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Iran Analysis: Politics and Subsidy Reform (Harris)

Kevan Harris writes in Middle East Report:

Although most Iranians forget it today, Mahmoud Ahmadinejad was elected in 2005 on a platform of technocratic competence. The clique surrounding his rise to mayor of Tehran and beyond once called themselves Abadgaran, “the Developers.” In a column four months after Ahmadinejad’s election to the Iranian presidency, commentator Saeed Laylaz reminded readers of the sage advice of Deng Xiaoping, arguing that a hard-line conservative government could push through economic reforms where the reformist administration had failed. “The cat is finally catching mice,” Laylaz wrote, “and its color no longer matters.” After the exhaustion of the reform movement’s momentum, Ahmadinejad presented himself to the people as the intrepid engineering professor, the humble, principled and no-nonsense expert who could get things done. “Expert,” in fact, is one of the good doctor’s favorite words.

What occurred was instead second-rate. The network of clients enveloping the new president set its sights on capturing the money and resources controlled by the ossifying bureaucracy of the Islamic Republic. Abadgaran men and assorted hangers-on replaced the aging first generation of post-revolutionary technocratic cadres. No sweet plum remained unpicked in the state agencies and ministries, not even in provincial offices and the development projects they oversaw. The rebellious tone with which this turnover was presented—“throw the bums out”—resonated with the lower social strata, who have rarely benefited from state largesse.

In 2007, the president stuck a pitchfork of his own in the 60-year old Planning and Budget Organization, taking away its independent auditing power. But overall the Ahmadinejad administration has not exactly been distinguished by fiscal discipline and managerial efficiency. Ahmadinejad, for instance, has paid three rounds of highly publicized visits to the oft-neglected provinces. On his tours, he has been met with hundreds of thousands of handwritten letters asking for small favors—resolving a quarrel with a local official, helping a son lacking sufficient connections for a state post, defraying the cost of an upcoming wedding or paying an overdue bill. The supplicants received personalized replies, and a few dozen thousand-toman notes (1,000 tomans equal $1) were stuffed into the envelopes for good measure. Ahmadinejad’s political vehicle was nothing less than a new patronage machine. It is an administration charismatic in appearance, but inconsistent in policy and practice.

In the spring of 2010, with the country still in political tumult over the dubious election of the previous June, and in economic pain due to global recession, the reinstalled engineer-president announced a plan that drew out critics of his competence in droves. The government proposed to enact the most sweeping economic policy change in over a decade: a phasing out of price subsidies for nearly all staple commodities—bread, electricity, water and gasoline—starting in March and continuing until 2015, when they would cease entirely. The plan provoked immediate protest and predictions of chaos, prompting parliamentarians to chop half of the cuts out of the budget bill they passed on March 9

Easy Money No More

Ahmadinejad’s political opponents within the Islamic Republic, from reformists to pragmatic conservatives, and irrespective of their feelings about the Green Movement arising after the June election, were pleased to see the president on the economic hot seat at last. After 15 years of attempting to construct their own versions of a modernization project, they were aghast that this upstart had labeled them as the backward, out-of-touch cronies of an old elite. Whether they had sought to do so through a glasnost-style opening, like former President Mohammad Khatami, or through a top-down economic restructuring, like Khatami’s predecessor Akbar Hashemi-Rafsanjani, they had been equally disparaged. Infuriating them more was that Ahmadinejad liberally stole from their policy playbook, just as President Bill Clinton was etched into the pages of US history though the use of softened Republican Party talking points. Politically, the Islamic Republic’s bêtes noires in the Bush administration gave the Iranian regime easy targets with which to justify their position: a region in conflagration and blatant enforcement of double standards in nuclear geopolitics.

