Reporter, why he would become a killer, a criminal. Why things happen that way. I would think that it needs to be the way al jazeera would do issueld go deep into the and look into all the possibilities and the reasons and bring experts to talk about it. That is the way we do it. Host director general of the al jazeera network. Thank you for talking about the network. That will do it for our show today. We will see you right back here tomorrow morning at 7 00 a. M. Eastern. The carnegie to endowment for International Peace for a discussion of the Economic Impact of lifting the sanctions on iran. [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] good morning to all of you. I will give you a few seconds to take your seats and we will get started. Lets get started. I want to welcome all of you to the carnegie endowment. Im a senior associate here. I wanted to welcome our guest speakers today. He is the chief economist for north africa at the world bank and the author of the report will be discussing today. Very insightful report on economic applications of lifting sanctions on iran. To my right, to my left is my friend and colleague from carnegie endowment, also a former senior official at the world bank. We only have about 60 minutes today is what wanted to jump right into it and it will have a discussion amongst ourselves and then handed over to all of you. Thank you very much and thanks to carnegie for inviting us. I should say im one of the authors of the report. I happen to be the boss. That is why i think i need comes out there. One of the other offices here as well authors is here as well. We did this because we thought the Nuclear Agreement of july 15 was one of the most important events of this time. It is going to have important economic applications for the world as a whole but also for iran in particular. I have to confess we also thought that this was the dog days of summer that our report would be the most important event to come out but i think we were wrong. [laughter] the summer has been quite chaotic with greece in china. Nevertheless, we think it is important to try to understand the economic applications of the lifting of sanctions on iran. This is a very difficult and competition problem. There is no crystal ball. We have to use a variety of different techniques and we were trying to triangulate the implications using different methods. Sometimes methods that are not exactly consistent with each other. To organize it, we said we look at the applications at the global level. What is going to happen on the Global Economy, the effect is going to have on irans trading partners, and what its going to do to the iranian economy itself. First, lets start with a global level. The most important implication that the global level is the increase in oil exports by iran as a result of lifting sanctions. As you can see there, when sanctions were tightened, particularly the European Union sanctions of 2012, there was a significant drop in irans oil exports by roughly one Million Barrels a day. You would also notice for later reference that the composition of trading partners also shifted. Europeanrop within the the trade with western europe. Whereas trade with the eastern oil expertsartners, to eastern partners actually increased in some cases and certainly the proportion was much larger. What we did was we said as a first approximation say that irans exports were going to grow by one Million Barrels a monthsabout a six to 12 after the accord is ratified. That is what people expect and the time needed to bring production backup to this level. We took that assumption of one Million Barrels a day and simulated it in a multicountry model. This is a model of multiple countries that are trading with each other and then we insert an additional one Million Barrels a day of iranian exports. We also simulated the effect of lifting some of the other restrictions and that sections had on insurance and services trade. Those turned out to be less significance. The big effect is that these additional one Million Barrels a loweringn effect on a World Oil Crisis by 14 . Some people, and i myself was surprised because one Million Barrels a day does not sound like a lot. 14 . O you get a drop of its really the other side of the coin of the fact that oil demand is quite inelastic. We normally talk about inelastic oil demand in terms of when the price of oil goes up, demand is not fall very much. It only falls a little bit. The other side of the coin is when you have an increase of supply of a small amount the price will fall by quite a large amount. As you can see from this graph that if you have a shifting in the supply curve of one Million Barrels a day given how steep the demand curve is the get a pretty big drop in the price of oil. Purehe here affect effect of the one Million Barrels a day. It is not a prediction about where oil is going to be six months or now or a year from now because lots of other things determine the price of oil including growth in china or europe or everywhere else. Simulationhis is a that assumes no strategic behavior by other Oil Exporters. Followinglar we are what seems to be the case with other Oil Producers, particularly the ones with swing capacity like saudi arabia. Which when the white price of oil fell in 2014 they did not adjust their production. They continued keeping this production their production as it was. The effect of the additional one Million Barrels a day in the drop in the price of oil on Different Countries because that is what we are trying to get at. We express this in terms of welfare but you can think of it as a measure of income. Its just a little bit more precise and