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The Economic Overhaul: Ahmadinejad's Masterstroke?

by HAMID FAROKHNIA in Tehran

26 Dec 2010 23:5128 Comments
25_8908121328_L600.jpgRationalization program of unusual design serves multiple objectives.

[ analysis ] Once again, President Mahmoud Ahmadinejad may have confounded his adversaries without their realizing it. In the week since the so-called Subsidies Rationalization Plan took effect, there has been a chorus of derisive comments by sundry experts purporting to demonstrate the speciousness of the entire reform package. A closer look at the plan, however, shows that far from being a muddled and misconceived effort, it is a bold and well-considered scheme with very clear objectives -- albeit very disagreeable ones. In the first six months of the plan, the combination of subsidy cuts and cash handouts will eliminate some 60 percent of all subsidies, add vast sums to the government's coffers, help pay off government debts, create a new class of political supporters for Ahmadinejad's administration, and ensure his continued ascendancy beyond the 2011 and 2012 elections.

Ahmadinejad's "price rationalization," as it is being called in Tehran, is unlike any other liberalization scheme. From Latin America to East Asia to Central Europe, previous examples have aimed one way or other at ending economic distortions and inefficiencies by giving free rein to market forces. Economic reformers have traditionally sought to do several of the following objectives in tandem:

* (1) lifting all subsidies

* (2) implementing structural reforms, such as elimination of state-owned monopolies

* (3) ending prices controls, at least partially

* (4) liberalizing labor and capital markets

* (5) privatizing

* (6) reducing or minimizing government intervention

* (7) liberalizing foreign exchange markets

* (8) facilitating enterprises to restructure

Ahmadinejad is pursuing none of these objectives. For instance, we see an actual tightening of price controls. Likewise, industries will face higher utility and input costs, without any prospect for technological innovation and with no low-interest loans available. Even at the heart of Ahmadinejad's plan -- the elimination of subsidies -- we see a heterodox model: The government is giving cash handouts to nearly 58 million people. This is itself a form of subsidy, albeit liquid. (He promised last week to double those cash handouts next year.) The first question to ask is, What are Ahmadinejad's true objectives?

Before answering this question, a close examination of the available facts is necessary. Under the plan, the price of gasoline and electricity triples, the price of natural gas for cooking and home heating quadruples, and the prices for vehicular natural gas, diesel fuel, and water rise by factors of 10, 9 and 5, respectively. The price of bread flour has increased by a whopping 40 times.

As a result, water and electricity prices are now close to the global average, flour has reached the average, and diesel is halfway there. In sum, Ahmadinejad has almost immediately implemented 60 percent of the subsidies cut. What most people don't realize is that he was required by law to do so not in the course of three months but over three years of a five-year plan.

In addition, by compressing the planned schedule of cash payments for the first year of the rationalization plan to one quarter, each eligible recipient now stands to receive $44 a month instead of the original $10 -- a seemingly noble, but in reality politically motivated effort.

Ahmadinejad's Objectives

Ahmadinejad is pursuing multiple objectives with this scheme. First, by consolidating the initial steps of the Majles-approved plan from a year to a mere three months, he is hauling off to the treasury $4 billion in hard cash (that is, one-fifth of the $20 billion in cuts) -- a value that will grow geometrically with each passing year to the announced $100 billion ceiling.

Second, quadrupling the value of compensatory cash handouts supports clientelistic objectives. According to a study that appeared December 5 in the newspaper Khabar, published by Majles Speaker Ali Larijani, some four-member families stand to gain around $105 per month. These families are concentrated almost exclusively in villages and small provincial towns and among the lowest income quintile. They have limited expenses -- in particular, they use relatively little gasoline -- and thus stand to benefit from the combination of cuts and compensation. For all else, including the middle class and the country's beleaguered working class, there will be a net drop -- in some cases a catastrophic drop -- in personal income as a result of the cuts. It is no coincidence that it is those in the first group who voted for Ahmadinejad in large numbers in last year's presidential election. The current plan is a continuation and an expansion of an extreme-right strategy of mobilization from below.

