World-System (1960-2100 Colombia's Globalization Bubble?

 

World-System (1960-2010) The Long Iranian Economic Bubble

 

Plotted above is the IR1 BAU (Business-as-Usual) model Attractor Path for the Late Twentieth Century. There were three Economic Bubbles starting in the mid-1970s and not ending until the final small Economic Bubble was popped in 1990 (the period starting in 1986 is best seen as a cyclical response to the shocks of the Iranian Revolution, covered in a future post here and here). What were these Economic Bubbles and why did they pop?

Starting with 1975 in Iran, Google AI reports:

The details (see below in the Notes) involved formation of a One-party state, the Algiers Agreement with Iraq, the military buildup funded by the US, economic disruption, political repression and social changes (the Family Protection Act, annulled in 1979 after the Islamic Revolution when Sharia law was re-introduced).

The period prior to the Iranian Revolution and the associated Economic Bubbles were largely, it could be argued, created by US Policy toward oil-exporting countries. 

In 1953, the CIA- and MI6-backed 1953 Iranian coup d'état overthrew Iran’s democratically elected Prime Minister, Mohammad Mossadegh, who had nationalized the country's oil industry to reclaim sovereignty from British control (Wikipedia).

US firms gained control of Iranian Oil production and the CIA helped fund Iran's Secret Police (SAVAK). The US, however, became mired in the Vietnam War and was unable to maintain it's global interests in the Middle East (Nixon Doctrine). At the same time, opposition to Pahlavi Iran  brought Ruhollah Khomeini to power as leader of the opposition.

I will decompose these evens more fully in a future post (here) when I look into more detail about how the Iranian economy worked in the Late 20th Century. What I want to emphasize now is that after major shocks and Economic Bubbles created by the US, Iran returned to the BAU attractor path (or at least cycles around it) up to the present.

You can experiment yourself with the IR BAU model (here). There are many questions remaining to be investigated before an understanding can be developed about how the Iranian Economy works. The IR BAU model is unstable in the growth component. How would stabilizing the model have affected Iran's development in the past and in the future? The Iranian system was under weak feedback control, particularly with respect to Globalization, Unemployment and Environmental issues. Would stronger feedback control help in any way or would it have made things worse? 

And, as a more general issues, how does our conventional understanding of economic models (exogenously drive technological change, instantly adapting free markets, etc.) make it difficult for us to understand Iran and make informed policy choices? So many questions...

Notes

1975 in Iran detail from Google AI:

The IR_LM Measurement Model is:

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

Further reading:

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

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

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

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

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

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

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

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

• Modernization Theory holds that as societies become more economically modernized, wealthier and more educated, their political institutions become increasingly liberal democratic and rationalist.

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

More Blog Postings about Iran:

• Seven Futures for Iran BAU is the best
  
  
• A Deep Dive into the Iranian State Space It's unstable.
  
  
• How Does the Iranian Economy Work? Not like a Neoclassical, free-market economy.
  
  
• Will US and Israeli Attacks on Iran Hurt the World-System? Yes!
  
  
• What was the Impact of the Iranian Revolution? Elimination of Cycles!
  
  
• Iranian Globalization and Unemployment Created the discontent that led to the Iranian Revolution.

World-System (1980-2070) US Central Government Debt Bubble

 

The US Central Government (CG) Debt Bubble was created by the Great Recession. The Spike around 2020 was the result of the COVID-19 Pandemic and the botched response under the Trump Administration. The question now is whether the Debt Bubble will pop and whether we will return to the USL20 Attractor Path (dashed red line) or whether CG DEBT will continue increasing and get beyond 120% of GDP.

Here is how Google AI Analyzes the Debt Crisis:

When the Debt Bubble pops, there will be a lot of Hardship (the US Great Depression was caused by the Roaring Twenties Bubble being popped after the Wall Street Crash). In this historical instant, the Debt Bubble might well pop as the result of foolish policy actions by the Trump II Administration which does not seem to understand the Historical Polycrisis it is facing.

Boiler Plate

 

State Space Model Estimation

The Measurement Matrix for the state space models was constructed using Principal Components Analysis with standardized data from the World Development Indicators. The statistical analysis was conducted in an extension of the dse package. The package is currently supported by an online portal (here) and can be downloaded, with the R-programming language, for any personal computer here. Code for the state space Dynamic Component models (DCMs) is available on my Google drive (here) and referenced in each post.

Atlanta Fed Economy Now

My approach to forecasting is similar to the EconomyNow model used by the Atlanta Federal Reserve. Since the new Republican Administration is signaling that they would like to eliminate the Federal Reserve, the app might well not be available in the future.

While the app is still available, there have been some interesting developments. In earlier forecasts, the Atlanta Fed was showing GDP growth predictions outside the Blue Chip Consensus. Right now, after unorthodox economic policies from the Trump II Administration, the EconomyNow model is predicting a drastic drop in GDP (the Financial Forecast Center is only predicting a slight drop here).

Climate Change

Another comparison for what I have presented above are the IPCC Emission Scenarios. These scenarios are for the World System. Needless to say, (1) the new Right-Wing Republican administration plans on withdrawing the US from all attempts to study or ameliorate Climate Change and (2) the IPCC does not produce any RW modes for the World System (but seem my forecasts here).

World System

The longest running set of data we have for the World-System is the Maddison Project based on the work of Angus Maddison (more information is available here). Data on production (Q) and population (N) for most countries and regions runs from years 0-2000. More data becomes available as we near the year 2000. 

