPP of 30,000 rials. Then the average PPP for this basket is 14,000 rials per $. For comparison, note that the World Bank estimate of the average PPP rate for Iran in 2010 was 5006 rials. To get to 14,000 rials in 2012 you would have to assume that inflation in Iran exceeded that in the US (close to zero) by 140% in the last two years, or roughly 70% per year. These are very high numbers, so I would assume that the PPP number of 14,000 is an upper bound.

Of course if you take a rich person’s basked, you would get a higher PPP than 14,000 rials. It would be useful if someone could prepare and post an (excel) table like the one below for Tehran. You can post it into the comment section directly or send it to me to post it here.

Another value of my anecdotal method of collecting price information is that it helps me keep track of inflation. Some of the prices I report, such as taxi rides and the unskilled wage are price aggregators themselves and act like a price index (similar to Economist’s Big Mac index). In the last two months that I have been collecting these data I have noticed that inflation has slowed down, after its sharp increase following subsidy reform and devaluation. So, no hyperinflation so far.

The observation that inflation has slowed down is consistent with the hypothesis (to which I subscribe) that the high rates of inflation in Iran in the last two years were in large part the result of two important adjustments in energy prices and the exchange rate, both of which were necessary for long run economic growth. The former needed to be adjusted by a factor of about 5 and the other by about 2-3, so the level of inflation Iran has experienced in recent years is not out of line with these huge adjustments.

The sad thing is that Iran is getting its prices right at a time when its ability to take advantage of them is very low, thanks to sanctions and economic policy paralysis in Tehran.

Table of prices in Iran and US with their implied exchange rates

Notes: All units are in kilograms unless otherwise noted. Iran prices are in rials and US prices in dollars.

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Prices for most goods have been rising fast but at rates well below hyperinflation. The price of some key staples have hardly risen in the weeks since the fall of the rial: energy prices have remained unchanged (thanks to the parliament’s objection to the second phase of the subsidy reforms), bread is still selling at 5000 rials a loaf, and chicken at about 50,000 rials a kilo. The annualized inflation rate for the month of Shahrivar (ending on 20 September 2012) was about 30% according to figures released by Iran’s Central Bank (their annual rate for month on month was 24%). I expect the inflation rate for 2012 to remain below 50%.

As I have explained in this blog (and most recently in Foreign Policy), the hype about hyperinflation was misleading because it was based on a faulty analysis of how Iran’s foreign currency markets work. But while the hyperinflation story has lost its appeal, people still speak of “rial’s devaluation” and its size as if it were easy to measure. Let me explain why it is not, and why talking as if it is can be misleading.

The short answer is the multiple exchange rates system. The long answer requires the use of an example that explains the mechanics of Iran’s devaluation. The example involves some knowledge of arithmetic but no economics — and there is a short quiz at the end.

Suppose a college football stadium needs to undergo renovation removing half of the seats from the market. Ordinarily, ticket prices are $10 per game, and at this price half of the seats are occupied by students and the rest by townies and alumni. This year, with only half the stadium seats available, the college estimates that the (equilibrium) market price could be as high as $20, a price that few students will be able to afford. To keep students coming to the games to cheer their team, the college decides to sell 80% of the available seats to students at the old price of $10 and sell the rest in a “free market”. Suppose also that the free market price is $40.

The short quiz is to calculate the rate of increase in the price of tickets. If you answered 400% you can get a job at a prestigious international newspaper but you flunk the quiz. Why? Because there are two markets and 300% is the ratio of the new price in one market to the old price in another. Actually, this turns out to be a trick question because it does not have a simple answer. For students (80% of the market) there has been no price increase, while non-students (20% of the market) experience a price increase of 300%. If you had to give one number, you might say 60% (= 0 x 0.8 + 300 x 0.20). A more complex answer would take into account the cost of students waiting in line resulting in a higher average rate of the inflation. Compare these answers to what the price increase would have been — 100% — had there been a single price.

This is pretty much what happened this summer to Iran’s foreign currency market. Iran lost about half of its supply of foreign exchange because of sanctions, and the government decided to protect its population from the worst part of its consequences. It abandoned the unitary exchange rate regime that had brought a decade of economic growth to the country in favor of multiple rates. As in our example, there is a single supplier of foreign exchange — the government — which allocates a part of its forex to basic necessities (at 12260 rials per dollar) and sells the rest to licensed buyers in the recently set up Foreign Exchange Center (at about 25,000 rials per dollar). It may be supplying some of its forex to the so-called free market (at widely fluctuating rates, between 30,000 and 45,000 rials per dollar) but we do not know how much, if any. The latter price is equivalent to the price of auctioned stadium seats. So, as in the example, calculating the rate of devaluation by dividing the rate in the free market by the previous singular rate (say 33,000/11,000, or 200% increase) is incorrect.