Third, rising government income should ease the burden on creditors. The Iranian government owes tens of billions of dollars to banks, private utilities, and various subcontractors.

Finally, Ahmadinejad seeks to force compliance with his broader policies among the other conservative factions by playing the "national security" card with the reforms. The Majles has been largely silent on his administration's outright defiance of the law. Even the most outspoken legislators have found it next to impossible to question Ahmadinejad's handling of the subsidies, as can be seen in the published reports of the recent closed session of the Majles on December 22. After all, the very survival of the Islamic Republic is somehow tied to the issue now.

Opportunities and Perils

If the above objectives are realized, Ahmadinejad will in one stroke have changed consumption patterns, particularly in energy, from profligacy to thrift; drastically increased the amount of oil available for export; minimized the impact of sanctions; added tens of billions of dollars to both his government's coffers and those of his political allies; and strengthened his social base. This is no mean feat.

Still, there are many factors that could undo the scenario he hopes for. Among these are runaway inflation, rising unemployment, and urban riots.

The first could be set off by a spike in spending by those with extra cash in their hands plus increases in the price of finished goods (say, as a result of soaring transportation costs). This would be a rare case where rampant inflation is both demand-driven and supply-driven.

Unemployment could rise if there is a major economic slump, especially if factories start closing, a distinct possibility. Indeed, the industrial sector is critical for Iran's working class -- over eight million people -- not to mention the owners of private capital. The Majles has required the government to pay 30 percent of the proceeds from the cuts to businesses as compensation. That translates into $6 billion in the current fiscal year, a sum woefully inadequate to prevent the closure of many factories, let alone to support their restructuring through the adoption of new technologies -- one of the main prospects advanced in defense of the plan.

Many Iranian businesses now must respond on multiple fronts to what appears to be an economic offensive. There are the new utility rates they must find a bear. Not only has the government not accorded them lower fees, in the case of electricity they will be paying the new higher rates imposed on the heaviest-use consumers in the country. Next is the higher cost of inputs across the board. As diesel and gasoline prices skyrocket, so will transportation costs for their supplies. The general rise in inflation will constitute yet another worry. As for business loans, even before the commencement of the plan, few banks were willing to offer the affordable 12 percent interest rates nominally made available by law. They are even more unlikely to do so now that prospective borrowers are facing the very real threat of bankruptcy.

Ultimately, a combination of higher utility bills, increased unemployment, and runaway inflation could also cause riots in Iran's crowded cities.

There are indications, however, that government planners have anticipated many of these contingencies. According to the head of the subsidies elimination program, former Revolutionary Guard commander Mohammad Royanian, the government has singled out 35 key goods, including fuel and basic food items, for special attention. Large reserves are being maintained at storage sites around the country. This is undoubtedly aimed at reducing spot shortages and controlling market gyrations.

The preparations also rely on the human element. Ten thousand inspectors are being deployed as watchdogs over merchants around the clock to ensure prices are not raised beyond official strictures. Violators face heavy fines. (One Majles deputy has even called for the death penalty for those who "sabotage" the economic plan.) A heavy urban security presence has been installed as a deterrent against potential demonstrations and riots. And thousands of informers masquerading as ordinary cab drivers and pedestrians are reportedly gauging the public mood minute by minute.

The regime has been very sensitive to popular sentiment in the early stages of the overhaul. Potential labor unrest among truck drivers in the cities of Isfahan and Bandar Abbas was averted with the quick payment of bonus compensation before trouble could spread to other cities. Still, it remains to be seen how responsive the government will be in such cases down the road. Clearly, an overyielding approach could backfire just as badly as a heavy-handed one.

