December 22, 2010

Engineering Economic Suffering

After hearing Ahmadinejad’s announcement on Sunday of the first phase of subsidy cuts, the world is watching and waiting to see what will come out of eliminating 30 year-old oil subsidies for Iranian citizens. With economic sanctions already taking a toll and the beginning of cuts on subsidies coming into effect, ordinary Iranians continue to bear the brunt of US pressure and Iran’s economic mismanagement.
Ahmadinejad claims that cutting oil subsidies will help the ailing Iranian economy. Given Iran’s already high rate of inflation – estimated to be around 20 percent – the Iranian government’s latest move could spark even more inflation and carries significant economic risk.
According to Tehran Bureau, the subsidy cuts are already causing a ripple effect on prices of goods and services:

“The price of electricity has tripled from 0.75 cents/KWh to 2.2 cents/KWh. The price of water has similarly increased by a factor of three. The price of natural gas for home heating and cooking has increased by a factor of four, and for vehicle fuel by a factor of ten. The price of flour has increased by a factor of 40.”

But before proponents of “crippling” Iran’s economy begin dancing in the streets, they should consider two factors.
First, while Ahmadinejad emphasizes that subsidy cuts are about distributing Iran’s economic wealth in a more equitable way, there is clearly another issue at hand: the subsidies have been a cancer in Iran’s budget for years.
As the USIP’s Iran Primer on “The Subsidies Conundrum” explains:

“Subsidies have been costly. They were estimated to eat up around 25 percent of Iran’s gross domestic product (GDP) of $335 billion in 2009. Subsidies for energy products alone accounted for 10 percent of Iran’s GDP in 2010, according to the World Bank.”

The Iranian government has attempted to cut the subsidies multiple times, but always been rebuffed by popular pressure.  But as GWU Professor Hossein Askari and NIAC President Trita Parsi warned in a New York Times op-ed from last year, the sanctions appear to be “throwing Ahmadinejad a lifeline” by providing him with the political cover to cut the subsidies and remove this cancer.  It is no accident that Ahmadinejad finally succeeded in cutting subsidies after the sanctions on refined petroleum were imposed.
Secondly, the response to the price shocks that have resulted from the subsidy cuts has been calm so far.  Jason Rezaian at the Global Post writes, “Despite steep price increases for everything from bread to gasoline, the Iranian public here has so far remained relatively calm,” though he cautions that “the impact of some of the price hikes, such as electricity and water, won’t be felt for weeks.”
William Yong at the New York Times echoes this point:

“Seemingly unaffected by a sharp increase in gasoline prices that went into effect at midnight on Sunday, drivers jammed the streets here on Monday after the government lifted traffic restrictions aimed at reducing severe air pollution.”

Compare this to one year ago when thousands of protesters turned out during Ashura to demonstrate against the injustices in the aftermath of the June elections – despite the massive presence of the riot police and basij.  US policymakers like freshman Senator Mark Kirk (R-IL) who want Washington to engineer economic suffering so that ordinary Iranians revolt against their government should take notice. Iranians were on the streets protesting last year not because of economic hardship but to fight for their right to basic civil liberties.  Perhaps it is difficult for ordinary Iranian citizens to think about the prospects of improving civil liberties when they are being squeezed from all sides and can’t even provide a simple noon-o-panir (bread and cheese) for their families.
As Askari and Parsi pointed out last year, sanctions proponents who “believe that increased economic pressure would cause Iranians to revolt against their unpopular rulers,” were engaging in “a fundamental misreading of the psychology of an embargoed people.”

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