A Conversation with Djavad Salehi-Isfahani

Salehi-Isfahani discusses impact on sanctions on Iran, youth unemployment on Middle East

We were just discussing where you grew up and your years before you went to college. Can you talk a little bit about that?

I grew up in Iran and got my high school degree there and then I got a scholarship to study economics in England. That’s where I got my Bachelor’s degree, at the University of London and then I came to Harvard to do a PhD in economics.

When did you first become interested in Middle Eastern and North African economics? What eventually led you to the Belfer Center’s Dubai Initiative?

That’s a very good question. I ask myself always that question: how I got interested in Middle East economics? You know, when I came to Harvard they told me, “Don’t do Iran. It’s just so predictable. Do something else.” And I tried to do something else, but every time I tried to do something else, somehow I got dragged into Middle East. But specifically when I got my first job which was at the University of Pennsylvania they asked me if I would teach a course on Middle Eastern [economics]. The obvious answer was, “Yes, I’ll do it” even though it was not very good for my career. One course became two courses, I had like sixty students, it was very popular and I’d start reading more, getting into it. I’ve taught a course pretty much continuously the last thirty years. Serious research on the Middle East came when two things happened: there was a network of economists in the Middle East that was formed in 1993 and I was part of the founding group. Then micro data, which is central for my kind of research, started becoming available, increasingly. So now doing micro economics is much more in the frontier, because you can work with good data, ask serious questions, and do good research. It’s a group of people who are doing that.

What is the effect of sanctions on Iran?

Let me answer that in two parts. Sanctions have had an effect, we’ve been sanctioned continually for many years now in Iran. These new sanctions will add to the economic pain, they will affect the economy, but I’m not quite sure they will affect the politics, specifically the nuclear issue. The way they affect the economy is basically… the economy has been doing very badly the last two years. There was a housing bubble that burst in 2008, and then there was a decline, a collapse of oil prices. That always causes a recession in Iran. And then on top of that the government has been mismanaging the economy, restricting credit in order to fight inflation, inflation having been caused by the oil (boom?) itself. So there was a rather hard landing in 2009, and now with the added sanctions, it seems less likely for the economy to recover. Most Middle Eastern economies, like the two largest ones in the neighborhood—Egypt and Turkey, they have recovered, they’re expected to be growing at 5% this year, but Iran’s economy is probably going to be stagnant this year. Sanctions affect expectations of business people and that means and that means that investment, specifically private investment, is not going to happen. There’s a problem with credit, that I mentioned earlier, and there’s a problem now, or uncertainty rather about how sanctions, will affect the economy and the private sector. So with investment funds drying up, I think difficult days are ahead. Now the problem with affecting politics or affecting nuclear issues or government stance on the nuclear issue. Is that, let me say it this way: sanctions are effective: like the South African sanctions, they’re effective because they hurt the economy, but also bring a moral force behind them. Those who suffer, which inevitably is the ordinary people turn against not those who impose the sanctions, but turn against those who brought the sanctions onto the country. So in the case of South Africa that worked very well, because there was a huge moral force fighting apartheid, behind the sanctions. In the case of current sanctions, U.S. and E.U. sanctions, United Nations sanctions, I think the problem is that you find ordinary Iranians are not very sympathetic to the Western cause. There are a lot of people in Iran who don’t like the government and we’ve seen that in a lot of demonstrations that happened a year ago, but when it comes to the question of whether the United States is right in asking Iran to freeze enrichment, most people would say no. That somehow there’s a double standard. Iran lives in a neighborhood where there are nuclear powers: India, Pakistan, Israel so because the U.S. has not put similar pressure on these other countries, you know they have a nuclear treaty now with India, they support Pakistan, they support Israel. Iranians feel that the United States is basically not wanted Iran to become a major regional power. So in that sense I think the sanctions, because they lack the moral force, are not going to bring about the kind of policy change  inside Iran that the United States and its allies hope. I fear in fact that there’s a section of the government or section of the society, that doesn’t mind the sanctions, even more they like it because from the beginning of the Islamic Revolution, there was this thinking among the revolutionaries, that in order to achieve their goals which was that of an Islamic society, egalitarian, social justice, they were better off being outside the global economy. That the global economy brought inequities, cultural drifts that were against Islamic ideals that they held, and those people are still around, in fact they are very much in the government, the Achmedinajad faction, so my feeling is that because they attribute some of the domestic problems to globalization, to being connected to the Western world in particular, that they don’t mind so much getting cut off and so much the better if the cutting off comes from the outside so that they can claim to be a victim of problems imposed from the outside. In addition if there are domestic problems as there are, they can blame it on the sanctions as opposed to domestic policies, bad economic policies that they follow.

