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Politically Confident, Iran Cuts Subsidies on Prices
By WILLIAM YONG
Published: January 16, 2011
TEHRAN After months of false starts, dire warnings and political wrangling, Iran has embarked on a sweeping program of cuts in its costly and inefficient system of subsidies on fuel and other essential goods that has put a strain on state finances and held back economic progress for years.
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Atta Kenare/Agence France-Presse Getty Images
President Mahmoud Ahmadinejads subsidy cuts suggest he has consolidated power.
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Readers' Comments
The governments success in overcoming political obstacles to make the cuts and its willingness to risk social upheaval suggest that President Mahmoud Ahmadinejad may have consolidated power after the internal fractures that followed his bitterly disputed re-election in 2009 a development that some analysts believe could influence Irans position at nuclear talks in Istanbul this month.
The initial success of the subsidy reform will increase the regimes confidence generally, said Cliff Kupchan, a former State Department official who is now a director at the Washington-based Eurasia Group. This could make them more assertive in the talks. But more importantly, a confident and unified regime is better positioned to reach consensus on some initial agreement.
Secretary of State Hillary Rodham Clinton said recently that international sanctions had slowed Irans nuclear program, and the restrictions do seem to have disrupted sectors of the economy, particularly banking and export-related industries. But the sanctions do not seem to be the driving force behind the subsidy cuts.
Irans foreign exchange revenues also sank in recent years as oil prices fell from prerecession highs, creating greater budget pressures. But Tehran has long sought to cut the subsidies even under the reformist administration of President Mohammad Khatami and particularly for oil.
The logic is compelling: artificially low prices encourage greater consumption, leaving less oil to export for cash. And the higher oil prices rise, the greater the opportunity costs in lost exports. But the timing, whether for political or economic reasons, was never right to cut the subsidies.
While the government may be feeling economic pressure now, analysts say, the current program of cuts is principally a sign of its political strength, having vanquished the opposition that sprang up after the 2009 elections and stared down the governments traditional conservative wing, which has challenged Mr. Ahmadinejads authority.
This was something the two previous administrations wanted to do but could not accomplish, said Kevan Harris, a graduate student at Johns Hopkins University who has written extensively on Irans economy and social welfare system. Now that the liberals have been sidelined, like any good politician, Ahmadinejad has taken the most popular ideas from the opposing side and implemented them himself.
The success of the subsidy cuts so far also seems to have contributed to a continuing reassessment of Mr. Ahmadinejad. He emerged in the diplomatic cables released by WikiLeaks as something of a sober pragmatist battling with retrograde forces in the government rather than as the ranting extremist he seemed when he called for Israel to be wiped off the map. In October 2009, according to one of the cables, he argued for a nuclear compromise promoted by the United States that would have sent uranium out of the country for enrichment. And during the protests following the 2009 elections, he is reported to have argued for more freedom of the press until a general in the Revolutionary Guards slapped him and shouted, It is you who created this mess!
The subsidy cuts, which the International Monetary Fund says have amounted to $4,000 a year for the average Iranian family, began in earnest last month when the rationed price of gasoline jumped to about $1.44 a gallon from just 38 cents. With a ration of only 16 gallons a month at the subsidized rate, most motorists buy the bulk of their fuel now at the even higher market rate of $2.64 per gallon, significantly more than the $1.80 that people pay in nearby Dubai.
In recent weeks, subsidies have also been reduced on flour, water and diesel. But the spike in prices has not provoked the angry protests that followed the introduction of fuel rationing in 2007. The price of bread has tripled, on average, the government says; water, which used to be practically free, now costs between 10 cents and 85 cents per cubic meter, based on a sliding scale under which consumers pay a higher rate the more they use.
The government says these are just the first steps in what it calls an economic transformation plan that will also include banking reform, sweeping changes in Irans tax and customs system, and ever more privatization of state-owned industries. And with officials already reporting drops in the consumption of gasoline, flour, diesel and electricity, even before the prices were raised, Mr. Ahmadinejad has been exultant.
I believe that the Imam of Our Time has managed this plan and supports it, he said in a speech last week, citing the hidden 12th imam revered by Shiite Muslims as the embodiment of justice and righteousness.
Irans state-directed economy has long been plagued by corruption, inflation, inefficiencies and unemployment, which is particularly high among young people. The problems have damaged Irans ability to compete in world markets. Ending state controls and subsidies have long been seen as the first step in reviving a moribund economy that the C.I.A. estimates grew by an anemic 1.5 percent in 2009. Analysts say the unemployment and inflation rates are about 20 percent, nearly double the official figures of 11.8 percent and 12.2 percent respectively.
Energy use was the most obvious place to start in reducing subsidies. Irans population has doubled since the Islamic Revolution in 1979, but energy consumption is five times higher. Few educated Iranians still believe in the old Khomeinist doctrine that Iranians have a right to free energy because of their countrys oil wealth.
