Ahmadinejad -- Free Marketeer

[ comment ] It was hard to believe, but they were on television: Mahmoud Ahmadinejad and three Iranian economists discussing subsidy policies and the administration's plan to remove subsidies within three years. As is his custom, Mr. Ahmadinejad spoke matter-of-factly in a tone that suggested no one else understood the problem as well as himself and no one else had anything of value to contribute to the debate.

The three economists listened attentively to Ahmadinejad as he lectured on the waste caused by current subsidization policies and the fact that because of artificial prices any investment was hardly justifiable. He told his audience that a free market was the "best distribution system to guarantee social justice."

"Of course we should be worried," he went on to say, "because the bureaucratic system is always after expanding its influence and increasing its monopolies."

As surreal as this sounds to anyone with any knowledge of the history of the Islamic Republic's economic policies, this was indeed real -- no need to pinch oneself to awake from some strange dream. News of the panel discussion was reported in the papers the next day. So yes, Ahmadinejad the Populist did lecture Iranians on a free market economy -- and it wasn't just talk.

Recently, his government put into motion a policy that would eliminate subsidies for fuel, energy and water in three years. At that time, the government would redistribute 60 percent of the amount saved in the form of cash handouts to members of the five lowest income groups. Ahmadinejad claimed that this would guarantee "small government" while securing "social justice" at the same time.

While such plans may appear balanced, many Iranian economists remain skeptical. For one thing, some question Mr. Ahmadinejad's incentives: Why does he want to do this now? On several occasions in the past, he has rejected expert economic advice and even dismissed existing principles of economic theory as "Western ideology, which has failed miserably." His solution was to devise an "Islamic economics theory," tailored to Iran's socioeconomic needs.

Rising oil prices gave his government a genuine opportunity. Incredible surpluses could have been used to boost economic development and help it reach a sustainable growth. Instead, his government set a record in wasting this revenue and initiated a series of disagreements with Majlis, the Iranian parliament. He spent money like water.

In those days, speaking of the free market as the "best distribution system to guarantee social justice" was heresy. It is difficult to believe that the president assumed office believing in free market economy. It seems that volatility of oil revenues, the huge expansion of government, and the resulting fiscal problems hold a more significant role in prompting his new-found love for the free market than a genuine belief in free market ideas.

Regardless of his motivations, this will be a great step toward economic prosperity for Iran - if the policy is implemented properly.

As it happens, Ahmadinejad has his own ideas about the proper execution of this policy, which leave much to be desired by an even larger group of skeptics. His government has suggested using 60 percent of the amount it saves as a result of not paying subsidies, to pay direct subsidies to low-income families. The question is: "who qualifies?"

Government officials want to give these cash handouts to families in the lowest five deciles of household income, based on the premise that only low income-families are qualified to receive support. However, the way they propose to identify these families is worrying. While economists can roughly estimate the number of households in these five deciles, it is almost impossible to use this to identify those households. Even if the government wants to rely on data and household budget surveys, some households might use a bit of "creativity" to qualify.

To offset this possibility, the government plans to give the handouts to households who receive services from social security agencies and organizations such as the Committee for Imam's Assistance and other agencies run by ultra-conservative groups, who are more concerned with the poor's political loyalty rather than their need for help. A growing slice of the population is concerned that the government would use these cash handouts to strengthen its political support and to punish the urban middle class.

In truth, if subsidies are removed a large number of Iranian households with fixed income, particularly clerks, teachers, and government employees -- the political backbone of the "Green" reformist movement -- will see a dramatic plunge in their purchase power and perhaps fall below the poverty line. Ahmadinejad's true purpose could likely be to punish these families and to get rid of government's obligations toward them in order to cultivate his own support more efficiently.

Such thoughts, and the fear of unleashing an inflation that would inject a major shock to Iran's malfunctioning economy, have promoted many conservative statesmen to oppose the government's plans, calling for cash handouts for all Iranian families. Sadly, their efforts have fallen flat, and now the government has absolute power to decide to whom such handouts should be allocated. The implementation of the law is based on the Ahmadinejad administration's interpretation of it. Majlis does not have any right to interfere now.

By exploiting the logic of small government, Ahmadinejad has gained yet another instrument to control Iran's economy and to interfere in the daily affairs of Iranian households. It is naïve to assume that the outcome of this move will be limited to economic consequences for Iranian society. Ultimately, there is much doubt that the new policy can achieve its announced targets. A liberalization of consumer markets is not the only step on the road to economic development. Such a step is useless without free foreign trade and a realistic approach to currency exchange and interest rates.

Ahamdinejad might seem to be economically enlightened but his ministers are not. His minister for housing recently boasted that his goal is to reach a zero price for land in Iran. His minister of finance went on record to claim that the exchange rate for the Iranian Rial against the US Dollar should be modified to reflect the strength of the performance of Iran's national economy while economists are whispering that the real exchange rate would in fact devalue the rial.

Given these realities, the government's reticence on divulging the details of this new policy is alarming. Ahmadinejad himself accepts that the announced plan is overly vague, but he was never one to be concerned with economic realities. He brushed aside economists' concerns by saying, "When these challenges come forth we shall deal with them." He seems to forget that his government's record in dealing with these challenges is far from reassuring.

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