Iran is undergoing a brutal bout of inflation as a result of its ambitious nuclear program. In response, the United States and Europe have tightened sanctions. Effectively, Iran is cut off from trade, and trade, as any economist will tell you, enhances the productivity of your workers. With the productive capacity of its economy plummeting, the government has resorted to the printing press in order to keep its bills paid. Estimates of annual inflation range from 30% to 100%.
This may be worth it if it gets Iran to abandon its nuclear program. The fewer countries with nuclear weapons in the world, the better; increasing the number of states with weapons increases the risks that a weapon will get into the hands of an undeterrable lunatic. But it's terribly hard on savers, and terribly bad for the economy as a whole. High inflation destroys the ability to plan or invest in anything other than the most basic tangible assets.
So will they be deterred? Will they exchange their nuclear centrifuges for the right to buy goods on the world market? Graeme Wood went to an Iranian resort to find out what Iran's inflation looks like. He came back uncertain as to whether this would be enough to scupper the Iranian nuclear program:
It’s not yet clear whom the Iranian working classes will blame for destroying their retirement savings. During my trip, no one mentioned any hatred for America—I’m Canadian, so they might have confided safely—or blamed America for the country’s ills. It’s at least plausible that Iranians would attribute their suffering to their own government. “Everyone knows there is corruption, and that the economy is mismanaged and inefficient,” says Mohsen Milani, a professor of international relations at the University of South Florida. “The big question is whether [sanctions] will have an effect on nuclear issues. And I believe they will. Elections are controlled and manipulated, but the candidate who can promise to end the sanctions is likely to win.” Salehi-Isfahani, the economist at Virginia Tech, points out that wages have mostly increased quickly to keep up with prices—although government-employee salaries have increased at only half the needed rate, and the economic situation has worn down optimism. “People are adjusting to lower real incomes,” Salehi-Isfahani told me. “But I doubt very much that they have adjusted to the lack of hope. The government can’t supply that just by keeping chicken cheap.”
In any case, no wages could ever really keep pace with very severe inflation of the sort that might be retriggered by sanctions, or a further closing of Chinese or Russian markets to Iranian trade. Iran’s foreign-exchange reserves are thought to be dwindling. In the absence of a new infusion, we can expect continued flight from the rial, a rise in prices, and finally the temptation that governments under stress have faced at least 56 times before: to print far too much money in order to pay the bills.
Almost definitionally, the regimes that we would most like to deter are, in general, the regimes that are least likely to abandon their military ambitions in exchange for the lifting of sanctions. Punishments may act as a deterrant, but once actually invoked, they make it psychologically difficult to surrender. Once someone has slapped sanctions on your country, giving them what they want amounts to rewarding someone who has hurt you. Anyone who has parented a teenager--or been one--can probably describe the dynamic that ensues.
My understanding is that sanctions worked in South Africa, but have a mixed record elsewhere. And as Wood points out, even hyperinflation doesn't necessarily mean that your regime will fall. Robert Mugabe is still ruling Zimbabwe despite previous inflation rates in the billions of a percent.
Iran isn't quite there--yet. But unless something changes, it probably soon will be. What may come next is mass suffering--and a regime even more determined to get its hands on a nuclear bomb.