A more reasonable estimate of the extent of devaluation in Iran should take into account (at least) three rates of devaluation: the official rate (10%), the Exchange Center rate (about 150%), and the free market rate (about 200%). But, unlike in the example, we do not know the shares of the forex going to these three markets, so even a simple weighted average of these rates is not available. If the share of forex allocated to the three markets are 0.40, 0.55, and 0.05, the weighted average would be 96.5% (= 0.40 x 10 + 0.55 x 150 + 0.05 x 200), which is much lower than 200%.

Any devaluation close to 100% is a huge shock to the economy, so the point of this exercise is not to minimize the gravity of the situation, nor to simply offer a formula to estimate the size of the devaluation. Understanding the mechanism is the important point. Even if we cannot quantify the rate of devaluation, we can still analyze its consequences if we have the right model. The consequences of a single-market devaluation are very different from one that involves transition from a unitary to a multiple exchange rate system. Put this together with the fact that the government is the main supplier of forex, and you can see why hyperinflation is a misleading account of post-devaluation Iranian economy.

First, there is a difference between the rate in the parallel market and the average rate of exchange for the country because of the multiple exchange rate system.  Second, the sharp rise in the value of foreign currencies in the parallel market was not a classic run on Iran’s currency, but rather caused by reduced infusion of currency into the parallel or free market.  Third, Iran’s economy is not on the verge of collapse, as some people were saying (or hoping).   In short, I tried to define the currency crisis in Iran in its own terms rather than the textbook cases from East Asia or Zimbabwe that immediately come to mind.  The one factor that explains most of the difference is oil, which means that the supply of foreign exchange is not in diverse hands but concentrated in the hands of the government.   While many people maybe buying and selling dollars at 35,000 rials, the government can decide to sell its dollars at a lower rate.

Admittedly, the situation in Tehran is both confusing and shrouded in secrecy– for understandable reasons –and I do not claim to fully understand what is going on between oil exports, frozen and unfrozen Central Bank of Iran (CBI) accounts abroad, and rupees and yuans.  But some reporters I talked to in the last few days did not know that Iran had a multiple exchange rate system, or that currency crises in oil exporting countries are different from those in which private sector earns the bulk of the foreign exchange.  So, it seemed there was reason to say something.

With its diminished oil revenues the government can still shield large sections of the economy from the adverse impact of large devaluations in the the parallel market.  The import classification system put into place last December was precisely for that.  I do not know how much of the CBI forex goes to basic goods, how much to the Exchange Center, and how much, if any, to the parallel market.  My guess is that, for obvious reasons, this market is not near the top of the list CBI priorities for cash infusion.  I am not sure if any central bank faced with the same difficulties would use its foreign currency to calm a currency market gripped by fears stemming from tightening sanctions, even war.  Any politician who decides otherwise would have to answer to voters (or people in the streets) when the country runs out of foreign exchange for essential  imports.

In my view, given the sanctions and the emergency conditions that the country faces, the decline in the value of the rial in the parallel market is not at all surprising   It should be no more a source of shock or surprise to see high ticket prices outside sports or entertainment events, especially when the quality of the event is uncertain beforehand.  There are people who believe that scalpers should not be allowed to buy and sell concert tickets, and there are those who believe that such trades at the curb even at very high prices have their place.  I happen to belong to the latter group.  However, I fear that with the hoopla over the “rial’s collapse,” the government may run out of patience with the free market and send it underground.  That would be unfortunate.

Some readers of my Lobelog post thought that it painted an overly optimistic picture of the situation.  I had said that the currency crisis did not amount to economic collapse.  It is also true that, as a matter of habit, I did not discuss conspiracy theories (which I rarely believe), such as those that would blame the government for creating this mess on purpose in order to make more rials, or those that blame a few ringleaders for corrupting the system.  (But, as they say, just because you are paranoid it does not mean that they are not out to get you!)

Sanctions are not a game. They are designed to inflict pain on the people of the country they are imposed on, and as we have seen they are doing just that in Iran, and not all social strata feel the pain at the same rate.  Iran’s government is in a position to decide who gets hurt more and who get off with less pain.  For example, it has decided that keeping chicken production going is more important than paying the tuition of thousands of students abroad.  That is a choice that many would disagree with, but to say that it makes sense from the point of view of Iran’s government is not to minimize the gravity of the situation or the level of pain on those who lose more than others.  If the economy has not collapsed, economic growth has and with it the hopes of young people for finding a job and setting up new families.