expression of income. Increaset is about 3 in welfare for iran itself. Iran is the one country because it has an additional quantity exported and there is the price of oil falling is going to be a net gain or even though it is an oil exporter. If you look at other countries, the Oil Exporters, they typically lose because for them the price of oil has fallen as a ult of the additional increase in iranian oil exports. And Oil Importers gain. Term tradeclassic shock weve experienced in different ways with the price of oil in different times in history. Secondurn to the question we were asking which is what is the effect on trading partners . This is the global model but doesnt actually look closely at irans bilateral trading relationships. Techniqueifferent which was to try to simulate, or try to track irans bilateral trading relationships using what is called a gravity model. Its basically looking at the growth rate of the trading partners and irans own growth rate and seeing what that trade would of been in the absence of sanctions. We looked at what the effective 2012 and 2013 were, by how much that trajectory of trade changed as a result of the events of 2012 and 2000 1320 eu sanctions 2013 when the eu sanctions became binding. And you can see that on this last column here there was a loss of exports over those two years of various trading partners, including some of the western european ones which you would predict. 17ling to Something Like billion, or about 3. 5 of gdp over a twoyear period. This could be thought of as the net effect of sanctions on exports. And conversely this is the amount by which we might expect exports to go back up once sanctions are lifted. The other thing is that the composition of trading partners. Because what happened both before sections became tightened as well as during the sanction era, there was a shift towards eastern partners. Irans president had been looking east for policy. They were trading more with russia, korea, china, india, and so on. That process accelerated during the sections era. I think what we will see with the lifting of sanctions is just an increase in trade with the west. Simply because that was what was cut during the sections era. But also because the composition of goods they trade with the west are very different. Iran basically buys consumer goods from the eastern partners but it actually buys hightech machinery and equipment from the western partners. It is in dire need of those having neglected technology upgrading during the sanctions period. Let me turn to the third part which is the effect on the iranian macroeconomy, or the iranian economy. I think that many of you know is that during the period of sanctions being tightened iran went into a recession. Quite a deep recession in fact. Growth has now become positive just this last year to about 3 . We expect that to be somewhat higher with the stimulation stimulus offered by the increase in oil exports. The spending of Oil Export Revenues are going to revive the economy and we expect growth to 2017. Ut 5 6 by that is one side. The other big issue in a run as unemployment, particularly youth unemployment. Here there is an interesting twist to the usual story. If you look at Unemployment Rates and Labor Force Participation rates, particularly if you split it up between women and men, we found a very interesting pattern before during sanctions and that pattern was one where the Unemployment Rate for young women actually went up. And the Labor Force Participation rate went down. Women were dropping out of the labor force as well as where increasing employment. The Unemployment Rate for young men actually went down. This is a bit of a surprise. If you think about it, it is one of those cases where economic whatlly is useful because was going on there was during thesanctions period currency depreciated. It depreciated rapidly. When the currency depreciate second evaluation, the trade sector is relatively more profitable relative to the nontradable sector. Women were mostly in the nontradable sector in services, whereas the men were in the tradable sector like manufacturing. You had the shift of the pattern of employment where the Services Sector was the one suffering from the depreciation. Women were having trouble finding jobs and many of them dropped out of the labor force at that time. Whole buy the story, the pattern would reverse with the end of sanctions. The lifting of sanctions. What do we get from an exchange coming into the country and the Services Sector would start growing and you would be able to absorb women back into the labor force in into employment. And the tradable sector, that is my last point, the tradable sector might suffer. This is the nonoil tradable sector might suffer. This is important because this event, the lifting of sanctions, can be thought of as a windfall to iran. But it really matters how you manage this windfall if it is going to generate any kind of sustainable growth. There is some concerns. Thehe report we track experience of previous windfalls. There have been windfalls before with the price of oil rippled doubled and tripled. The windfall was not very impressive. In 1973 when the price of oil shaw decidedhe to sideline the National Planning office and decided by himself on a Public Investment projects to be spent on that and they were not very well designed or managed. It was really a wasted opportunity. When Commodity Prices rose in the early 2000s, another windfall because iran was exporting oil there because the sections and not started becoming binding yet, there was a big windfall. When there was this windfall to get a Real Exchange rate appreciation. The price