Struggling economy could be Iran's undoing

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TEHRAN, Iran — In the end, Iran’s breaking point might not be broad international sanctions or the country’s increasingly vocal opposition movement. Instead, it might be President Mahmoud Ahmadinejad’s own plan to slash long-standing, and enormous, government subsidies.

In January, after decades of debate within the government and throughout every contour of Iranian society, the country’s parliament finally agreed on a bill to roll back the government support. The law will take effect later this month amid growing concern that the sudden and dramatic cut in subsidies could lead to high rates of inflation, price shocks and public unrest — destabilizing the country.

“I think that getting rid of the subsidies … will result in more demonstrations, more internal political problems,” said Hossein Askari, professor of international business and finance at George Washington University. “In the long run it will be a total failure because I don’t think they really thought this out.”

Iranian subsidies, some of the largest and most widespread in the world, have long acted as an economic lifeline for the country’s poor and middle class. But they are also a significant drain on the economy, accounting for a quarter of the GDP, or about $100 billion. Gasoline, natural gas, electricity, water, bread, rice, cooking oil, milk, sugar, postal and transportation services and medicine are all made cheaper through government support.

In Iran, a gallon of gas now costs a mere 40 cents.

Although cutting subsidies is generally considered to be smart economic policy, economists urge accompanying them with safeguards to help shield, at least initially, those the subsidies were meant to help.

“Iran has done none of those things,” Askari said.

A cab driver in central Tehran, like many locals here, strongly opposes the president’s plan.

“Of course the government should keep the subsidies. Iran is an oil-rich country and has to give back to the people,” said the driver who did not want to give his name because of safety concerns.

The cuts are politically dangerous for the government of Ahmadinejad, who is already facing severe economic sanctions from a growing list of countries and a simmering opposition movement that proved capable of launching large-scale demonstrations during last year’s contested elections. Even among Iranian lawmakers, disagreement with the president over how to roll out the subsidy cuts forced the country’s supreme leader, Ayatollah Ali Khamenei, to intervene.

Under the new law, all subsidized items will move to free market prices by 2015. In the first phase, from September through March 2011, $20 billion of the annual $100 billion in subsidies will be cut. Fifty percent of that $20 billion will be used as cash handouts for poor families, 30 percent will go to companies in the form of loans and 20 percent will be used to build a social security safety net.

But the law gives the president discretion on how the cash payments will be distributed, a system analysts said invites corruption and leaves open the ability for the government to punish the country’s middle class, which largely opposed Ahmadinejad during the 2009 elections and demonstrations.

“Despite its helpful aspects, however, the statute leaves many questions regarding its coverage, overall impacts, effective execution and financial balance unanswered,” Jahangir Amuzegar, a former executive board member for the International Monetary Fund, told, a Middle East business website. “As a policy document, it is also a poorly worded and awkwardly constructed piece which some legal scholars regard as unconstitutional; most economists consider inequitable, ineffective and even counterproductive; and many social psychologists find morally flawed. And nearly everyone outside government circles thinks it would be unworkable.”

Iran last tried, on a much smaller scale, to reduce subsidies when it increased the price of gasoline by 25 percent in 2007. Public outcry and massive anti-government demonstrations quickly followed, resulting in the burning of nearly 20 gas stations.

This time, in an effort to soften the blow to poor families, the Supreme Council of Labor has pledged to increase the minimum wage by 14 percent, from $260 to $300 a month. But Parliament’s own research center said inflation could rise as much as 50 percent following the cuts, canceling out much of that help.

The removal of subsidies will also likely exacerbate the effects of international sanctions, economists say, which have been levied against Iran for suspicion that it is pursuing nuclear weapons. The European Union, joining the United States and the United Nations, signed aggressive sanctions against the country last month.

Djavad, 50, was once a full-time employee at the ministry of telecommunications. But international sanctions left him with little work to do, so he took up a job as a hotel clerk in his native Shiraz, a city in southern Iran.

“Once we had the sanctions, we stopped receiving the right electronic parts from Europe. Now we get shipments from China and the quality is not good. I am an educated man but there is no work for me to do. And I need more money for my family. So I started working at the hotel in the evenings,” he said.

Further exacerbating Iran’s economic instability is a government decision, fearing the gathering of large crowds following the election protests, to shutter Tehran’s once vibrant street stalls and flea markets, which helped support the country’s unemployed.

And the city's bazaars were forced to close down following a government decision to increase income tax for bazaar merchants by 70 percent. The merchants went on strike, closing down their stalls.

An opposition activist said that hundreds of students and merchants gathered in the shoemakers’ quarter of the Old Bazaar over the summer, chanting, “Death to Ahmadinejad” and "Death to this deceptive government!”

“I want to get married, I am old now. I am ready but there are no men in Iran to marry,” said one 29-year old student, lamenting Iran’s anemic economy. “How can we marry and buy our own home like a normal couple when there are no jobs and no money?”

Becky Katz is a freelance journalist living in Beirut, Lebanon. She regularly writes for GlobalPost, the Los Angeles Times and edits for DIHA News Agency, among others.