We now know that two advisory groups, representing two very different schools of thought, have vied for influence over the president and the design of the rationalization plan. One is led by Ahmadinejad's chief economic advisory board -- the Competition Council under the tutelage of Professor Jamshid Pajouyan, an economist with neo-liberal leanings who is considered the guru of Economy Minister Seyed Shamseddin Hosseini. The other is centered in a hitherto-unknown entity called the Network of Technology Analysts of Iran. The latter espouses a mix of anarchist and ultra-hardline positions -- calling both for free utilities for the poorest 30 percent of the population and the forced relocation of most of the capital's inhabitants. According to the far-right newspaper Ya Sarollah, which broke the story on December 8, the final reform package was the result of a debate between the two sides for Ahmadinejad's edification. In the end, the president took a little from the Islamo-anarchists and a little from the neo-liberals. As is customary with Ahmadinejad, we can anticipate that the plan will continue to evolve in the coming months, adapting to shifting circumstances as a work-in-progress of unprecedented design.

Hamid Farokhnia is a staff writer at Iran Labor Report and covers the capital for Tehran Bureau.

Copyright © 2010 Tehran Bureau

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28 Comments

Thank you for this analysis. It's informative, easily understood, very well done.

Observer / December 27, 2010 1:53 AM

"And thousands of informers masquerading as ordinary cab drivers and pedestrians are reportedly gauging the public mood minute by minute."
Reminds me of the German Democratic Republic, which crumbled although she had the Stasi and thousands of informers...

Unfortunately Mr Farokhnia does not mention the fact that foreign imports are subsidised by a completely unrealistic value of the Rial. Domestic businesses have certainly no chance to compete with the IRGC's profitable import business.
No reason given for the huge government debts to banks, private utilities, and various subcontractors neither. Perhaps he should have read what the Majlis reports on AN's huge embezzlements since 2006: http://www.khabaronline.ir/news-118773.aspx

Arshama / December 27, 2010 2:08 AM

Thank you for this. I really appreciate your well-balanced reading of this plan. One of the best and most enlightening pieces I read on this issue so far.

Ramin / December 27, 2010 2:50 AM

okay pirouz I admit, if they can pull it off WITHOUT massive backlash and negative consequences, it will be a grand achievement long overdue.

12th Imam / December 27, 2010 4:07 AM

The plan should be called " Robbing Ali to pay Mahmoud". The oil price in the near future will be all-important as ever.State corruption will be the undoing of this or any other plan.

pirooz / December 27, 2010 6:15 AM

Should have been gradual as promised. The anticipated impact can go the other way round; cut in real wages; low consumption; low revenues and low profits; business closures; non performing loans and a BASEEJ of unemployed!!!!

get ready for another revolution. Green economists and sociologists have a lot to learn and plan:

suggested readings:

Pakistan 1968.
Tunisia 1984
Algeria 1984

Naqi Akbar / December 27, 2010 8:14 AM

A crucial step that must be taken has not been taken: The rate of exchange between Rial and dollar is way too low and has been kept low artificially by the government. Some say it is due to the government fearing hyperinflation. But, I believe there is another at least equally important reason.

If rial is devalued, foreign imports become too expensive, hence helping domestic production which solves unemployment and makes people happier. But AN will not do that. Why? Because many of his supporters, particularly the IRGC- and Basij-linked mafias, benefit tremendously from cheap imports.

Add to this the utter incompetence, rampant corruption, and cronyism, and we may indeed get a revolution, because all the positive effects will be wiped out and only the loss of income, extremely expensive commodities, and hyperinflation will be left.

Mr. HF has done a fine job of analyzing, but it is incomplete. It draws a too rosy picture. It aint'.

Vaez / December 27, 2010 9:07 AM

I reiterate the concern of two of the readers about the lack of analysis of the subsidized import 'enterprise' ... it is also somewhat naive or too optimistic about sanction-adaptiveness of this plan, in terms of increasing the domestic product. It ignores the fact that Iran's production sectors, agriculture and industry are heavily import-dependent.

Naj / December 27, 2010 4:15 PM

A really excellent and insightful piece. TB would be a much better site if it published more of HF and less of Sahimi's rants.

