Tyranny of numbers

The recent decision by the government to merge several ministries has ignited a fresh round of dispute between President Ahmadinejad and his conservative critics, but the controversy has been all about whether the president has the authority to merge ministries and very little has been said about the actual merits of the proposed mergers.  It now seems clear that the Guardian Council and the Parliament will have their say on the merger (see this report in Persian), but in the highly politicized environment in Tehran, I doubt that the merits of the proposed reorganizations will get the attention they deserve.  The stated objective — to cut down the size of the government — is unlikely to be realized beyond cutting the size of the cabinet.  I am not aware of any downsizing dividend from the “dissolution” of the Management and Planning Organization two years ago.  (Incidentally, that decision was made in a similar manner to these mergers, but at the time it was the reformers who questioned the government’s authority to change the line up of the ministries.)  As far as I know, MPO’s bureaucracy is still in place.

The merger between the Ministries of Labor (MOL) and Welfare (MOW) raises important questions that go beyond the turf issues that are being hotly debated.  Work and welfare are intrinsically bound in laws and institutions of a country as they are in people’s lives. Economists have recognized the link between supply of labor and the level of welfare not working.  The idea is very simple: the higher the level of welfare while not working (the “reservation wage”), the lower the incentive to work.  The British colonial authorities in Africa discovered as much a long time ago when they imposed a hut tax to “persuade” African subsistence farmers to work in their mines.

Classical economists believed that in the early part of the Industrial Revolution labor supply was determined by population growth, which, because of diminishing returns, kept living standards in the rural areas (the reservation wage) low, and sent large numbers of people looking for work in industry.  Gradually, as the Industrial Revolution passed its Dickensian phase of low wages and worker misery, most industrial societies adopted programs to care for the unemployed, the elderly, and the disabled.  Today the tradeoff between effort and social protection is now recognized as a central issue in economics and in public policy.  On the tradeoff between work and welfare conservatives stress personal responsibility and are generally against publicly provided welfare of any kind because it reduces the incentive for people to work, while liberals seek a compromise between taking care of those in need and work incentives. The welfare reform of the 1990s in the United States under Clinton was a liberal compromise between these two tendencies in American politics.

In Iran, our entire approach to balancing the incentives for work and provision of welfare is very different from that of the industrialized countries.  The way our political dialogue has been conducted since the Constitutional Revolution is that the responsibility for individual welfare lies with the government, not the individual.  The rise of oil revenues has further tilted this debate in the direction of government responsibility.  Oil revenues thus not only raise the reservation wage directly, by providing benefits to people not working, they also raise it indirectly because they shift the responsibility for welfare from the individual to the state.  Before the subsidy reforms of 2010, various forms of subsidies affected the reservation wage, after the reform cash payments do it more effectively.

How is this related to the merger of ministries?  The policies pursued by the Ministry of Welfare affect the reservation wage while a separate Ministry of Labor is concerned with the incentives to work.  The coordination of policies dealing with work and welfare may work well in two separate ministries in societies in which the relationship between work and welfare are widely acknowledged, but in Iran a single ministry might just be what we need to take seriously the tradeoff between work and welfare. The current division of tasks between MOL and MOW reinforces the expectation that MOL’s task is to generate jobs while MOW attends to their welfare.

Whatever its original motive in merging the two ministries, the government has a unique opportunity now to use it to make a statement about the need to balance the provision of public welfare with the incentives for work, and the role of public policy in mediating the tradeoff between individual incentive to work and the desire for comfort.  Affirming the role of personal responsibility in determining life outcomes is particularly important in view of the progressive redistribution of incomes that has taken place as a result of the subsidy reform program, The low income and the lowly employed Iranians have doubtless interpreted the monthly deposit of cash in their bank accounts as the first installment of their share of the oil wealth, sending a strong message contrary to personal responsibility, that their standard of living can increase without any increase in their expenditure of effort and any change in the national employment picture.

Last December, when he announced the start of the subsidy reform, President Ahmadinejad promised to make employment his top priority in the coming year.  The merger of MOL and MOW offers him an opportunity to make it clear that his promise to improve employment prospects was not to create public jobs, that the government’s responsibility to employment is not to create jobs but rather to prepare the conditions that would encourage private employers to do so.  The most important task in this regard is to engage the public in the debate on the balance between the individual incentives to work and the public provision of welfare.  There are positive lessons the  government can draw from its experience in selling the subsidy reform program to the public. International experience on the subject is, as always, invaluable, but in the end this is a problem that requires local solutions designed by people familiar with the local conditions and the national mood.