Contrary to what most mainstream U.S. newspapers and The Economist have printed in recent months, Iran's subsidy reforms have been a failure thus far. This is not because Iran does not need subsidy reform (it certainly does), but because the reforms have not been implemented effectively. Back in December 2010, a massive subsidy reform known as the “Subsidy Smart Plan” was put into effect in Iran, radically changing a system put in place soon after the Iranian revolution in 1979. Subsidies to the Iranian people, mostly for food and energy, have grown substantially since then, and were estimated to have reached as high as 25% of GDP in 2009. In fact, before these subsidy reforms were enacted, Iranians paid among the lowest price for gasoline in the world.
In particular, The Economist cites the International Monetary Fund's recent glowing report on Iran's subsidy reform, and points to these reforms as a way to lower domestic energy consumption, increase growth, boost competitiveness, and free this 25% of GDP for more productive purposes. Unfortunately, this argument is based on faulty assumptions. If the IMF report were accurate, if the Iranian government followed through on their subsidy reform plan, and if it were implemented in a way as to avoid major domestic unrest or civil disobedience, this analysis would have merit. However, this is not the case.
Firstly, the IMF's recent report on Iran's subsidy reforms is shoddy analysis. With all due respect to IMF workers, the IMF relied solely upon the Iranian government and official government news websites for its analysis, and thus fell short. A look at some less biased Iranian media sources shows a wholly different picture on the ground. Prominent analysts outside and within Iran generally derided the report.
The initial reaction to the subsidy cuts from the Iranian people was muted, however. This was in part from the temporarily increased police presence on the ground, and in part due to the direct cash stipends ($80 over two months) given to each Iranian to help them cope. However, the money is insufficient, and Iranians are now trying to wrap their heads around energy and food prices that have gone up as much as 500% from their pre-reform levels. It is hard to convince a family accustomed to having electricity and gas for the past 20 years that they should suddenly go without it. This has caused civil disobedience because some Iranians are simply not paying the bill when it arrives.
Iran's government has two ways it can continue: It can either forcefully punish those who refuse to pay by cutting off their utilities, or it can turn a blind eye. At the moment, they have chosen the latter, clearly in an effort to avoid new domestic unrest. However, doing so defeats the purpose of subsidy reform. Conversely, a major government crackdown is likely to cause significant unrest among the poor and working class Iranians — a group of people the Iranian government has managed to keep mostly happy with these subsidies in the past, even through the 2009 protests. The Iranian government is loathe to lose this core group of support. When more Iranians discover they will not be punished for refusing to pay their bills and opt for non-payment, however, the government will have to either relent on subsidy reforms or crack down. Either way, the reform plan is a failure.
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