of nontradables are going up. Traditionally you expect the nonoil tradable sector to suffer. Perioddid during that except for two sectors, pharmaceuticals and petrochemicals. Those continue to grow exports. It turns out those of the to that perception dies the most subsidized the most. The president at the time when to promote these two sectors as exporting sectors, particularly to the eastern partners. Not only do they receive direct subsidies, but these are the sectors that received and benefited the most from the Energy Supplement subsidies. The reason they kept the nonoil tradable sector going in these two areas with huge subsidies, which is a very inefficient way. My final point is that at this time lets try to make good use of this windfall and ways to do thinkould be i dont the Real Exchange and appreciation can be avoided. That is just a phenomenon of market forces. But we can do something in iran about lowering the cost of production of these nonoil tradable sectors. By removing some of the manmade constraints to doing business. There are lots of constraints that are really policy and bureaucratic restraints and the lack of competition in many of the sectors, that if we can intimate some of these policies and reforms you can bring down the costs even when the real change rate is appreciating. Secondly, infrastructure. In particular, iran has a good infrastructure in some ways. But Telecommunications Infrastructure has been neglected. For theseitical nonoil exporter will sectors because they need telecom. Particularly the hightech ones. This is what is going to be key for the postoil era. Iran actually has to start preparing for what its going to do in the oil runs out. There is tremendous potential in this country. It has a highly educated population and he want them to move to the nonoil era, you have got to the knowledge economy. Those of the things that require hightech communication equipment and good infrastructure excellency Company Policy for business environment. On wall street they say never confused genius with the bull market. Is never confuse wisdom of the high prices of oil. [laughter] to you areover not using slides, are you . No, im just point to speak. Lowtech. I would like to congratulate my team foranta and his the conference of analysis of the lifting of irans sanctions. Let me say a bit on the study and a bit on policy applications. The study brings home a couple of things. How devastating the intensification of sanctions since 2012 has been on the iranian economy and how important the boost of lifting them will be. It makes you understand better why iranians came to the table, and also why the negotiators are confident that they are unlikely , the western negotiators so to speak, they are unlikely to flout the agreement in the future. The report shows the lifting of sanctions will be beneficial for the World Economy overall, even though Oil Producers will lose. It is a striking fact that the economies of developing countries on average are about 25 30 bigger than they were prefinancial crisis. At the iranian economy is not much different than it was then. Highlights in a simple way, were talking real money in these numbers. The report discusses the lifting of sanctions as a windfall which suggests a onetime big game gain. The lifting of sanctions should not be called a windfall in my view. It is much more of a fundamental shift in the iranian economy. An economic regime change, not a political regime change. An economic regime change. It should be looked at as the potential for a new start, a start were iranian iran integrates into the world market and an integral way. We are confident with the lifting of sections. Could run upains significant larger than the 2 a year or so estimated in the report. Because in addition to the onetime boost to all exports, and the efficiency effects of trade opening, you have to factor in a sustained increase in total productivity growth and in private investment. Not only Foreign Investment, but also domestic private investment. Chanta is absolutely right to stress that these beneficial will depend dominantly on how iran deals with the new economic regime. As an opportunity to enact Structural Reforms and clean up its governance or alternatively an opportunity to capture by the state and its associated special interests. And possibly get up to no good abroad. Iran is a large and sophisticated economy. About the same size in terms of population and income as turkey. Larger andabout 40 40 richer perperson roughly than egypt. It is much more than an oil economy or an oil state. Cars. Uced 1. 6 million that is almost three times as many as italy produces today. Admittedly, italy is not a good example of efficiency. [laughter] i was working in italy when they were producing 2 million cars. 1975. Iran has an effect on world trade and investment oneworld treatise stuttering. The report says iran could the number could be much higher than that. Inkey attracted 13 billion 2013 and turkey does not have huge oil reserves in need of technology and money to restart and expand. As for the effect on oil markets, the report stresses the biggest gain for the World Economy. I have to say i have my doubts as to whether this is good for the world today. I understand the point that it improves the incomes of Oil Importers, including the United States. The incomes of Oil Exporters. But the point is we live now in a lowinflation, low price world. We live in a low price world. Low oil price world. I believe you can have too much of a good thing. The oil prices already fallen so fast and so low that the wellknown destabilizing effects on the budgets of Oil Exporters and on t