The translated article departs from my views where it implies that Iran can revert back to the unified exchange rate system, by the Central Bank selling its foreign currency at a higher rate, say 15000 rials per US dollar, without noting the important qualifier of emergency conditions.   I doubt very much that, under the present conditions dictated by the draconian sanctions imposed by the US and the European Union, Iran’s Central Bank can or should try to sell its dollars to lower the parallel market rate, to a rate between the low official rate of 12,260 and the 20,000 rials per dollar that the dollar has been trading in recent days.

Unification makes a lot of sense when other markets function properly, not when sanctions have closed many markets and caused others to not operate normally.  Under sanctions, the objectives of the Central Bank should be to make sure that  there is enough foreign exchange for the country to continue to import the basic and strategic goods from abroad, and at a low enough price to prevent spiraling inflation.

The inefficiencies caused by a dual rate system can be minimized but not completely avoided.  These are costs to being denied access to global markets; a dual exchange rate system is one of them.  While all dual exchange rate systems are inefficient and costly, some are better than others.  There are ways to minimize misallocation and corruption, for example by publishing a complete list of all official foreign exchange sold to private importers along with the list of the items they import.  The alternative, which is to sell all currencies at the rate set in the parallel market, is to give too much influence to sanctions and to sentiments that underly capital flight. Neither of these should be allowed to set internal prices in Iran or to fuel inflation.

This statement does not negate the important role of markets in allocating foreign exchange, nor does it contradict the point in the DE article regarding the perils of a dual rate system.  The point I raise here is very similar to the familiar second-best argument in economics:  when some markets do not work well, seeking efficiency in one — a unified exchange rate — may not be the best option.

But before searching for remedies, we must have the right diagnosis, and I will limit my scope in this post to just that.  I will argue that the DE articles misdiagnose Iran’s education problem as low enrollment, in part because they use faulty statistics and in part because they confuse enrollment with education and skill formation.

Faulty statistics
The DE articles speak of 3-7 million children out of school.  Seven million out of school is more than half of all the school-age population (6-17 year olds numbered less than 14 million in 2011-2012), and it would indeed be very shocking if it weren’t false.  The origin of the claim of 7 million deprived kids is an article published in the Shargh newspaper, which commits a simple error: it uses the census figures from 1385 (2006) for children aged 6-17 (about 19 million) to calculate the school-age population five years later, in 1390, when the size of this age group had shrunk by nearly 30% because of the well-known changes in the age structure of Iran’s population.  The 6 to 17 year olds (grades 1 through 11, the last year of high school) of 1390 (2010) were 1-12 years old in 1385, and totaled only 13.6 million.  The Ministry of Education does not offer hard facts about total enrollments that I know, but two numbers that have been reported by Iranian online news sources — 11.9 and 12.3 million — suggest that the number of kids out of school in 2011 is at most 2 million and not 7.

The DE articles refer to a more serious study published by the Majles Research Center that, while critical of low enrollment rates, does not botch its numbers.   Still, this study also overestimates the extent of lack of access to primary school, when access is really critical.  The study focuses too much on 6 year olds, not all of whom can be in school in any given year.  Each year about a third to one half of 6 year olds are counted in the census in November, when the census is conducted, but are not yet enrolled in school because September 20 (the beginning of the school year) arrives before their sixth birthday, or their parents may think they should wait a year to be more ready for school.  Another difficulty with the Research Center study is that it lumps young and older kids together. So, for example, the 17 year olds in 1385 who never attended school reflect lack of access 12 years earlier, in 1363, not today.  The best measure of lack of access is the enrollment rate of 7-10 year olds.

We can avoid these difficulties by examining the data from the 2% sample of the 1385 (2006) census, which have been publicly released by the Statistical Center of Iran (see Table 1).  We notice a big jump in the enrollment rate between ages 6 and 7, from 74% to 96% for boys and 74 to 95% for girls.  Furthermore, in 1385 about 95% of children 7-10 years of age were in school.  The same enrollment rates estimated from the 1389 Household Expenditures and Incomes Survey (HEIS) of the Statistical Center of Iran (Table 2) show a marked improvement, raising the figure to 99%.  (The high enrollment rates of the 6 year-olds in 1389 are probably due to the way the survey, which is collected throughout the year, deals with the enrollment question. Unlike the census, the survey also excludes kids living in institutional settings, like dormitories or military barracks.)  These are hardly any signs of lack of access in these numbers, but there are falling enrollment rates at higher ages.

Table 1. Enrollment rates from census data, 1385 (2006)

Source: The 2% sample of the 1385 (2006) census

Table 2. Enrollment rates from survey data 1389 (2010)

Source: HEIS data files, 1389.

