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Economist: Iran's bold economic reform (Economic jihad)


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http://www.economist.com/node/18867440

GOOD news from Iran is rare, and the IMF is seldom a font of happy tidings about anything. So when a mission from the Fund cheered the Islamic Republic’s economy earlier this month, heaping praise on the policies of its ruthless government, eyebrows spiked upwards as in a comic scene in a Persian miniature. The shock was even sharper given that the IMF, whose biggest shareholder happens to be the Great Satan, America, is a pillar of global capitalism, a system that Iran’s maverick president, Mahmoud Ahmadinejad, gleefully lambasts as evil.

The reason for the praise is Iran’s exemplary execution of a task dear to the IMF’s heart: structural reform. The Islamic Republic describes things differently. Speaking on the occasion of Nowruz, the Iranian new year in March, the supreme leader, Ayatollah Ali Khamenei, declared this to be the “year of economic jihad”. Whatever its name, the sweeping reform of a ruinous, three-decade-old system of state subsidies that Iran began last December seems to be radically reshaping the country’s economy for the better.

Not only has it relieved the government of a huge financial burden. It has slashed local energy demand, reducing chronic pollution and leaving more oil for export. It has dramatically raised disposable incomes for the poorest without placing extra burdens on the rich, spreading social equity while boosting consumption and bolstering the banking system. In future, Iran’s subsidy reform may even be seen as a model for top-down social change, not unlike successful schemes pioneered by Mexico and Brazil. But so far Iran’s scheme carries no conditions.

Until December, economists estimated the annual cost of subsidies on food, fuel and electricity at $60 billion-100 billion, a quarter of Iran’s GDP and equal to or greater than the value of annual energy exports. Most of this burden was carried as an implicit subsidy to domestic energy consumers, with the price of diesel fuel, for example, set at the equivalent of two American cents a litre, and petrol selling for less than bottled water. The predictable results were soaring energy consumption, waste, smuggling, pollution, market distortion and inexorably rising bills for the state.

The government cleverly doled out two months’ worth of family cash transfers, amounting to some $90 per person, before unleashing its shock. When the first tranche of price rises hit, quadrupling the cost of some kinds of bread and shooting diesel prices up by 2,000%, among other things, there was barely a peep from the public. Iranians have rapidly got used both to paying a lot more for some things and to having more money to spend as they wish. A family of five now pockets monthly sums close to Iran’s minimum wage, enough to pull a big proportion of the 10% of Iranians who live on less than $2 a day above that bar. Yet tight controls on the money supply have kept inflationary pressure lower than feared. By some counts it has already fallen from an annualised 20% in March to 14% in May. With government finances now in better shape, that may drop still further, and quickly.

I think it's kind of ironic, and funny in a way that sanctions (and especially the threat of a gasoline embargo) pressured Iran into making by far the most effective economic reform it could ever hope. Hell, I'm absolutely amazed they were able to convince people to go along with it during such tumultuous times.... but maybe the tumult helped. Since the sanctions started years ago, the IR has been big on "independence" so they spun the economic reform as a way of gaining economic indepenence... only what they were dependent on was their own oil export, used to fund an outrageously skewed demand for gasoline. Without the subsidies people won't be as likely to waste gasoline (pennies for a gallon of gasoline used to be normal in Iran), and thus demand for gasoline in Iran will plummet, and go back to levels that the native refineries can support.

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reading the comments on the article remind me of a tailgate thread.:ols:

I wonder who is right?????

First, it was a mistake to pay cash benefits to 73 million citizens as a substitute for the abolished subsidies. It is beyond the government’s abilities to continue paying cash benefits to so many civilians for a long period of time, and even now it has to run the printing press to keep up with the payments. The government revenues from the reform are less than what it expends on paying the cash benefits, and are also less than the Majles’ original forecast.

Second, the inflation driven by the reform has a gradual negative impact on the citizens, particularly the middle class. If the current trend of inflation persists, it may negate the positive effects of the cash benefits paid to the citizens.

Third, the reform has taken a severe toll on the industry and agriculture sectors. The benefits promised by the government to these two sectors have not been paid, and the government has not raised the prices of industry and agriculture products. As a result, the industrialists and the farmers are facing particularly severe problems (Tehran Emrouz, July 4).

The reformist daily E’temad also warned about the negative consequences of the reform. In an interview given to the daily, top Iranian economist Mousa Ghaninejad warned about the program’s impact on Iran’s budget. He noted that while the increase of energy products’ prices was justified and correct, it was not the right choice to indiscriminately substitute cash benefits for subsidies, ignoring the differences between the rich and the poor. According to Ghaninejad, the government is unable to sustain the payment of cash benefits as they currently stand, which will likely lead to a budget deficit. He further added that the government should have updated the prices and protected the weaker sectors of society instead of paying cash benefits to such a large number of citizens.

The top economist also said the government did not transfer 30 percent of the revenues generated under the reform to the industrial sector as it had promised, severely hitting the industrialists. He warned that, due to the way the reform was implemented, government expenses significantly exceed its revenues, which may jeopardize the reform’s future (E’temad, July 4).

http://www.terrorism-info.org.il/malam_multimedia/English/eng_n/html/iran_e122.htm

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there's no question who's right, the economist, that website looks shady, and I don't trust it

fact is they were either 1) not selling oil and refining it into gasoline OR 2) buying gasoline

given high oil prices the oil from #1 can now be sold at a higher price (the government made decisions based on $65/barrel, now that the rate is almost 2x that, the government has even more cash)... thus more cash... #2 leads to greater savings than expected as well because of the increase in gasoline prices

Worst case scenario the state pays out as much as it saves

Best case scenario the state pays out less than it saves as wastefulness and corruption (like people buying gasoline and smuggling it into an unsubsidized country) decrease, thus leading to a natural decrease in prices

given the idiocy of the original policy, the idea that getting rid of it made things worse seems like bull****. The article says the payments haven't been made yet, well that's not true individual payments were made AHEAD of time, so that the money went out before any cuts were made (as a buffer), that will lead to a short term cost, but not a long term cost once the subsidizes are actually cut.

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