Tyranny of numbers

This Friday, as Iranians were getting ready for their day off, they were rudely greeted with a surprise government announcement — a sharp increase in the price of gasoline.  Within hours they in turn surprised the government by rioting in several small and large cities.  Worldwide, riots and protests almost always follow gasoline price hikes, Mexico in 2017 and Paris 2018 are the latest examples.  The price increase came with rationing and a two-tier price.  Rationed gas of 60 liters per month is set to sell for 5000 rials (500 toman) per liter and the free market gas for 30000 rials.  Rationed gasoline accounts for roughly one-third of the total supply of about 90 million liters per day, so, taking into account the much higher price of the free market, the overall price increase is more than 100 percent. The logic of the price increase is not in dispute, but the way it was done shows that an important lesson from the last price hike, in 2010, has not been learned.  The lesson is this: cash compensation is an integral part of the removal of subsidies, and for a distressed and incredulous public, government promises to pay are not the same as money in the bank.

For decades, Iran has had the dubious honor of being the country with the second cheapest gasoline in the world, second only to Venezuela.  Two days ago, at 10 cents a liter Iranian gasoline was one-20th of the price in Turkey, making it the most lucrative contraband export.   The minimum daily wage could buy about 13 gallons of gasoline, about four times more than what the Turkish minimum wage can buy.

Subsidizing gasoline is also highly regressive.  People in the top decile of the income distribution get more than ten times as much in gasoline subsidy as the poor in the bottom decile (see figure 6.1 in this article).  Add to these the environmental damage (last week Tehran schools were closed because of pollution), there is no question that it was high time that the gasoline subsidy was eliminated.

Energy price increases are often followed by protests by the poor.  This may seem at odds with the fact that energy subsidies are regressive but it is not hard to explain.  The fact is that energy accounts for a higher share of the total expenditures of the poor, so the price increase hurts them more that the rich.

Interestingly, Iran is one of the few countries with the experience of a peaceful increase in the price of gasoline.  In December 2010, the government of President Ahmadinejad jacked up the price of gasoline four fold, and, unlike this time, it added other sources of energy as well.  As I wrote at the time, the price increase was not followed by protests. The reason, as I explained elsewhere, an important reason for this was the fact that the removal of subsidies and (over)compensation happened simultaneously, on December 19, 2010.

The Rouhani government may have forgotten, it it ever learned it, the main lesson from the 2010 reform.  And the lesson was this: do not raise energy prices without making at the same time a commitment to compensate the poor.   Ignoring this important lesson, this time the Rouhani government opted to raise prices without such a commitment.  Instead, the government made an announcement that it would return all the earnings from the price increase to 60 million people.  In the event, protests did erupt the next day, on Saturday.

I am not sure that a commitment to compensate would have prevented the riots, but then, given the low credibility of a cash trapped government, why risk raising the price without coming up with a plan?

To be sure, Rouhani’s government has never liked the Ahmadinejad program, and many of the neoliberal economists associated with it have dismissed cash transfers as lacking economic and political logic and “fostering beggars.”

Taking the government at its word, how much money is there to distribute?  My calculations below indicate that, for the poor, it is nothing to sniff at.  It would more than double the cash transfer that the poor are getting now as part of the 2010 program.  Assuming that the higher price will reduce gasoline consumption to 80 million liters per day (2400 ml per month), about 30 million liters will go at the lower rationed price, bringing an additional 500 toman each, and the remaining 50 million liters per day sold in the free market would bring 2000 tomans each.  The total additional revenue would be 3.45 trillion tomans per month, which, dividing by 60 million, yields 57,500 tooman per person per month (compare this to the 45,500 toman that people are receiving now), or close to $1 PPP USD per person per day.   If prices for other sources of energy are also raised, it would probably double this amount.

As painful as the price hike is for Iran’s middle class, the transfers can make a difference for the country’s poor.  If and when they happen, they could bring back out of poverty about 1.3 million (my calculation) that fell into poverty last year (2018/2019).

What I fail to understand is why another — in my opinion superior — program that has been debated (link in Persian) in the Iranian press was not adopted.  The current method still gives some subsidy to people who own cars (30000 rials per car per day, to be exact). As such it rewards car ownership, which is not a good idea, and discriminates against those who do not own a car.  The proposal that made a lot of sense to me (and which I defended in writing and in the ecochat interview this past summer) would issue the smart cards to people instead of cars. It would then let those who do not own a car or do not use all their ration to sell their allowance to others in an organized market, perhaps linked to the ATM cards that people already have.

Beside being more egalitarian, it would have made the cash compensation part automatic and as a bonus let the market to set the price of gasoline.  More important, the government would be off the hook and would not get the direct blame for having jacked up the price (though the government would still affect the price by determining the total supply).  The invisible hand of the market would change the price as supply and demand shifted, freeing the political process from having to adjust it with much fanfare every ten years or so.

Whether this scheme was not adopted because of perceived administrative difficulties or lack of imagination, I do not know.