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In Iran, a difficult adjustment to price increases

Using both cash handouts and increased security, Iran avoids a public backlash.

Iran economy
An Iraqi woman buys bread from a bakery in the town of Khanaqin, in Diyala province near Iraq's border with Iran, Jan. 30, 2009. (Filippo Monteforte/AFP/Getty Images)

TEHRAN, Iran — Nearly a month after Iranian President Mahmoud Ahmadinejad introduced sweeping cuts to the country’s long-standing subsidy system, a much-feared violent backlash by the Iranian public — which has long been accustomed to some of the cheapest gasoline and other commodities in the world — has yet to take place.

The Iranian government, using a combination of financial handouts aimed at the poor and middle class and a large security presence in the days after the announcement, has successfully managed to temper the public reaction to the deep cuts, which resulted in steep increases in the cost of everything from gas to bread.

Kevan Harris, a sociologist at Johns Hopkins University, who makes regular research trips to Iran, said that although average Iranians generally believe the country's oil belongs to the people and should be kept cheap, the cash handouts have softened the blow.

“The check-is-in-the-bank tactic is clever,” he said in reference to the electronic payouts the government is now making to about 60 million Iranians. “And I think it deflates a lot of the anger.”

The drastic subsidy cuts have come just as severe international sanctions, levied against Iran by the United States and its allies in an effort to stymie the country's nuclear program, begin to take hold. The sanctions will likely only get worse after talks with Iran last week fell apart without a deal. The sanctions, together with the subsidy cuts, have hit average Iranians hard, giving rise to concerns that the dire economic situation could give rise to a popular revolt.

Economists, however, long criticized Iran’s dependence on government subsidies not only for its crippling effect on the Iranian budget, but also because it nurtured a wasteful culture among the Iranian people.

In one state television report, a correspondent looked at how bread subsidies had created wasteful consumers, with one homemaker remarking, “Prior to this, we used to get 20 or 30 loaves of bread, of which five used to rot in the fridge. Presently, I buy five loaves and use it for two days and after the two days are up we buy again.”

Such interviews have been common in Iran’s media in recent weeks — another apparent attempt at gaining support among the public for the subsidy cuts.

In an article in Hamshari, a newspaper published by Tehran’s municipal government, a chart showed the subsidized price of electricity, which increased fivefold after the cuts. It noted that the new price is still only a quarter of the utility’s true value.

Still, although Iranians have not erupted in violent protest as a result of the subsidy cuts, the increased costs have increased the pressure on some of the country’s more vulnerable citizens. Most utility costs have risen five-fold and cheap gasoline, long considered a birthright by Iranians, is a thing of the past.

A gallon on the open market now costs about $2.80.

“The subsidy reforms and the cash deposits are great for farmers and people who live in the country,” Abbas Hosseini, a small business owner in Tehran, said. “For people who don’t iron their clothes, watch television or need electricity at night it’s fine. But for my family and me it will be a disaster.”

Others, however, have resigned themselves to the new economic realities.

“People are already getting used to the higher price of gasoline,” one Tehran taxi driver said. “No one was driving when the subsidy cuts were announced, but look at it now — there’s just as much traffic as ever before.”

Well, maybe not quite as much as before. The oil ministry announced in the first weeks since the cuts that gasoline usage in the country had dropped considerably, signaling an early victory for the supporters of the plan.

While gauging a decrease in traffic has been difficult, it is clear that commuters are increasingly turning to public transportation, which in Iran is cheap and relatively efficient — a bus ticket costs about $.10, while a one-way subway pass is less than $.25.

Scuffles, mostly between taxi drivers and passengers, angry at fare increases, have become commonplace, and although the state has said it will severely punish those who excessively raise prices for goods and services, since Iran’s economy is almost entirely cash-based, enforcement is nearly impossible.

It is too early to predict what the ultimate impact of the subsidy cuts will be, Harris said. But he does not see them as the patent failure so many predicted.

“They deserve credit for carrying out an economic policy that Iran’s elites have wanted to carry out for 20 years,” he said. “If this is coupled with jobs programs and help for industry, re-capitalizing the banking system and diversifying the economy into more upstream products than simply oil, then we can talk.”

http://www.globalpost.com/dispatch/middle-east/110118/iran-economy-subsidy-cuts-ahmadinejad