Thursday, November 18, 2010

The Decline of the Left in Europe

As America has been moving left, Europe is taking the opposite course. Social-Democratic parties have lost some of their dominance.

These two maps plot political power. For countries with coalition governments, the holder of the Prime Minister or being the largest party in the coalition is used.

Purple is where the Prime Minister and President are from different blocks (for countries where the President has some actual power).

I follow European tradition by using the color red to signify leftwing control. In November 2000, the center-right controlled only countries representing 16% of the population in west and central Europe (with divided power in France and Poland).

In November 2010, the right holds power in countries that constitute 83% of the population(!). A different map of Europe, to say the least.

Spain and tiny Iceland are the only country that went from right to left control between these two dates.

Germany, UK, Italy, France, Poland, Czech Republic, Netherlands, Denmark, Finland, and Sweden switched from full or partial left control to complete right control. Even in Switzerland, a decade ago the largest political party was the Social Democrats. As of the last election, the largest party is the ultra-conservative Swiss People’s party.

So why has this been happening?

Part of it is cyclicality and coincidence. Particularly in Central Europe there is still a lot of chaos in terms of who gets to be in power (voters are constantly dissatisfied and vote out most governments). And because of reversion to the mean in competitive political systems, the more countries your side control compared the historical average; the more likely are you to lose some in the following elections.

Still, a large portion of the decline is systematic, with 3 trends that comes to mind:

1. Working class voters have less class consciousness, and don’t vote as a block to the same extent.

2. Voters are punishing the left as a reaction to the failures of mass immigration and multiculturalism.

3. Middle of the road voters as well as the European elites are ideologically abandoning Social Democratic economic policy.

The last tendency crucially depends on the center-right parties accepting the popular parts of the welfare state (a safety net for the poor, publically financed health care and higher education) but opposing the less popular ones (long term welfare dependency, high tax level, deficits).

During the last decade, the expansion of size of the government in Europe stopped, and even slowly started to reverse. The main exception is the U.K, where the welfare state expanded rapidly during Blair/Brown. But if we look at the other traditional western European welfare states (Germany, France, Italy, Spain, Portugal, Greece, The Netherlands, Belgium, Austria, Sweden, Norway, Denmark, Finland and Iceland), the government is in full retreat, decreasing its share of the economy in 10 out of the 14 above mentioned countries.

As a whole, total government expenditure in these countries decreased from 49% of GDP to 47% of GDP during the last decade. In Sweden, total government expenditure declined from 59% of GDP to 52% of GDP.

Needless to say, it is quite ironic for the left in America and in Europe to champion an Europeanization of the American economy during the same period when Europe is abandoning those exact same policies.

Friday, November 12, 2010

The Iranian Economy

It’s common to read western analysis about Iran's economic situation, especially in the context of foreign policy. While the level of interest is natural, there are many misperceptions about the Iranian economy.

In my opinion, on the whole it is not true that the Iranian economy is getting worse. While the standard of living fell sharply after the turmoil of the 1978-1979 revolution and Saddam Hussein’s subsequent invasion of Iran, it is forgotten the economy eventually recovered. Iran currently enjoys the same or higher standard of living than before the Islamic Revolution.

Here is per capita income as measured by the late Angus Maddison, in purchasing power adjusted numbers.

The economy grew rapidly from 1950-midd 70s, declined until the end of the Iran-Iraq war, but recuperated since. The end of the war coincided with a period of free-market and fiscal reform, lauded for example by the IMF. Obviously the last few years of growth is closely linked to increasing oil prices (although the volume of oil exports has stagnated).

1. If Iran’s economy is growing, why do we constantly hear about the problems in the Iranian economy, but not about the progress?

One reason is mismanagement and squandering of the nation’s wealth. Having zero per capita growth for 30 years is nothing to be proud of, and all around you in Iran you observe signs of misallocation, poor policies, rationing, inflation, asset bubbles and corruption. The cost of family formation is prohibitively high for some young people in larger cities. Iran’s economy is doing relatively well despite, not because of Iranian economic policy.