These tables show the large drop-off in enrollment rates that occurs after middle school, at ages 15-17, which is partly a question of access but for the most part reflects choice.  There is clearly a problem of access to high school for youth living in small rural areas, which is understandable because building a high school for a small community is not economical.  Either the kids living in smaller rural areas have to commute to a nearby town where there is a high school or quit school.  We don’t know what proportion of the rural boys and girls in the 15-17 age range who in 2010 attended school at 68% and 56% rates, respectively, were constrained in this way.  Perhaps if they had better access they would have enrollment rates closer to their urban counterparts (84% for boys and 86% for girls).  There are no easy answers to this problem.

Comparison with other countries of the Middle East
Like Iran, other countries of the Middle East are famous for high enrollment rates, but not for teaching their students a whole lot (see, for example, this paper of mine).  According to international data, such as World Development indicators, Iran has generally higher secondary enrollment rates than the more economically advanced Turkey (84% compared to 78%), and compares well with Egypt and Jordan, two countries that, like Iran, are obsessed with the quantity of education instead of its quality.  I happen to have comparable survey data for these two countries so I can provide below a more detailed comparison between them and Iran.  The graphs below show enrollment rates by age for your groups of children and youth, by gender and place of residence.

Figure.  Enrollment rates by age, Iran, Egypt and Jordan

Sources:  Iran, HEIS; Egypt, ELMPS 2006; Jordan, JLMPS 2010.

Enrollment rates in Iran are close to those of Egypt and Jordan until age 14, but fall below Jordan for older children.

Iran’s real enrollment problem
This evidence speaks clearly to the major argument of the articles in DE and by the Majles Research Center, showing  that Iran is not facing a major enrollment or “access” problem at present.  These articles correctly point to pockets of deprivation — for example, children of Afghan immigrants without proper identification or children living in poor households whose parents force them to work as peddlers and street vendors.  These are real problems that need to be addressed, but building more schools is not the answer.  Parents in these households need to be persuaded to send their kids to school.  Many countries have successfully experimented with cash payments (Bangladesh and Mexico come to mind) to induce families to send their kids to school.  Iran, which has recently embarked on a program of uniform — some would say untargeted — cash payments to all families in return for the removal of subsidies, would do well to look into their programs.   The uniform cash payments can be better targeted — be made conditional on behavior — to make sure that their children not only enroll but actually attend school and get good grades.  But this should not extend beyond age 14, when the benefits of formal schooling as it is administered presently in Iran decline rapidly for the average child.

The larger problem of low enrollment rates at the high school level requires a different approach.  This is not the place to give a full overview of youth education and employment problems in Iran, about which I have written elsewhere (here, here, and here).  The short version is that Iran’s educators — families and schools — are too absorbed in a high-stakes competition for university admission to be able to help their children discover their talents and develop them.  The fault is not entirely with them, however.  Iran’s formal labor markets, where educated youth aim to go, are stifled by regulation and are under pressure from competition from abroad, which the rush of oil money in the last decade intensified.   The winners of the schooling competition — those who pass the dreaded concour and graduate from a decent university — have such a hard time finding a job in Iran’s weak economy that the losers, with only a high school diploma at hand –the consolation prize — have little reason to engage in the risky investment of high school education.   Why would one encourage students below the median (or even the 75% percentile) to stay in the race to the university?  Aren’t they making a rational decision by stopping the formal schooling charade before they finish high school and their failure to enter a university is obvious to all?

Let me illustrate the problem with an example.  Put yourself in the place of a rural boy, age 14 with average grades who faces a difficult choice.  One option, the one that family and friends as well as education experts prescribe, is to leave home to attend high school in a nearby town, staying with relatives and imposing a high cost on his parents who live on their modest farm income.  His second option is to stay home, learn the farming skills that his parents have inherited from their ancestors, combine it with the knowledge of modern cultivation and produce marketing, and get ready for when his father retires from farm work.  (Maybe he can even take advantage of the high fresh produce prices that the city dwellers so complain about!)

Any honest observer half aware of the low odds that an average kid faces in entering a public university, not to mention making a living after graduation, would urge this rural youth to at least consider the second option seriously.  That would be a good place to start.   The policy question in this case is whether the right thing to do by this young boy is to build a high school in his village at great cost so he can continue his education without leaving his family, or to expand free university education, at even greater cost, so his chances of getting into a university is not so dismal, or to find a way so he can pursue a farming career if he is so inclined.

How to do the last part is not an easy question to answer.  But if the answer is not obvious is it not better to wait, explore, and ask more questions than head fast in the wrong direction?