By WILLIAM YONG
Published: January 16, 2011
TEHRAN After months of false starts, dire warnings and political wrangling, Iran has embarked on a sweeping program of cuts in its costly and inefficient system of subsidies on fuel and other essential goods that has put a strain on state finances and held back economic progress for years.
Enlarge This Image
Atta Kenare/Agence France-Presse Getty Images
President Mahmoud Ahmadinejads subsidy cuts suggest he has consolidated power.
Related
- Times Topic: Iran
Readers' Comments
Share your thoughts.
The governments success in overcoming political obstacles to make the cuts and its willingness to risk social upheaval suggest that President Mahmoud Ahmadinejad may have consolidated power after the internal fractures that followed his bitterly disputed re-election in 2009 a development that some analysts believe could influence Irans position at nuclear talks in Istanbul this month.
The initial success of the subsidy reform will increase the regimes confidence generally, said Cliff Kupchan, a former State Department official who is now a director at the Washington-based Eurasia Group. This could make them more assertive in the talks. But more importantly, a confident and unified regime is better positioned to reach consensus on some initial agreement.
Secretary of State Hillary Rodham Clinton said recently that international sanctions had slowed Irans nuclear program, and the restrictions do seem to have disrupted sectors of the economy, particularly banking and export-related industries. But the sanctions do not seem to be the driving force behind the subsidy cuts.
Irans foreign exchange revenues also sank in recent years as oil prices fell from prerecession highs, creating greater budget pressures. But Tehran has long sought to cut the subsidies even under the reformist administration of President Mohammad Khatami and particularly for oil.
The logic is compelling: artificially low prices encourage greater consumption, leaving less oil to export for cash. And the higher oil prices rise, the greater the opportunity costs in lost exports. But the timing, whether for political or economic reasons, was never right to cut the subsidies.
While the government may be feeling economic pressure now, analysts say, the current program of cuts is principally a sign of its political strength, having vanquished the opposition that sprang up after the 2009 elections and stared down the governments traditional conservative wing, which has challenged Mr. Ahmadinejads authority.
This was something the two previous administrations wanted to do but could not accomplish, said Kevan Harris, a graduate student at Johns Hopkins University who has written extensively on Irans economy and social welfare system. Now that the liberals have been sidelined, like any good politician, Ahmadinejad has taken the most popular ideas from the opposing side and implemented them himself.
The success of the subsidy cuts so far also seems to have contributed to a continuing reassessment of Mr. Ahmadinejad. He emerged in the diplomatic cables released by WikiLeaks as something of a sober pragmatist battling with retrograde forces in the government rather than as the ranting extremist he seemed when he called for Israel to be wiped off the map. In October 2009, according to one of the cables, he argued for a nuclear compromise promoted by the United States that would have sent uranium out of the country for enrichment. And during the protests following the 2009 elections, he is reported to have argued for more freedom of the press until a general in the Revolutionary Guards slapped him and shouted, It is you who created this mess!
The subsidy cuts, which the International Monetary Fund says have amounted to $4,000 a year for the average Iranian family, began in earnest last month when the rationed price of gasoline jumped to about $1.44 a gallon from just 38 cents. With a ration of only 16 gallons a month at the subsidized rate, most motorists buy the bulk of their fuel now at the even higher market rate of $2.64 per gallon, significantly more than the $1.80 that people pay in nearby Dubai.
In recent weeks, subsidies have also been reduced on flour, water and diesel. But the spike in prices has not provoked the angry protests that followed the introduction of fuel rationing in 2007. The price of bread has tripled, on average, the government says; water, which used to be practically free, now costs between 10 cents and 85 cents per cubic meter, based on a sliding scale under which consumers pay a higher rate the more they use.
The government says these are just the first steps in what it calls an economic transformation plan that will also include banking reform, sweeping changes in Irans tax and customs system, and ever more privatization of state-owned industries. And with officials already reporting drops in the consumption of gasoline, flour, diesel and electricity, even before the prices were raised, Mr. Ahmadinejad has been exultant.
I believe that the Imam of Our Time has managed this plan and supports it, he said in a speech last week, citing the hidden 12th imam revered by Shiite Muslims as the embodiment of justice and righteousness.
Irans state-directed economy has long been plagued by corruption, inflation, inefficiencies and unemployment, which is particularly high among young people. The problems have damaged Irans ability to compete in world markets. Ending state controls and subsidies have long been seen as the first step in reviving a moribund economy that the C.I.A. estimates grew by an anemic 1.5 percent in 2009. Analysts say the unemployment and inflation rates are about 20 percent, nearly double the official figures of 11.8 percent and 12.2 percent respectively.
Energy use was the most obvious place to start in reducing subsidies. Irans population has doubled since the Islamic Revolution in 1979, but energy consumption is five times higher. Few educated Iranians still believe in the old Khomeinist doctrine that Iranians have a right to free energy because of their countrys oil wealth.
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