It’s about the Price of Watermelons: Subsidy Reform in Iran

By Reza H. Akbari and Monica Witt
Contributors
March 28, 2011

On March 20, as Iranians celebrated Norooz, marking the beginning of spring and the start of the Persian New Year, Supreme Leader Ayatollah Ali Khamenei proclaimed that this would be the year of “economic jihad.” Last year, in an attempt to combat international sanctions, the Iranian government started a five-year plan to phase out costly energy subsidies. However, the flawed implementation process, coupled with the country’s tumultuous socio-political situation (witnessed during the February 25 and March 1 protests), could lead to more dissent and promote increasing anti-government demonstrations. Both Khamenei and President Mahmoud Ahmadinejad realize that the burdens of the economic sanctions and increasing unemployment will play a crucial role in Iran’s political situation.

In the region’s current state, the fallout of Iranian subsidies could cause Iran to follow in the regional upheaval that led to the fall of autocratic leaders in Tunisia and Egypt. Conversely, Ahmadinejad's cash handouts may strengthen his base of support. The subsidy reform program could become the government's method of controlling the flow of cash, benefiting those insiders who support the government–khodi-ha–and excluding those who contest it–gheir-e khodi-ha. Further, the subsidies could be used to manipulate the electorate: Ahmadinejad has already indicated that the reformers would take away the subsidies and cash payments to the lower class if they gain power.

Background

“This revolution was not about the price of watermelons,” Ayatollah Khomeini once famously responded to an aide who was concerned about inflation. His belief was that the Islamic Revolution stood for loftier ideals than the price and availability of consumer goods. Ironically, the current regime's struggles have centered on just that—the price of watermelons.

Since the end of the Iran-Iraq War, three Iranian administrations have struggled to cut subsidies and relieve pressure on the government budget. In the early 1990s, Hashemi Rafsanjani, a self-labeled pragmatic-conservative, sought to revive Iran’s post-war economy through the reform of free market principles and the re-opening of Iran to foreign investment. Ultimately, the prices of utilities and consumer goods were kept down in order to pacify a war-weary society. Rafsanjani’s reformist successor, Mohammad Khatami, also tried to do the same but was unable to garner approval for his subsidy reform program in the Parliament.

Ahmadinejad is dealing with a divided ruling elite and a populace that is distrustful of any added government interference in their daily lives—a monumental challenge to any subsidy plan. Despite the turmoil that occurred after the disputed 2009 presidential elections, Ahmadinejad's administration is determined to move forward with the program by implementing a five-year subsidy phase-out plan by the end of 2015. Economic sanctions levied against the country, along with excessive rise in consumption have been the prime motivators for implementing this plan.
The Iranian government is planning to cut up to $20 billion worth of subsidies within the first year. Authorities have allotted 50 percent of subsidies for those who qualify for government assistance, 30 percent for industries, such as oil and medical supplies, which rely heavily on subsidies. The remaining balance will go to the Iranian Treasury in order to reduce the country's dependence on oil.

Problems at Hand

Perhaps the most controversial part of the plan is the “handouts,” which the government has labeled “cash transfers.” Up until now, subsidies have helped everyone in the country, rich and poor alike. Implementing “targeted subsidies,” is the Iranian government's attempt to reach individuals who need help the most: the financially deprived.

The process of deciding who qualifies for the program is flawed. Prior to the launch of the program, the Iranian government initiated a financial survey in order to gather data on the income levels of each Iranian household. According to many experts, including Fariborz Raisdana, an Iranian economist arrested and then freed after criticizing the targeted subsidies, most individuals simply lied about their income levels in order to qualify. Others refused to even participate, which could be a result of the high level of distrust between the people and the government.

The Internet-based subsidy registration process presented a further complication when so many attempted to submit information to the system at the same time. The website, unable to handle the large amount of traffic, frequently crashed. Combined with a registration process that was either too difficult or too confusing, many people still struggle to register and receive their monthly allowances.

In addition, the Internet-based surveys did not consider the differences in the cost of living among families; two households with the same income can have very different expenses. For example, one household might have a family member who is suffering from a chronic disease and would, therefore, have to spend the majority of their income on medical expenses.

The government has distributed $40 a month per qualified individual, an amount that may appear to be significant for about 20% of the population below the poverty line, but will ultimately disappear under Iran’s projected inflation rate of 20%.

The Potential Impact

The first unsubsidized gas utility bills were recently sent out to Iranian households. Many were shocked to see a drastic increase in the monthly bill despite the continuous claims from the Iranian government that lifting the subsidies would not cause an increase in energy prices. According to a report by Jahan News, a person living in a 90 square meter apartment who paid $ 3-4 a month will now pay around $ 97 for the household’s gas consumption. With this new increased financial strain on the average citizen, it is possible that the Iranian government will face a heated backlash from the people.

Although the economic situation in Iran differs from that of Egypt and Tunisia, the Iranian government will have to navigate various problems produced by reform. Thus far, the peoples’ reaction to the outcomes of the program has been subdued but the continued economic pressure might result in new protests affecting a wide range of Iranians.

Reza H. Akbari is a M.A. Candidate at the George Washington University's Elliott School of International Affairs, majoring in Middle East Studies. He has previously served as a Program Officer for a prominent non-profit human rights organization in Washington, D.C. focusing on human rights issues in Iran. He has also served as a research assistant at the Woodrow Wilson International Center for Scholars.

Monica Witt is a M.A. Candidate at the George Washington University's Elliott School of International Affairs, also majoring in Middle East Studies and in her spare time she focuses on Iranian Studies/Literature. Monica currently is an intern at AMIDEAST where she assists the Iraqi Fulbright nominee and grantee Program Assistant, prior to which she served in the U.S. Air Force.

This image is being used under Creative Commons licensing. The original source can be found here.

Comments

In reference to this statement:

Many were shocked to see a drastic increase in the monthly bill despite the continuous claims from the Iranian government that lifting the subsidies would not cause an increase in energy prices.

Doesn't the mix message from the Iranian government compound the issue of reducing subsides? Certainly one would feel blindsided by the increase in the monthly bill. Does the mix message suggest competing goals by the Iranian government, e.g. political stabilization and economic inflationary pressure?

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