Laleh / December 27, 2010 5:20 PM

A great analysis this is. Thanks! But it seems that the author thinks Ahamdinejad had actually thought about this subsidies removal thing beforehand, that is not true. ahamdinejad has no forecasting ability. He cannot even manage the firing of a minister (mottaki) let alone this monumental task of subsidy removal.

Amin / December 27, 2010 8:40 PM

What utternonsense and pro-IRI propaganda. The lifting of the subsidies shows that the regime is under pressure and the international economic sanctions are working. The regime simply has no more money and need to feed their brutal power base - the Basij.

The regime can kill the youth in numbers; but once regular workers such as truck drivers (as we see with truck drivers striking), taxi drivers, and ordinary people hit the streets; the regime can not slaughter them all. This is near the end for this regime and as a student of history, we know such dictatorial and oppressive regimes can not survive; regardless of how many people they slaughter. Regular people - poor people are suffering and they iterate this everyday in the streets - from stores to taxi's - and the regime is continuing to isolate itself and its people. This regime is a brutal regime that does not care for the welfare of its own people and continues to support terrorists instead of feeding their own people. These recent developments excite me to the prospect for a free and democratic Iran in the foreseeable future.

sisssss / December 28, 2010 12:51 AM

http/www.foxnews.com/politics/2010/12/27/cracks-start-irans-economy-touts-sanctions/

Interesting read for all

sissss / December 28, 2010 2:19 AM

http://www.foxnews.com/politics/2010/12/27/cracks-start-irans-economy-touts-sanctions/

Sorry I didn't post the complete link on my last post...interesting read for all!

sissss / December 28, 2010 2:21 AM

It's very early on in this reform, but so far energy consumption is seeing drops and that's a positive indicator.

Pirouz / December 28, 2010 3:48 AM

@Sisss

Let's assume that all the things you say are plausible. Quoting fox news as a source for your opinion is a kiss of death in terms of credibility. Now, I am not saying that other new sources are much better. No, I am just saying that fox news is one of the worst out there.

Green messenger / December 28, 2010 5:25 AM

Green messenger; Fox News is one of the most reputable news organizations in the world. To claim by simply quoting Fox News as losing my "credibility" is a falsity on the part of anyone who wants to make rational arguments. One must read the article and analyze the sources and contents of the news article.

sisss / December 28, 2010 6:28 AM

"Fox News is one of the most reputable news organizations in the world."

Okay, that was laugh out loud funny, but I agree with attacking the content rather than the spin machine it came from.

Kurt / December 28, 2010 9:55 AM

"Fox News is one of the most reputable news organizations in the world."

hahahahahahaha!!!!!!!!!!!!

lol / December 28, 2010 10:39 AM

The substance was not the point of discussion, as I said, let's assume its plausible. What I said was that Fox News is perhaps and if not, THE WORST news channel you could possibly quote from. Just look at a 1 minute report of Fox on my city Amsterdam, and you will laugh out loudly!!!! :)

http://www.youtube.com/watch?v=sTPsFIsxM3w

Green messenger / December 28, 2010 2:39 PM

And MSNBC or CNN are better? Fox News reports both sides of the issue on American politics rather than being one sided like the other news organizations (particularly MSNBC) and selective news reporting from an organization such as CNN. Sure, they lean to the right but they provide the critical thinking and dissenting viewpoints needed in a free society with a free press.

sisss / December 28, 2010 10:08 PM

Sisss

Read this Dec. 10, 2010 report from World Public Opinion.org:

http://www.worldpublicopinion.org/pipa/pdf/dec10/Misinformation_Dec10_rpt.pdf

Result of this study: Fox news viewers are the least informed.

B / December 28, 2010 10:51 PM

The idea that Fox news is impartial and credible is not just funny or hilarious, but also indicates how much Sisss knows! Anyone who relies on Fox News for his/her information cannot be informed! Fox News does not lean right. It is a far right organization with neo-fascists, Islamophobes, racists, etc.

