The Economic Overhaul: Ahmadinejad's Masterstroke?
by HAMID FAROKHNIA in Tehran
26 Dec 2010 23:51
[ 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 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.
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