Egypt: between populism and subsidy reform
Cairo, June 14, 2011
This is my first trip to Cairo since the uprising that toppled the Mubarak regime. The airport was unusually quiet and all Mubarak pictures are gone, but otherwise there are few signs of a country that has just experienced its most dramatic social upheaval since the 1952 revolution. Egyptians like to think of the uprisings as Revolution (“al thawrah”) which in Arabic signifies deeper social change than “enghelab,” the word Iranians use for revolution. But what has transpired in Egypt’s first six months of “revolution” pales in comparison to Iran’s 1979 Islamic Revolution. There have been no executions or mass exodus of the rich, and not even an overhaul of the high echelons of the bureaucracy, as happened in Iran. Egypt’s judicial system has taken the lead in calling the members of the ancien regime to account. So far it is moving cautiously; only 45 individuals are currently in jail or standing trial for their alleged crimes, including Mubarak and his two sons. If the judiciary can satisfy popular demands for justice, Egypt has a good chance for a soft landing on this side of the uprisings, and its judicial system may emerge as a strong pillar of its future democracy. If it fails to do so, revolutionary justice may take over and all bets would be off about democracy and restoring the economy to its previously robust growth path. No one seems certain how Egypt’s revolution will end. As de Tocqueville has said, “in a revolution, as in a novel, the most difficult part to invent is the end.” (more…)
More on Iran’s subsidy reform
This oped of mine on Iran’s subsidy reform appeared on the Brookings website on Thursday. Suzanne Maloney of Brookings also wrote a nice piece on the same program, viewing it as a possible solution to Iran’s economic problems, which is a fresh approach instead of the more usual view that we have come to expect from commentators in Iran and the West — as the harbinger of economic ruin. I think the program’s initial success to raise prices at one go without mass protests is noteworthy, and perhaps a model for other Middle Eastern countries to follow, but its overall success depends on two things: (a) whether consumers will use the cash rebate to pay their energy bills and buy local goods and services, like health and education, or spend it on luxuries imported from China, like LCD televisions; and (b) whether producers can manage to stay afloat, by hook or crook, without shutting down or laying off many workers, long enough for the economy to adjust to the new price levels. Both of these depend on complimentary economic policies that the government will introduce in the next few months to improve the business climate in Iran. As usual, reform of the markets for labor, credit and foreign exchange are at the top of the list for action.
Is inflation anti-poor in Iran?
This week Iran’s Central Bank announced that the annual inflation rate has dropped below 10%, so it may seem like an odd time to talk about how rising inflation might affect Iran’s poor. But if the government implements the subsidy reform law, as it has promised to do in the second half of this year (Iranian year 1389), inflation will most likely rise. The strongest objection to this reform is not that it will increase the rate of inflation, but that higher inflation will hurt the poor. If that were to happen, it would be the height of irony, for the entire scheme was proposed to promote social justice, not to take money away from the poor. From the point of view of social justice the best part of the scheme as it was originally proposed was that the rich would pay full price for energy and other basic goods while the poor received their subsidy as income. With that scheme, the poor would have gained, at least in relative if not in absolute terms. But the progressive cash-back scheme is no longer on the table, so the distributional effect of the subsidy reform very much depends on how inflation affects the poor versus the rich. So, the crucial question is this: will the inflation that follows the removal of subsidies hurt the poor more than the rich? I have not seen serious evidence that can answer this question (perhaps there is, but I have not seen any). To satisfy my own curiosity I review here the historical evidence on inflation and equality, which seems to suggest that in Iran inflation may not be the cruelest tax of all, as the saying goes. (more…)
Iran’s place in the world distribution of income
Branko Milanovic is a leading authority on the global distribution of income. His influential 2005 book, Worlds Apart provided the most comprehensive account of how global inequality has evolved over time. He has just completed the sequel (The Haves and the Have-Nots, Basic Books, forthcoming), which updates his earlier analysis using survey data on income and expenditures from 119 countries for 2005. He finds that despite rapid economic growth in China and India, two very large and poor countries, in recent years global inequality has remained constant and very high (Gini index = 0.80). I asked him to help me understand where Iran was located in the global distribution of income, and he produced this amazing graph. (more…)
Greater equity through redistribution: what can the targeting of subsidies do?
The Fifth Five-Year Plan of the Islamic Republic of Iran (1389-93, 2010–14), still under review by the parliament, has a clear goal for reducing inequality in five years– a Gini index of 0.35 for income. This is a substantial reduction from the high level of inequality that has plagued Iran in recent years. The law for targeting of subsidies, which was passed last January but is still in limbo, is the main instrument for reaching this target. It aims to raise prices of energy products to world prices during the plan period and redistribute half of the proceeds to lower income households. How radical would the redistribution have to be for the government to reach its inequality goal? (more…)
A good time for goodbye to subsidies
Everybody acknowledges that Iran’s $50 billion subsidy program cannot continue forever but many don’t think that the time to undo past excesses is now. Iran’s economy is in deep recession, external threats of sanctions and military strikes are on the rise, and internally the nation is in the grips of an unprecedented political crisis. Yet this week the bill to reform the vast subsidy program became law and the Ahmadinejad government is getting ready to take the plunge. (more…)
Off target in subsidy reform
This week the bill to target subsidies, intended mainly to reduce subsidies for energy products, left Iran’s parliament (majlis) for the Guardian Council. The Council has the last word on matters legislative, and may well decide to kill the bill because the government does not want to implement it with the modifications added by the parliament. President Ahmadinejad, known more for its populist inclinations than pro-market sentiments, has taken an unlikely position to reform Iran’s $60 billion subsidy program (more than 15% of national income) on energy, food, and a few other items. But the dispute over who should control the revenues saved from the bill’s implementation (the subsidy fund, for short) threatens to derail this historic effort to wean Iranians off cheap energy. If the bill survives the Guardian Council, it is sure to die in implementation. Raising prices for basic commodities in the highly charged post-election political atmosphere of Iran is difficult enough, an unwillingness government is not likely to forge ahead with doing so. (more…)
Reform of energy subsidies
At long last and after decades of talking about doing something about the subsidies, there is a bill before Iran’s majlis to target (but not remove) subsidies. I could not locate the bill itself but my impression is that it only addresses energy subsidies and not other subsidies such as food and medicine. So far only 5 of the bill’s 14 articles have been passed, but the government already has the mandate to raise prices on energy products over the next five years. The bill has been criticized from both the Right and the Left, which leads me to think it must be a move in the right direction. (more…)
The Ahmadinejad-Karrubi debate: and the loser is …
Statistics. Between the two of them it was hard to tell who won that debate on June 6, 2009. But statistics was a certain loser. Mr. Ahmadinejad provided a series of charts to defend his economic record (which, by the way, was not under attack that night) but Mr. Karrubi dismissed them by simply saying that his numbers were wrong. Most of the numbers I was able to see on the television screen seemed right to me. But, unfortunately, numbers were not the point of the debate. (more…)
A surprising result for inequality in 2007
Following the good suggestion by a keen reader, I went back to the data to see if the rise in inequality I reported earlier was due to the housing boom. It turns out that taking out all housing expenses from expenditures does not change the decile growth rates significantly. So it seems that the housing boom did not cause expenditures at the higher end to be exaggerated relative to the poorer deciles. In other words, the housing boom appears to have been inequality neutral. While doing these calculations I came across a finding that, if it stands, is good news for Mr. Ahmadinejad. (more…)
Tyranny of numbers 
7 comments