If Iran prefers an isolated mindset around these things, are there any proposed sanctions floating around right now that you could see being effective or none at all?

Let me first say that not everyone in Iran likes the sanctions, this is a specific ideological streak among the revolutionaries, Islamic revolutionaries that believes that being isolated enables them to create the kind of Islamic society that they want, that globalization is antithetical to reaching the global and economic ideals. But I don’t think by any means that that is the majority of Iranians, who are fairly open. Iran has always been a very open society, you know it’s been on the silk road between the east and the west, in a major path for cultural shifts in the region. I don’t think Iranians by nature like isolation. In fact if you are in Iran and you are watching the news they are always emphasizing the fact that they are “on” global issues, that they are the major news item on CNN or BBC, that sort of thing seems to please them. On the other part of your question about what kind of sanctions can help, I’m not an expert in that area and I generally believe that there are no such things as “smart sanctions” you know the ones that are closely targeted to hurt the government, but not the people. The government is the richest entity in Iran, so it has the greatest degree of freedom. It earns about $70 billion in foreign exchange—that’s the oil revenue—and they have all sorts of contacts around the world and I think they can get around the sanctions. The people who cannot do that, as I mentioned in the article that you referred to are people in the lower economic strata. They’re the people that lose their jobs and they don’t know what to do. They don’t have savings to fall back on like the middle class or the upper class who could perhaps survive a couple of years, spending their savings. So there’s got to be a lot of pressure on the lower classes and in some sense, oil sanctions are collective punishment and that’s where the moral force comes in, because if there’s collective punishment that coming from a weak moral position, then people become angry and turn against those who impose sanctions. If they come with a strong moral authority then the population can tolerate the difficulties and perhaps turn against their own rulers.

A few years ago you edited the book Labor and Human Capital in the Middle East, 2001, which was recognized as a Noteworthy Book of the year by the Princeton University Industrial Relations Section. This collection of research was seen at the time as a necessary tool to pressure Middle Eastern and North African governments to improve their education systems and to equalize opportunities in their respective countries. Nine years after this book’s publication, what are some of the areas of growth you have seen for MENA countries in regard to economic progress and what are some areas that could either still use some work or have stayed relatively the same?

That book was really the beginning of this new research effort which is working with survey data, to analyze policy issues and in that sense it was novel for the region. It was based on conferences that we organized in the Middle East and it was well received. A couple of issues that we identified in the series of studies that came out in that book are still with us. One was the inefficiency of the education system. There were lots of studies that had been done that showed there’s a lot of interest in the Middle East in acquiring education, there’s a lot of education, in fact Middle East has experienced the fastest rising rate of schooling in the world, comparable to East Asia in terms of years of schooling they have outpaced other regions of the world, yet the economy is such that this educated labor is either not absorbed well into the labor market or it is not even wanted because the skills they learn in school are not useful  for the new global economy. Bit of history, education basically expanded in the Middle East because modern governments came like Attaturck (?) in Turkey, (full name) Nasser in Egypt and Rezarshar (?) in Iran, they brought modern education in order to train a civil service who would take care of the administrative tasks in the government. As the region has become globalized people need new skills, they do not need so much university degrees, for example as people who could do things, who have specific skills that are needed by the private sector. That transition hasn’t taken place, the education still is focused on diplomas and the labor market is becoming increasingly globalized and in need of skilled manpower. So it is that in Egypt for example about 29% of the work force has college degrees. This is a country with per capita income of about $2,000 and Turkey, which is a much more advanced economy than Egypt has less than half as many  university graduates. So this kind of a miss match of the education system and the labor market and the needs of the labor market, that was one of the issues that I think interested me and it came out in the book where I think those are unfortunately with us. The policies to improve the matching between the outputs of the educational system and demands of the private sector, that hasn’t improved a whole lot. It has improved to some extent in Turkey, it has improved in Egypt because in Egypt they had a big labor market before that allowed the private sector to make more decisions, better decisions on its own  and these decisions have to do with paying people whether they want to pay the university graduate more than the guy with the diploma is their decision, whereas before, and this is still true in Iran and many countries in the region, like Syria, the government tells the private sector how much they should pay people with different degrees, and you can imagine that if their hands are tied they can’t really pay skills, they can’t compensate for skills they have to compensate for diplomas and that miss match continues. What to do? I think really the key issue is to allow the private sector, which is the only source of new employment, the government is really full, it has to shrink even, private sector is rising, it has to become the major employer, will become the major employer of a skilled work force. They need to set the standards and they need to send the signals to young people: what it is that they need them to learn and what are the skills that are compensated and who gets to keep a job and prosper in a company and who would not be able to do well. And when that discretion is given to the private sector, which basically means changing the labor laws that regulate private employment, when that discretion is given to the private sector, I believe you will find schools and the parents, who are the decision makers about what the kids learn, you will see them change as well. And that will be I think the major impetus, the major way in which productivity will increase and young people will come to benefit from their education. They work very hard, but the rewards are limited.

