Removing Subsidies: Political Risks and Rewards

By Nader Uskowi

President Ahmadinejad’s plan of the five-year phase out of government subsidies of essential consumer goods and services, including gasoline, water and power, transportation and food products, carries with it significant political risks as well as huge rewards. On the risk side, just the announcement that subsidies of gasoline will begin to be phased out has already caused a rapid rise in prices across the board, especially in major cities.

To assuage the concerns of citizens over their shrinking purchasing power, the government has started handing out $40 per month to 80% of all Iranian citizens. Ironically, the monthly payouts could themselves stir up further rise in prices, a self-destructive short-term solution to a long-term problem. But if Ahmadinejad could pull this off, eliminating most of the subsidies within the next year or two, without inciting pressure from the public and rival politicians to end the program, he could start an economic boom that can politically reward him and his close associates, some of whom might have aspiration to run for president in 2013, say Eskandar Rahim Mashaie. Ahmadinejad himself, serving two consecutive terms by then, is barred from running and needs to wait it out until 2017 (but an Ahmadinejad-Mashaie-Ahmadinejad sounds too Russian!)

If Ahmadinejad’s first term was marked by uranium enrichment and later marred by the Green movement, his second term will be defined by the success or failure of his subsidy reforms. Preliminary signs paint a rough road ahead. But he can succeed if he sticks to the program and do not back out under popular pressure until the economic benefits of the reform start a boom in the economy. No Iranian governments could afford to finance so many subsidies, but no Iranian governments had the political will to tackle the monumental problem created in the past five decades, and growing worse every year. That’s why the success of the program would be translated into huge political rewards for the government doing it.

During the first year of the reforms, subsidies of utilities, rice, wheat, cooking oil, sugar, milk, mail, air and rail services will begin to be phased out. The government estimates a saving of $40 billion as the result of the first phase of the reforms. If the saving is invested in economically sound projects, an economic boom will follow. If it is spent on cash handouts and projects more suitable to political propaganda, the reforms will fail miserably. The choice would define the seriousness of the government to succeed. After all, when the reforms start, they will result in majestic success or majestic failure, depending on how they are handled.