Tyranny of numbers

Will Rouhani complete the reform of subsidies?

Posted in General, Inequality, Poverty, Subsidy reform by Djavad on September 9, 2015

In principle, the answer to this question should be yes.  Rouhani’s administration professes to be pro-market and is eager to shift resources from wasteful consumption to economic growth.  What better way to remove energy subsidies and use the proceeds to fund the cash-starved development budget?

That is in principle; in practice there are two problems.  First, the subsidy reform law within which the Rouhani government must operate is  the legacy program of the Ahmadinejad administration, which it has endlessly criticized and is loath to emulate.  So they have condemned the subsidy reform program without carefully examining its pros and cons.    In particular, they fail to understand the serious adverse consequences of subsidy reform on the lives of the poor, and the need to protect them, for example, by offering them cash transfers as compensation.

Which brings me to the second problem.  Rouhani’s economic team has condemned the cash transfer program using such unfortunate language as “fostering beggars.”  They must infuriate millions who depend on the transfers to make ends meet at a time that prices for energy and bread are rising and they unable to replace the lost purchasing power with higher wages.  The strong negative view of cash transfers in the current government is likely to prevent it from fully implementing a reform which is good for the economy, the government’s own budget and the environment.

Since coming to power, Rouhani has raised bread and energy prices (by roughly 50%) without increasing the amount of cash transfers (now worth less $15 per person per month).  The highest price increase has been for gasoline, from about 4800 rials for the average liter (counting liters sold at 4,000 and 7,000 rials) to 10,000 rials per liter (about 30 US cents), still half the US price and one fifth of the average price in Europe.

Oddly, in the last installment of the adjustment, in May 2015, it was the lower price that was raised (from 7,000 to 19,000 rials per liter) while the higher marginal price remained unchanged.  In the name of price unification, richer consumers were allowed to continue to get gasoline at half the price in Iraq and Afghanistan and one-sixth in Turkey, while the smaller users were asked to pay more.  I cannot understand the urgency to unify the price of gasoline when the smart card introduced by Ahmadinejad (a clue?) enabled  sensible price discrimination favoring smaller (and most likely poorer) consumers.

In this week’s Persian weekly Tejarat Farda (issue #145) Mohammad Mostafavi-Dehzooei and I argue (link in Persian) that removing all the remaining subsidies without increasing the amount of cash transfers is highly impractical.  We also argue that with proper targeting of cash transfers to the poor the amount of compensation needed to prevent poverty from increasing is reasonably small leaving some money for  government revenues.  It is true that cash transfers were too generous at the start of the subsidy reform program in 2011. This was a costly mistake that bankrupted the Ahmadinejad government, fueled inflation, and undermined the whole program (as I have argued before).  But now the transfers are worth only one-third of what they were before and therefore no longer too generous.

The main remaining problem with the cash transfer program is that it is paid evenly to the rich and the poor.  That Iranian parliament has mandated the government to stop paying the rich (easier said than done).  The government claims to have already dropped 2 million undeserving individuals from its roster.  This is good news but as the government goes down the very murky distribution of wealth the number of deserving people who are dropped by mistake will rise exponentially.  Surely not a wise thing for the government to be doing in the the month before the crucial  parliamentary elections this February.  In the end, lack of proper targeting of cash transfers is a poor argument for continuing to distribute energy subsidies in a highly unequal way.

Given the stagnant economy and large gaps in Iran’s social protection, I believe that raising energy prices further should be coupled with increase in cash transfers.  To seriously consider doing so, policy makers must first stop calling cash transfers beggar fostering.  To pay people a small share of their hydrocarbon wealth in cash instead of cheap energy (or bread) so they can decide how to spend it is a reasonable proposition no matter how unreasonable was the person who thought of it first.

4 Responses

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  1. Baddu said, on October 16, 2015 at 9:23 pm

    Dear Professor Salehi,
    On page two of your excellent (ERF) study “Iran’s Subsidy Reform” you write:
    ‘This attempt at reform ended [in] a huge government subsidy, estimated at upwards of $70 billion per year, or nearly $100 per person per year.’
    Should the last number read ‘$1000 per person per year?’ If, as I think, this was a clerical error, the order of magnitude should have by now alerted you or your readers!
    BTW, my estimate of this figure in 2010 is about double the figure you have come up with.

    • Djavad said, on November 2, 2015 at 9:36 pm

      Thanks for noticing the error. You are right, it should be $1000. I noticed it earlier but could not change it in the ERF working paper. I have corrected it for publication in a forthcoming book.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sda1g8bfubunjkx_jga@comment.wordpress.com” <comment+2i1eh_sda1g8bfubunjkx_jga@comment.wordpress.com> Date: Friday, October 16, 2015 at 8:23 PM To: Djavad <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “Will Rouhani complete the reform of subsidies?”

  2. Baddu said, on October 16, 2015 at 8:42 pm

    ‘…..targeting of cash transfers is a poor argument for continuing to distribute energy subsidies in a highly unequal way.’
    When would our learned academicians, who clearly see through the class biased nature of the continuing distribution of energy subsidies to cement, steel and above all petrochemical industries to the tune of tens of billion dollars a year, also see through a cabinet that heavily represents those same interests? Pretending not to favor ‘fostering beggars’, is the loftiest excuse for continuing to pocket colossal subsidies.

    • Djavad said, on November 2, 2015 at 9:43 pm

      Could not agree more. The discussion of energy subsidy vs. cash transfer has been turned into a debate about the ill effects of cash transfers- as if they have no link to energy subsidies. I read in the Donyaye Eghtesad of about a month ago a plea by Parviz Aghili, the CEO of Bank Khavarmianeh, urging the government to provide free natural gas to petrochemical producers. In the long run, sustaining market prices for energy without some sort of compensation is not possible.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sda1g8bfubtucpx60mw@comment.wordpress.com” <comment+2i1eh_sda1g8bfubtucpx60mw@comment.wordpress.com> Date: Friday, October 16, 2015 at 7:42 PM To: Djavad <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “Will Rouhani complete the reform of subsidies?”

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