Another reason may be that the group that was most hard hit economically by the revolution was the educated middle class, who are the people who moved to the west and whose voice is heard loudest. The biggest benefactors were islamists followed by the rural and urban poor. These are not exactly groups well represented in western media.

A third, probably most important reason is the ratio of expectations and outcome. The standard of living in Iran is growing, but nowhere near as rapidly as people want it to.

The Iranian middle class for example has rapidly expanded, as many more people have entered the middle class. With being middle class comes middle class values and middle class expectations.

This growing group and their growing complains have been misinterpreted by westerners as a sign of Iranians being increasingly squeezed.

Lastly there may be an element of wishful thinking behind some of the more negative assessments about Iran’s economy by foreign policy hawks.

2. Oil is very important, but it’s not all about oil. Oil prices started to be high in 1973, yet Iran was growing at a rapid rate throughout the 1950s and 1960s.

One factor that is now virtually completely forgotten is the foreign aid Iran received during this period as an important regional ally against the Soviet Union, mostly from the U.S. If I remember correctly for a long period this aid was as important as oil exports.

Also, Iran is not Saudi Arabia or Kuwait. There are too many people to live completely off oil. On the other hand you have a large labor force that (unlike Gulf Arabs) has no problem doing hard manual labor. Iran is more similar to a slightly less developed version of Mexico or Russia, which is to say an oil economy + a large lower middle income economy.

During the 1960s, when Iran’s growth was second only to Japan, there was a lot of industrial development, and a great deal of non-oil entrepreneurship.

Since than Iran has developed its service economy. If you have lots of oil to export, it is not as crucial to be able to compete in global markets with reasonably high quality manufactured goods (which Iran is still not capable of). You have enough currency to important high tech products, capital goods and whatever else you can’t produce at reasonable prices yourself.

Instead the remaining capacity of the economy is geared towards what Iran can compete in, namely import substitution and local services.

3. Iran has experienced a dramatic expansion of physical and human capital. Most importantly, Iran’s rise as a regional power cannot be understood without taking into the expansion of the educated workforce. This process started before the revolution, but was a priority of the leadership and continued afterwards.

The investment rate recreated during the decade of turmoil following the revolution, but later recovered to very high levels, closer to that of China than to the West.

The gross saving rate has now been around 40% for two decades.

I have further downloaded some statistics on education levels from the World Bank. Public education expenditure is currently 5% of GDP in Iran, above the world average, partially because the population is so young. This figure is in comparison 3% in Turkey, 3.7% in Egypt and 2.8% in Pakistan, other large Middle Eastern countries with many young people.

Part of the explanation for is the strong tradition of learning in Iran relative to other countries in the region, dating to pre-Islamic times.

The illiteracy rate witnessed an astonishing decline from 63% in 1976 to only 18% in 2006.

The share of the working age population with completed tertiary education quadrupled from about 2% in 1975 to about 10% in 2010 (it's about 20% in the west). Iran now has around 9 million college graduates to replace the two million or so expatriates. Meanwhile the share with at least completed high scool roughly increased from 19% to 64%.

This kind of explosion in human capital would transform any economy. Notice also the type of education. The share of college graduates in Iran who study engineering and manufacturing was 31% is, one of the highest in the world (in comparison the figure is 14% in Turkey and 7% in the U.S).

It is perhaps in part because of all these new technically educated individuals that Iran has been able to regionally challenge the U.S.

4. Social indicators have improved following the revolution.

The absolute poverty rate has declined (click on this link) from about 30% to a little over 10%.

The mortality rate for children under 5 declined at impressive and fairly steady pace before and after the revolution. It went from 0.29 in 1960 to 0.155 in 1975 to 0.032 in 2008.

Life expectancy continued to increase, again it appears with little interruption, after the revolution. Health expenditure as a share of GDP is also fairly high in Iran at 6.4% of GDP. Some of this is private spending and under-the-table payment to doctors, but the poor do have access to health care.

Illiteracy was targeted both before and after the revolution, and is largely gone.

Electricity production was more than ten times higher in 2007 than 1977, in a period when the population doubled. This is interesting for two reasons. First, if you don’t trust GDP estimates in a country such as Iran, electricity production is a reasonably objective measure of economic activity (although keep in mind that energy is heavily subsidized in Iran).