Do not pollute these pages by promoting Fox News. Go to Fox News and stay there!

Vaez / December 29, 2010 12:05 AM

Did I ever claim Fox News was impartial? I claimed that Fox News provides the right and left view in U.S. politics. To claim that Fox News is full of "neo-fascists, Islamophobes, and racists show the narrow minded thought process of the likes like Vaez.

B: I never claimed their viewership are all intelligent; the U.S. electorate and population for the most part are uneducated about world affairs and science. Saying this, Fox News has the most diverse of viewers and provides both sides of the debate on critical issues. We don't need to make this about FoxNews except that the person who criticized the link I posted simply because it was from FoxNews lacks critical thinking skills and reasoning; we must evaluate news articles based on their content and there is a reason why Fox is #1 in all demographics and political groups. More independents and democrats watch fox news than the other networks.

Thank you for the interesting link B; I will read that PDF as I enjoy those types of topics provided by the PDF file.

sisss / December 29, 2010 1:12 AM

Name the "leftists," "progressives," or "liberals" that work for Fox News. I would like to know them!

Give the source for your claim that more independent and Democrats watch Fox than any other.

I repeat again: Fox News is full of Islamophobes, racists, and far-right reactionary right wingers, and not just Hannity, Beck, O'Reily who are! Often, they brazenly lie, mix it with grand - really grand - exaggerations. That is their version of "fair and balanced," not in our universe but in a parallel universe detached from ours.

When you make an outlandish claim, you must stand by it when criticized. Yes, this is not about Fox, but about what you know and where you stand.

vaez / December 29, 2010 8:45 PM

Since when has Ahmadinejad gone through with his plans? There are numerous programs that he has proposed and satrted with great fanfare, only to be forgotten in a few months and left undone. He just wants attention, and he's getting it.

Anonymous / December 31, 2010 1:54 AM

Vaez, what I stated were clear facts. Not extraordinary claims.

Some leftists, progressives, liberals and moderates include the following: Juan Williams, Alan Colmes, Geraldo Riviera, Bob Beckel, Kirsten Powers, and the numerous paid consultants and advisers they have on their shows consistently who are Democrats such as Marc Lamont (I believe is his name)..

More independents and democrats watch Fox News Channel because it is more entertaining and provide both sides of the view. I myself as such a moderate Democrat who decides issues on the issues rather than them being "Democrat" or "Republican". The evidence that more independents and democrats watch Fox News Channel and are clear, the ratings and demographic numbers!

Remember, more Democrats and Independents in TOTAL SHEER NUMBERS watch Fox News than the other networks...:

http://www.mediaite.com/online/fox-news-audience-grows-among-republicans-and-independents-cnn-and-msnbc-down-in-all-categories/

http://pewresearch.org/pubs/1395/partisanship-fox-news-and--other-cable-news-audiences

http://www.dickmorris.com/blog/fox-news-reaches-across-party-lines/

http://tvbythenumbers.zap2it.com/2010/07/26/fox-news-1-overall-cable-news-network-in-primetime-but-last-with-african-americans/58200

http://publicpolicypolling.blogspot.com/2010/01/fox-leads-for-trust.html

Sweety, don't try to use your brain cells too hard. These are clear facts no one disputes. For you not knowing the truth demonstrates that it is you that not only doesn't live in another parallel universe, but you don't seem to exist at all.

sisss / December 31, 2010 4:52 AM

Iran has come a long way to become like the West by having people with "anarchist and ultra-hardline positions" views setting policy. We call them the Tea Party.

Amu / January 2, 2011 4:15 AM

SiSSS

Fox news????? need we say more.

For your information, cutting Iran's subsidies has been talked about and suggested since the 1990's. Ahmadinejad promised it in his first term and was criticized for postponing it until after his re-election. Now, you come along and say it's because of the sanctions that were just passed, as if the world began this summer.

Anonymous / January 5, 2011 12:08 PM