You have worked as a visiting fellow at the Middle East Youth Initiative at Brookings Institution, which is an organization that focuses heavily on research pertaining to Youth Exclusion during a time period known as “waithood,” a term used for young unemployed college graduates in the Middle East. Can you tell us a little bit more about that and about some of the conclusions you have come to about the economic future of today’s youth in the Middle East?

You’re talking about this project that we did at Brookings about three years ago. Let me tell you a little bit about this Middle East Youth Initiative. It’s a joint effort, by Dubai School of Government which is also a partner with Harvard Kennedy School and Dubai Initiative and the Wolfinson (?) Center for Development at Brookings. The objective of that research program was to analyze youth transitions from school to work and to marriage and family formation and to understand, where are the bottle necks? Where  policy could help remove the bottlenecks and help young people to have less painful transitions from adolescence to adulthood.  The term “waithood” that you refer to, that’s a term that was coined by this research program and basically is means that young people work very hard through school, when they get their degrees they have to wait one year or two years, maybe three years before they get their first job. So there’s a period in which they wait and they’re not really accumulating skills, it’s more like depreciating their skills. They’re getting less hopeful as opposed to more positive about their future. This is one of the hallmarks of Middle Eastern labor markets that make young people wait at the door, not for months, but for years. If you look at Europe, you look at Latin America, the average waiting time, the transition between work to school is measured in months, maybe a few months, six months you wait, you find your first job. In the Middle East it’s measured in years, so that’s one of the big “waits” if you like, waiting to join the adult society. The other big wait comes in marriage. Age of marriage has increased very rapidly in the region, Middle Eastern youth marry later than their counterparts in East Asia, part of that is economics because there is a stress on especially young men, having a secure job, before they can marry. As I mentioned earlier, these secure jobs come late, they have to wait for that, so marriage has been pushed to late 20s, early 30s. Now about the policies, I mentioned this education/labor market miss match earlier, when you asked the first question, that’s really still the core of the youth exclusion. I believe that one of the reasons why young people are staying outside the adult economy and society for so long is because the skills they learn aren’t all that useful for the labor market and they have no chance to compete with other workers because adult workers, older workers have either formal or informal tenure. If you look at the employment, or rather unemployment pattern in Iran, you find out that the unemployment rate for people over 30 is about 5%, which is very low, basically that could be full employment for them, but unemployment rate for people under 30, is 25%, so five times. That is exclusion of young people. They are not allowed to compete for jobs with older workers, and what is interesting is, this is the part about tomography, that is the center of my own research, because of past fertility, high fertility, high population growth, young cohorts are the largest in history of all these countries, you find out for example in Iran and Syria, people in the 15-29 year age group, they’re as many as those in the 30-54 age group. So if you like, people outside this adult economy, the young people are as many as those inside it and I think the societies have to become more youth friendly, they have to allow young people to compete with older workers, so they learn the skills that they didn’t learn in the schools, schools have to be informed so they get the skills in schools that employers need, all those are part of this Middle East Youth Initiative that has produced a series of papers and a book, called Generation in Waiting, which came out last year by the Wolfensohn Center [for Development at the Brookings Institution].

