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March 29, 2011

Subsidy Reform & Regime Resilience in Iran

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Traditional rules dictate that all politics is local.  As such, most politicians seek to produce periods of stability or popularity before enacting controversial policies. Mahmoud Ahmadinejad has consistently bucked tradition (and long-standing political red lines) in the Islamic Republic, instead making himself a force to be reckoned with on the basis of his audacity and unwillingness to be sidelined.  The most recent example of Ahmadinejad’s assertiveness can be seen in Iran’s landmark subsidy reform plan. 

Against the backdrop of region-wide protests, political instability, and an economy slowed by populist practices, Ahmadinejad received the blessing of his benefactors – Ayatollah Khamenei and the IRGC – to introduce Iran’s most significant economic reform initiative since the 1980’s: eliminating subsidies on a range of staple commodities, and depositing cash directly into the bank accounts of Iranian citizens.  Though still in its infant stages, the plan demonstrates the interrelationship between Iran’s economic realities and the government’s efforts to remain in control.


What Just Happened?

Subsidies have long been a burden on Iran’s economy.  Originally designed to fulfill the government’s promise to distribute oil wealth among the people, Iran has offered unrealistically low consumer prices for energy and foodstuffs since reforming its war-time rationing policies.  Presidents Rafsanjani and Khatami recognized the failure of subsidies to promote social justice and equality – mantras of the 1979 revolution – but neither was able to achieve reforms, despite being acknowledged as necessary across Iran’s political spectrum. 

Enter Ahmadinejad, who poached the best ideas of his political opponents and sold them as his own.  After a first term littered with populist patronage and poor planning, the burden of governing has bred a degree of economic pragmatism.  As such, the plan’s objective is to ease the financial burden of subsides on the treasury and utilize released funds as follows: 50% paid to Iranian citizens in cash benefits; 30% allocated to industries most affected by price shifts; and 20% returning to the treasury. Reset prices are slated to reach market levels by 2015, and the plan will be the key process shaping Iran’s economic health.


Initial Success

Subsidy reform will help reduce distortions in Iran’s economy, and thus has the potential to address long-standing problems plaguing economic performance.  Apart from financial benefits to the treasury, issuing cash deposits across the population helps maximize successful implementation by reducing the political space for factional feuding.  To date, new pricing has moderated consumption of energy and foodstuffs, and public transportation use has increased exponentially.  The plan’s short-term success also demonstrates a surprising degree of government functionality and stability.

Iranian citizens only recently received their new utility bills, and the Norooz holiday brings everyday life to a crawl.  It therefore remains to be seen if the plan’s initial success carries over into the new Iranian year.  If history is any indication, economic grievances alone will not be the casus belli for unrest.  Iranian society has been under emergency conditions for so long that many have learned to endure.  And the boost in cash on-hand among poor Iranians likely helped mitigate unrest as prices increased. 

In the short-term, the plan helps reduce waste and poverty – no small feat given Iran’s track record of state inertia and bureaucratic red tape. Executing reforms with minimal drawbacks allows the government to claim a legitimate achievement despite domestic and international pressures.


But the Jury is Still Out

With the political will for subsidy reform in place, the Iranian government must overcome the practical obstacles to its implementation.  Despite claiming altruism, the government’s plan has uncertain social consequences.  Subsidy reform is expected to produce significant inflation – through uneven price controls, and increased liquidity as the large sums paid out raise the money supply.  With higher prices likely to follow, middle class purchasing power will decline.

The plan is also likely to raise unemployment, as higher energy prices may cause producers to downsize or shut down.  The primary losers in such a scenario: the youth and the poor – historically the backbone of Iranian political opposition (along with bazaaris). 

Perhaps the greatest risk of cash handouts is increased corruption. The plan enlarges the state apparatus to issue cash deposits, but fails to outline a concrete method for avoiding distortions.  Iran’s history of economic (mis)management demonstrates high potential for corruption – why would the Ahmadinejad-Khamenei-IRGC troika assume political risk if they didn’t plan on controlling the rewards? – and this could undermine the intended impact of corrective measures.

Maximizing the plan’s success will require additional measures to liberalize economic policy – a difficult task in the face of sanctions and regional unrest.  Without further reforms, the plan will become a stopgap measure for deeper economic imbalances.  New reforms can help domestic producers stay in business without exacerbating unemployment, while increasing the likelihood that consumers use cash deposits to offset higher prices – thus ensuring a modicum of increased social justice and equality.


Looking Ahead

Though increasingly unresponsive to the political, economic and social aspirations of its population, the Iranian government is not unaware of their grievances.  Long before subsidy reform, the government – through reconstruction, reform, repression and revolutionary fatigue – has kept its finger on the pulse of its restive population.  It thus managed to lower expectations to a point where many Iranians grudgingly accepted their flawed system because it was preferable to uncertainty and chaos.

The contested 2009 election changed this paradigm. Since then, the government has sought to reassert authority through force.  Depending on how the modalities of subsidy reform play out, it may also use new revenue to buy time – literally and figuratively.  If cleanly executed, reform could provide a foundation for sound economic planning. But if it follows the negative trajectory of state-society relations, the plan could become another catalyst for mass malevolence toward the government. 


Reza Marashi is Director of Research at NIAC and a former Iran Desk Officer at the U.S. Department of State.  The Iran Working Paper Series is supported by the Rockefeller Brothers Fund, the Ploughshares Fund and the Norwegian Foreign Ministry. 





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