Author Article by Lyric Hale: A Lamentation of Black Swans – Economic disaster in Iran

Lyric Hale

Lyric Hale

Last week leading economic commentator and What’s Next? author Lyric Hale looked at the controversial Tobin Tax, generating interesting debate on this blog. In her column this week she discusses the potential economic catastrophe caused by a natural disaster in the most earthquake-prone nation in the world, Iran.

Article by Lyric Hughes Hale

Last week, the strongest earthquake to hit the English Channel in 300 years rattled china in the United Kingdom, a region seldom thought of as a hotbed of seismic activity.  With so many outrageous and unforeseen events in global abundance, we are getting used to the unusual.  However, we must not become too jaded to ask what could happen next, because more could be on its way. Even if black swans appear to be the norm nowadays, we still need to keep track of all the ugly ducklings.

Two of the biggest black swan events I can imagine would be centered in Iran.  One is in the realm of human control, the other is decidedly not.  Both would have an immense impact on oil prices.  Iran provides 5% of the world’s oil and holds 10% of its reserves.  It is estimated that loss of this supply would result in a doubling of oil prices, which would stop any global economic recovery and perhaps, plunge us into a global depression.

A major earthquake in Tehran is not an improbable event.  Should Tehran, a city of more than 12 million people perched on the crosshairs of multiple faults, be the epicenter of a major earthquake, the human suffering, casualties, and the worldwide economic shock could all hardly be imagined.  I have said before that politics trumps economics, but the forces of nature can overwhelm us all, and have consequences beyond the borders of any disaster, as Japan has shown.  In fact, Iran is the most earthquake-prone nation in the world, in terms of number and frequency, and sadly, casualties.

In our book, What’s Next?, Narimon Safavi discusses how Iran watchers, transfixed by the sexiness of the nuclear issue, have entirely missed the main event in the most promising country in the Middle East—the transfer of power and ownership of key assets from public to private hands.

As a result, public infrastructure in Iran’s capital city has suffered.  Even though Tehran’s mayor has sounded the alarm about the effects of a possible earthquake, he has been unable to marshal the resources necessary for an emergency response plan.  That’s right- there is basically no plan.  Estimates of casualties from an 8.0 magnitude earthquake vary between 1-2 million people, which would be the deadliest earthquake in human history.  There is no movie scary enough to conjure up what this might mean, but this is one of those cases of not if, but when.

According to Mohammad Ashtari Jafari at the Institute of Geophysics at the University of Tehran, “one may expect that a large damaging earthquake may occur around Tehran approximately every 10 years.”

Christopher Hitchens has written about this threat in Iran and other rapidly growing cities, and the response that the rest of the world should take, a “seismic imperative” to help Iran prepare for the worst.  But contributor Narimon Safavi is unenthusiastic about allowing what would be in effect a geophysical occupation of Iran by foreign powers eager to shore up its infrastructure.

Somewhat amusingly, there have been calls for the capital to be moved elsewhere, and President Ahmadinejad has said that 5 million people should move away from the capital.  The puckish response of an Iranian blogger:  “If the president wants to see 5m people leave, he should start a long-term plan of better redistributing the country’s resources (maybe he is already doing that, I’m not sure).”

It is easier to track the likely path of the second threat, Black Swan #2.  The US Congress is seriously considering an oil and natural gas embargo on Iran.  Hopefully, they will be too busy avoiding default to go ahead with this, but an embargo could in addition to the economic damage it would inflict, be a precursor to opening yet another military front in the Middle East.

What's Next?

What’s Next?

With the world in increasing turmoil, let us hope that Iran stays out of the headlines for a little bit longer…at least until August 3rd.

What’s Next? Unconventional Wisdom on the Future of the World Economy by David Hale and Lyric Hale is available now from Yale University Press.

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  • August 2, 2011

    Narimon Safavi

    Great points Lyric!
    It seems like we are living in an era when the “Black Swan” events might become less of a rarity and the disruptive effects of such phenomena in a more tightly interdependent world, greatly magnified.
    The fact is most of our ability to perceive and judge what is “normal” on the societal level has been shaped during a time when we did not have the means to observe the world both at the micro and macro levels so closely. Neither were the anomalies in distant places as consequential as they have now become. Iran is not the only part of the world that begs fresh thinking.
    Funding the global ability to respond rapidly to disruptive events like natural and environmental disasters is both a morally praiseworthy cause as well as smart economics. If it were married to a concept that helps deter speculative excesses of the global financial markets then it is a classic win-win scenario. My hunch is that the key to an effective Tobin like tax would be its widespread enforcement to help minimize the utility of tax havens. If the North American and EU markets are brought on board, then a lot of the hard work would already be done. Kudos to Andrew Sheng for putting this issue back on the map.

    Good luck with the new blog,

    Narimon Safavi

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