Second, much of rural Iran did not have electricity until about a generation ago. They do now, as the regime made this into a priority. Anecdotally, when my father installed an electric generator for his horse breeding farm just prior to the revolution that was the first time anyone in that Kurdish village had any electricity. Having access to electricity for the first time in your life is a concrete and sizable improvement in the standard of living. One third of Iran’s population is still rural.

5. The Iranian economy is dysfunctional, but has some safety valves. Corruption is a huge problem, but it does grease the wheels on occasion and the high degree of corruption, nepotism and overall inefficiency in the state is ironically one of the reasons that Iran is not a totalitarian country (it is “merely” authoritarian).

Furthermore, Iranians adjust their behavior in response to poor policies. For example, the labor market is heavily regulated, and (like many developing countries) you have a constant problem of underemployment.

However, this major inefficiency is mitigated by the very high rate of self-employment. Iran has a remarkable rate of non-agricultural self-employment of 37% according to the ILO.

If regulations and poor institutions make work in large organizations difficult, people can sell their labor directly through self-employment.

Granted, this motivation for self-employment is not a sign of health for the economy. However it is what economists refer to as a second best solution. Sure, Iran would be richer if the 500 best entrepreneurs and managers in the country got to expand their firms and absorbed much of the remaining mom-and pop operations, small scale family firms and the like (or if large, efficient foreign firms increased their presence in Iran). But having all these tiny firms is clearly superior to the alternative, which is unemployment induced by regulations and poor institutional quality.

Again, for all the talk about there being no jobs, the employment to population ratio in Iran has remained fairly constant during the last 20 years, increasing from 46% in 1991 to 49% in 2008.

Comparatively little is known about the Iranian economy. One obvious reason is the lack of hard data, but another reason is pervasive misinformation. We would learn and understand more about Iran’s economy, future growth perspectives, investments opportunities and similar issues if Irans economy was analyzed more by disinterested parties. Furthermore, it would be preferable if the discussion on Irans economy was decoupled from the sensetive and ideological foreign policy debate.

Wednesday, November 3, 2010

Median Voter Theorem winner of the 2010 election, Extreme left and Tea Party losers.

Turning sharply to the left in rhetoric and economic policy cost the Democrats over 60 house seats.

Nominating under-qualified rightwing extremists in Delaware, Nevada, Colorado, Alaska and West Virginia cost the Republicans 4 Senate seats or 5 if Murkowski caucuses with the Democrats.

Meanwhile, moderate and qualified Republicans won in Illinois, New Hampshire and North Dakota. A Moderate Republican did unexpectedly well in blue Washington state, on a night when most Republican Senate candidates underperformed.

The first lesson is that most of the time, going to the center wins you votes. There are some exceptions, such as if you need a clear message to be percieved as an alternative or if you are winning anyway, like Rubio. But the rule works, on average.

The second lesson is that 100% of the time, with no exception, you win by nominating qualified candidates. Nominating individuals with little ability and second-rate cognitive skills such as Christine O'donnell and Sarah Palin always costs you votes. This is particularly true if these candidates combine this with extremist positions on social issues.

I hope the 2010 results at least means Sarah Palin has less power and is less likely to run for President.

Tuesday, November 2, 2010

Some demographic trends in the 2010 election.

Looking at the CNN exit polls from this and the last two elections, here are a couple of interesting fact:

Compared to 2006, the share of Hispanic voters has not increased (8% of voters in both years). Don’t pundits keep telling us the Hispanic vote is going to be dominant any day now?

Compared to 2006, African American turnout has not increased (10% of voters in both years). We all knew those voters they would be less enthusiastic than 2008. But in 2010 Obama did not manage to enthusiast African American voters relative to the pre-Obama period.

In the last midterm, 32% of voters identified as Conservative. This year it is 41%.

In 2008, first time voters went an amazing 69% to Obama compared to 30% for McCain. This year Republicans actually won first time voters, 48%-47%.

Compared to 2006, the youth vote has decreased, from 12% to 10% of the vote. In 2008 it was 18% of the vote! Even John Stewart didn’t manage to engage the youth vote.
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