You talked a lot about the skills that they need before they can enter the work force. In the U.S. economy students are high skilled in things like technology that allow them to enter the workforce and compete with older workers. What are the skills that Middle Eastern and specifically Iranian students are not learning?

That’s a very good question, it’s a very informative comparison to look with the Middle East along with the U.S.  I believe that in the United States the private employers are able to send signals to schools and to parents and to students about what they need and how they compensate. So you find young people doing things, a variety of things besides learning mathematics and sciences, they learn a variety of skills that employers need. I believe even playing soccer as a kid is a way of learning how to play with teams, how to become a team player, how to compete and at the same time work in teams, I think that’s really the essence of modern corporation, competition along with teamwork . You look at the Middle East, most Middle Eastern countries, have one big test which students take at age eighteen, at the end of high school. And these tests, are invariably multiple choice, and that determines pretty much what kind of a university education if it all a young person gets. It’s as if universities in the United States and by implication employers, where only to look at SAT scores in the U.S. Just imagine what life would become for young people if you put away the resume, the school recommendation forms, and all the summer jobs that young people do, volunteer work they do in order to impress future employers with their capacity as a full person to participate in the work place. You put all those away and you took one number, which is the score on the SAT, I think you’d pretty much ruin the American economy and that’s where we are in most of these Middle Eastern countries. Last week 1.3 million Iranians took this big test, it’s two, three-hour tests, about 170 questions, one minute each and that really determines where they end up. Either they can go to a top school, engineering school, medical school, and the best programs take about 5,000, out of this 1.3 million, hugely competitive system. Did that answer your question? One other thing about the U.S. system is you find young people when they finish high school or finish college, they don’t wait for a permanent job. They do a variety of things, sometimes unpaid work; people compete to get unpaid work as interns, like yourself, right? All this becomes part of a work history, and part of the signal they give to the labor market to prospective employers about who they are and what they’re capable of doing. So changing jobs as a young person is not considered a bad thing, and if you think for a moment about the marriage market, you know how parents of a young woman are going to look at a prospective young man who enters, in the Middle East, he has to have a permanent job, because they’re looking to the future, if he’s got a permanent job then he can provide, he’s a good provider, he’s a good breadwinner. In the U.S. if somebody is changing jobs, but the jobs are in the context of building skills and building a resume, that person is considered a good prospect as well. That’s I think, where the Middle East needs to move. Allow young people to acquire skills while working, maybe on internships, doing social entrepreneurship, doing temporary work, but it will be a while before a traditional society would look at a person who is changing jobs as having a great career, before they look at a young person changing jobs as having a stepping stone toward a good career.

You asked about the Dubai Initiative at the very beginning and I wanted to say just a few words that might be useful.

Coming here this year was really nice for me because I went to school here and like Cambridge a lot, but also as I mentioned I worked with Dubai School of Government in the Youth Initiative at Brookings, and I’ve been interested in trying to understand the plight of well off youth in the Persian Gulf. You have United Arab Emirates, Attar, Saudi Arabia, and Kuwait, these are countries that are very rich, yet  they have similar problems that poorer countries like Egypt have in helping their youth transition from school to work and I’m very interested in learning why so many educated young Saudis or Emirates are unemployed, what are they waiting for? Is it because the oil money enables them to wait longer, or is it again something wrong in the labor market, the skills they learn in school and the needs of their employers. And recently data has become available in United Arab Emirates that allows kind of what I like to do which is policy analysis using survey data and Dubai School of Government is a policy school, affiliated with Harvard Kennedy School and it’s a very promising place where this kind of research can be carried out and allow policy makers in the Persian Gulf and wider Middle East to see the benefits of doing good research with good data to understand problems and find solutions. So that’s one of the reasons why I came here to Dubai Initiative to work on that part of the world.