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Reaction to Iranian Government's Subsidy Reform Program

01/04/11 By Nader Habibi

I arrived in Iran for a short visit on December 17, 2010. On the evening of December 18 President Ahmadinejad held a TV interview and announced that after a long delay the removal of price subsidies on 16 goods would begin that evening. Finally it was here and although the media had talked about adjustment of prices for several months it still came as a shock to many Iranians. Needless to say the announcement and its consequences immediately became the main topic of conversation for majority of Iranians. At least this was the case among the relatives and friends that I met during the next few days.

Sangak bread bakery in Tehran
As part of the reform program, all subsidies are being phased out

As an economist I always believed and continue to believe that the replacement of wasteful price subsidies with direct income assistance for the low income families is a good policy for Iran. Yet everywhere that I spoke to people I heard mostly negative comments and strong criticism. On a few occasions that I rode the public bus or shared a taxi with other passengers I heard negative comments from strangers.

So strong were the negative reactions of the people towards the rising prices of gasoline and few other necessities that I did not dare to say anything positive about these policies. To say that the current government (and for some the entire Islamic regime) has lost its legitimacy for many Iranians, is not an exaggeration. You can feel the frustration and resentment of these people in informal conversations.  One of the unfortunate consequences of this disconnect between the people and the government is the widespread distrust of government policies. Many people in Iran refuse to evaluate each government policy on the basis of its own merits. Instead they tend to view all government policies with skepticism and pessimism.

One of the main reasons for removal of fuel and food price subsidies is to reduce their heavy budgetary burden. Elimination of subsidies will help reduce the budget deficit and free up a large amount of government funds for other expenditures. Yet many Iranians remain skeptical about how the government will use the money that it will save by removing them. There is a widespread suspicion that monthly income subsidies (yaraneh), that are being offered by the government to all citizens as a substitute for price subsidies, will not be enough and will be stopped after a few months. Some people feel that a large portion of these subsidy savings will be used for foreign policy adventures in Lebanon or Palestine. Some also fear that government might use political (loyalty) criteria for distribution of direct income subsidies to further solidify its political power. (This view was expressed by Fariborz Rais Dana, an economist and government critic in Tehran, on December 18th during an interview with BBC-Farsi. He was arrested a few hours after this interview.)

Another even more important benefit of eliminating the subsidies is that current low prices of fuel, natural gas and electricity have resulted in massive waste and high per capital consumption of these resources. Iran's domestic consumption of oil and natural gas is rising at such a high rate that if unchecked it will absorb all the oil and gas production within a few years and not much will be left for export. Yet unfortunately, very few people are willing to acknowledge that increasing the price of these essential products will encourage the consumers to use them more efficiently and hence will be good for the society.

These are only a few examples of how political frustrations with the current regime have affected the public opinion about government's economic policies. It is as if people refuse to believe that the government is willing or capable of introducing any beneficial policies.

This widespread negative public reaction in Iran is a specific case of a more general phenomena in the interactions of people and policy makers in non-democratic regimes that lack electoral/popular legitimacy. How should citizens respond when a non-democratic government tries to introduce a social or economic policy that will benefit the society? Should they judge each policy based on its own merits and regardless of the overall legitimacy of the policy makers?

Or, should they offer a blanket rejection of all policies that are implemented by an unpopular government in order to intensify the public discontent and increase the likelihood of political change?

This latter option will amount to strategic rejection of social and economic policy. This question becomes even more significant when posed to political activists and reform leaders that can influence the public opinion more than others.

In my opinion citizens of any country must separate the questions of public policy from the issues of government legitimacy. They must judge every issue by its own merits through an impartial evaluation of its costs and benefits for the society. There is no doubt that when a policy is successful in meeting public needs, the government will use this success to legitimize its rule and gain popularity. The risk of such a political manipulation, however, should not be used as an excuse by some people for deliberate rejection and possible derailing of a good policy.

Unfortunately this separation is easier said than done and strategic rejection of good policies for sake of political gains is common in many countries and under various political regimes. The rapid increases in electricity consumption during the few years before the Islamic Revolution resulted in frequent power shortages in Iran. The Shah responded in 1977 by introducing a daylight savings program (by setting the clocks ahead by one hour from April to September).

The clerics and Islamic opponents of the regime launched a negative campaign against this policy and accused the government of trying to interfere with people's Islamic faith and prayer times. The public resentment toward Shah's regime was so strong that majority of people readily accepted this view rather than the government's economic rationale for the daylight savings program. Immediately after the Islamic revolution the daylight savings program was abolished as a hateful symbol of the Pahlavi regime's animosity with Islam. After a few months, however, the worsening electricity shortages forced Ayatollah Khomeini to reintroduce the daylight savings program in 1979.

Strategic rejection of the current subsidy reform program by opposition intellectuals in Iran (and expatriate Iranian community through satellite TV programs) can produce a poisoned environment against these reforms which are painful by nature. Such a campaign can increase the risk of spontaneous public riots and mass protests against this program. Fear of such a reaction might ultimately force the government to water down or stop the implementation of these reforms. Yet these activists must ask themselves whether derailing the current reform initiative will be in the long-term interest of the Iranian people or not. They must make a choice between destructive criticism and constructive criticism of these reforms.

The events of the last two years and the public response to the outcome of 2009 presidential election have clearly demonstrated the desire of Iranian people for political reform and fair elections. A constructive and unbiased approach to government policies, however, does not necessarily hurt the cause of political reform as some political activists might fear. This fear is rooted in the mistaken belief that support for a government policy is equivalent to accepting the government's political legitimacy. These are two different issues and an activist can simultaneously support a specific program and criticize another aspect of a ruling political regime.

With regard to the government's economic policies some activists might also fear that if the government is successful in improving people's economic conditions they might lose interest in political reform. There is however, no evidence that economic success of a country under a non-democratic government will delay that country's progress toward democracy and political reform.

Several developing countries have taken their greatest leaps toward democracy after making considerable progress in economic reform and enjoying sustained economic growth for one or two decades. South Korea, Taiwan, Indonesia, and Chile are a few cases in point. In these countries the economic and educational advancements increased the public desire for democracy and equal political rights. These developments forced the ruling governments to open up the political space.

To conclude, the attitude of some Iranians toward the current subsidy reform program suffers from a negative bias that is rooted in political discontent. This bias is unjustified and should be replaced with constructive criticism of the policy, its specific components and how it is implemented. It is already clear that the implementation of the program has many weaknesses and requires significant adjustment along the way. Constructive criticism will make a valuable contribution at this stage. Blind rejection of government policies, on the other hand, does not serve the public interest and it does not help the cause of political reform either. 

About the author: Nader Habibi teaches economics in Brandeis University near Boston.

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