Available data were entered in a spreadsheet (see Population above, double click to enlarge). Missing data were interpolated with nonlinear spline smoothing using the R programming Language.

In cases where initial values were not available (see GDP above), the E-M Algorithm was used to estimate initial conditions.

From the graph of GDP above (W_Q) for the World System, it can be seen that economic growth from the year 0-1500 was basically flat. The period of British Capitalism (after 1500) had a small plateau of growth. Takeoff does not happen until the Nineteenth Century.

From a system's perspective, the only model that can be tested for the entire period is Kenneth Boulding's Malthusian Systems Model [Q,N] = f[Q,N].

When developed as a State Space model (measurement matrix above) there are two components: W1=Growth and W2=(Q-N), the Malthusian Controller. When more data is available, the Malthusian Controller can be generalized to other SocioEconomic theories.

What the Malthusian Controller shows (plotted as Q-N above) is that a long-developing Malthusian Crisis (Q<N) started in the Late Middle Ages and accelerated through the period of British Capitalism (Dark Satanic Mills) and was reversed spectacularly during the Nineteenth Century.  Takeoff in response to a deepening Malthusian Crisis would not be an unreasonable way to view Modern Economic Growth.

Error Correcting Controllers (ECC)

In another post (here), I presented Leibenstein's Malthusian Error Correcting Controller (ECC). It can be generalized to the dominant ECCs in most theoretical economic models (above). These controllers can be further generalized. For example, (X-U) and (L-U) can be generalized to (N-U), a more general Urbanization Controller which describes market expansion for economic growth. In countries and periods with limited data, (N-U) might subsume all these processes. ECCs describe important feedback processes in SocioTechnical System that are typically not recognized as such in academic literature.

Kaya Identity

The basic theoretical model underlying all the World-System models I crate is the Kaya Identity. There are a number of advantages to starting theoretical development with the Kaya Identity: (1) An "identity" is true by definition Adding other variables to the model ensure that theory construction is on a solid footing. (2) The Kaya Identity is also used as the foundation for the IPCC Emissions Scenarios allowing a linkage between World-Systems Theory and the work of the IPCC.

World Development Indicators (WDI)

After WWII, extensive data sets on all countries in the World-System became available from the World Bank (here). The indicators above where chose to construct the state space for each WDI-based model. Addition indicators can be added for specific forecasts and analyses.

World-System (1900-1950): Did the Smoot-Hawley Tariff Cause the Great Depression?

 

US President Donald Trump recently said (here) that low tariff's caused the Great Depression. But, the Smoot-Hawley Tariff Act of 1930 raised tariffs right after the Stock Market Crash of 1929 and GNP continued to collapse dramatically. Is Trump wrong about tariffs, as almost every economist claims?

Sorting causality out during the early Twentieth Century is difficult (so much was going on) and compounded by lack of agreement among economists and historians (see Fearon, 1987). When I was in Graduate School I was told not to wade into this area because it was way too controversial. Obviously, nothing has changed since the 1980s.

But, here's my attempt to explain the period in the US. The graphic above shows actual GNP (dark black line) and the World System attractor path for GNP (dashed red line) based on the USGD model (and WGD Model here). What you are looking at is the mother of all bubbles caused by WWI (a similar Bubble happened during WWII but GNP was below the attractor path at the start of the War) and the Roaring Twenties. The Bubble was popped by the Stock Market Crash of 1929 (not the Smoot-Hawley Tariff). Once the Bubble had been popped, GNP had no where to go but back to the attractor path (dashed red line) where it stayed until well into WWII. 

Part of the problem with my explanation is that Free-Market Economists will not admit that Economic Bubbles exist (the market is always perfect). From the perspective of World-Systems Theory, the assumption of market perfection makes it impossible to understand the Great Depression. Economic collapse should never happen; bubbles shouldn't happen. Keynesian Economics threw out market perfection, but Neoliberalism is the dominant ideology today and we are blinded by it.

World-System (1970-2020) The Bubbly Economy of Argentina

 

The Economy of Argentina has been through some things: Military Coups, Recessions, Inflation, Neoliberal Austerity measures, IMF interference, Protests, etc. etc. The graphic above shows actual GDP (dark line) compared to the attractor path (dashed red line) and the 98% prediction intervals. It's not a pretty picture. For most of the late 20th Century, the economy was underperforming. After 2000, there was an Economic Bubble that eventually popped and allowed the economy to return to the attractor path (you can read the details here).

Looking at the 2003-2008 Expansionary Monetary Policy Bubble more closely, the bubble began after 2005 and was popped by the 2008 Global Financial Crisis. By 2012, the economy had returned to the attractor path (dashed red line) with growth ranging from1-2%.

The period from 1975-1990 was not good for the Argentinian economy and is sometimes describe as a period of stagflation. From 1989 to 1990, Argentina endured a hyperinflation shock. Minister of the Economy Domingo Cavallo instituted Austerity measures (trade liberalization, deregulation, and privatization) in addition to pegging the Peso to the US Dollar. Inflation has been well below the attractor path (dashed red line above) since then.

The Austerity measures (AUST1 above, see Shefner et. al.) kicked in after the hyperinflation and extended well into the 21st Century.

And, poor economic performance leads to hardship (HARD2 above, see Shefner et. al.).