MR
27.12.10
Iran's Subsidy Reductions:
Upon Whom Will the Costs Fall?

by Kevan Harris

The long awaited liberalization of energy commodities in Iran has finally begun.  President Ahmadinejad stated: "At this stage, we don't want to free prices, rather we are going to regulate and reform them."  How regulated will this new system be?

Iranians with private cars get a monthly ration of about one full Iranian tank of gas (in the newer stylish Peugeot) at around $1.50/gallon; beyond that, the price goes up to $2.60/gallon.  The price is not floating -- it is still set.  Additionally, what is not being covered in the Western media is that all sorts of bonuses and extensions of monthly ration limits are being granted for now -- essentially this is a way of cushioning the shift to higher prices.

For instance, licensed taxis get a monthly ration on their "smart card" of 130 gallons a month, and a bonus of more than 100 gallons for them has been announced -- that's a hefty increase, and it may placate the perennially grumbling taxi drivers for now.  Private drivers (including many who moonlight as gypsy cabs) get a bonus of 13 gallons -- not even a full tank of gas for an Iranian car, I am told (I never developed the fortitude to drive in Tehran, I must confess, and thus never owned a smart card).

But let's face the facts: Iranians who have long priced in cheap gasoline and other energy sources for their budgets are now confronted with a huge shift in costs.  Some will cope, others will be hurt.  The government is giving around $40 a month to every individual via personalized bank accounts, which can now be withdrawn by Iranians from the very handy ATMs that are available near most city streets.  It is said that around 80% of the country are getting these payments -- we will see how accurate that number is as time goes on.  Comments in the blogosphere are interesting -- some Iranians writing "this oil is the nation's," which they take to mean that subsidized gasoline is a citizenship right.  US citizens also expect cheap gas as a (god-given?) right.  The question is not whether this is true but how particular citizenship rights are construed.  Rights are a matter of politics, not providence.

Will this lead to inflation?  Most certainly -- the question is how much and where it is concentrated.  One worry I have is that the cash payments are not indexed to inflation currently, though the government could make changes to this in the future.  As things stand now, the purchasing power of $40 a month (in tomans) will be inflated away over the next 4-5 years.  The government has promised to spend a portion of its freed revenue in the health system -- let's hope some in the majles will remember they promised that and hold them to it.

Because here's the rub.  When the government pays the difference between the actual costs of goods and their subsidized prices, it decommodifies a lot of the burdens of daily life.  What is happening in Iran now is a re-commodification of life, and as we know from Karl Polanyi, the attempt to embed daily life in the market can lead to a "double movement" -- a reaction against the marketization of previously uncommodified social practices.  What Polanyi never analyzed very well is the share of burdens of commodification of daily life: upon whom will the costs fall?  The answer to that question is not a given -- it depends on the distribution of power in society.

According to witness accounts, people are going about their business.  I would discount intermittent media reports of unrest, because (1) griping is an Iranian art form and (2) the outside media is operating in a particularly inane manner here.  For instance, a BBC reporter in London who phoned in a report to NPR about Iranian woes due to subsidy reductions got two of his major facts wrong.  One, he said that subsidies in Iran started in 1980, when in fact a subsidy of at least a few basic but important goods goes back to the Shah's time.  The Shah was most likely emulating the more populist regimes of Egypt and Syria in the 1960-70s, which had rather generous subsidies for bread (ah, the good old days in the Arab world).  Two, the current subsidy regime was originally a policy implemented as a reform of the strict rations and black-market corollaries of the 1980s Iran-Iraq War era.  So this is not a policy the government has wanted to enact since 1980, but rather since 1989 once the era of reconstruction commenced.  I would have hoped that a Brit, whose welfare system is basically a legacy of World War II, might see the similarities between his country's experiences under duress and the social policies that resulted in Iran as a result of the Iran-Iraq war and its legacies.

But, back to the present, I am concerned that the subsidy reductions as currently demarcated will lead to increased inequality in an already polarized middle-income country.  The bottom line is this: if the point of this plan is to get people to consume less of these goods, then the government will achieve its goal.  Economist Saeed Laylaz is telling the Los Angeles Times that traffic will be less congested in Tehran -- the silver lining for sure, and something that also occurred after the summer of 2007 when gas rationing and price tiering was first introduced.  But if the point of the plan is to "get the prices right" and kindle economic growth, the government will be sorely disappointed.  Furthermore, the fact that everyone in Iran is together experiencing this seemingly arbitrary act of the state could form a powerful collective grievance if anything goes wrong in its implementation.  Unfortunately, our analysis of the state capacity in Iran is dominated by hearsay and axe-grinding, not sober empiricism, so don't expect much from the experts.


Kevan Harris is a Ph.D. Candidate in the Department of Sociology at Johns Hopkins University.  He travels to Iran frequently and recently returned from a year-long stay in the country.  Cf. "Proyecto de Lineamientos de la Política Económica y Social"; "Raúl Castro: 'Las medidas que estamos aplicando están dirigidas a preservar el socialismo'" (CubaDebate, 18 December 2010); Patricia Grogg, "Socialism Needs More Taxes, Fewer Subsidies" (Inter Press Service, 20 December 2010); Camila Piñeiro Harnecker, "Risks in Expanding Non-state Enterprises in the Cuban Economy" (The Bullet, 6 December 2010).
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