For most of Ahmadinejad’s first term, the money poured in, in the form of oil rents inflated due to the same regional crises. The government rode the heady boom in land prices and resplendent construction projects. In 2006–2007, many Iranians with capital jumped into the housing market, seeing dizzy gains of 100 percent every year. The resulting real estate bubble temporarily concealed the lack of a coherent development policy. The benchmarks and proposals of the Fourth Five-Year Plan (2005–2009), passed in Khatami’s era, were discarded in favor of hundreds of bridges to nowhere, and most of these were not even completed. The economy entered a liquidity trap, where over-accumulation of capital and a lack of profitable outlets for investment drove down the rate of return while sending prices into an upward spiral. Finally, Iran’s central bank reined in the easy money in mid-2008, months before the collapse of global financial markets (with much resistance from the president, who forced the two largest state banks to continue to hand out loans, resulting in the large debt burdens of today, as borrowers default). Each block of every middle-class neighborhood in Tehran is now home to three or four real estate offices, all filled with jacketed agents listlessly huddled together.

The economic hangover allowed political competitors to pin the label of ineptitude on the president’s dwindling faction and make it stick. If any theme permeated the televised debates between presidential candidates before the June 2009 election, it was competent governance. The intra-elite bickering was so intense that it arguably burned through the electorate’s apathy and ignited mass participation in the balloting.

Into this environment the President introduced his subsidy reform law, whose provisions were as follows: The government spent around 40 percent of its 2006 budget ($40 billion) on such subsidies and even more during 2008’s oil price peak. Of the revenue gained from the lessening of subsidy levels, the state would keep 20 percent, ostensibly compensating for increased costs in the public sector. Another 30 percent would be allocated to industries that rely heavily on subsidies and development of more energy-efficient infrastructure. The remaining 50 percent would be given back to Iranians in direct cash transfers or indirect welfare benefits, “targeting” the poorest strata of the population. After five years, the prices of the staples were to be close to regional market levels. The parliament wrote into the law that the government should gain no less than $10 billion and no more than $20 billion during the first year, which would have meant increasing prices for subsidized goods on average between 2.5 and 4 times their current levels.

Debate over the law was heated, even a bit melodramatic, with parties for and against seeming to believe equally in the awesome power of unregulated markets. The president identified this single reform as the solution to the country’s many economic, social and perhaps even cultural woes. On March 9, amid reports that Parliament would approve only half of the cuts, state news agencies relayed that Ahmadinejad was praying in the chamber for passage of them all. Critics of the law, including stalwart conservatives in Parliament, predicted hyperinflationary catastrophe and industrial collapse. Green Movement supporters hoped that an intensification of economic grievances would keep middle-class Iranians, some of whom see the plan as a government attack upon their livelihoods, coming into the streets. Labor activists foresaw a new surge of working-class unrest to fuel the Green fire.

The drama of the subsidy debate was all the higher for playing out against the backdrop of the post-election turmoil and the fragmentation of the political elite into so many temporary chiefdoms, with the accompanying fleeting wars and alliances. In this climate, no policy initiative on the scale of subsidy reform would proceed without the express approval of Ahmadinejad’s patrons, Supreme Leader Ayatollah Ali Khamenei and the Revolutionary Guards. Why, given the hubbub, did they permit the president to move forward with the subsidy-cutting plan? Have they gone nuts?

Read rest of article....

Reader Comments (8)

Mr Harris,

Thank you for your detailed account on the subsidies issue and analysis of the current situation. I wonder however that not a single mention is made of the so-called "privatisation", which is in fact a militarisation of economy, selling state-owned companies at ridiculous prices to IRGC clients. I only refer to the case of the Iranian Telecom, put on sale to the IRGC-owned Etemad-e Mobin consortium:

Etemad-e Mobin bought the 51 % at $7-8 billion, "though experts say the company's real value, considering its large mobile phone operations, assets, and the fact that it is a monopoly, is at least double that."

I wonder also that you do not mention the fact that up to 60 % or at least 40 % of Iran's economy lies in the hand of a military mafia, having neither the required management capacities nor any other concern than quick profits. Masking such essential data gives a completely distorted picture of the current economic situation, striken by corruption and nepotism, where (necessary) subsidies' cut would only increase these disastrous developments.

Instead of bashing Iranian expats, who look at the ruin of their homeland with tearful eyes, I should like to ask you to courageously reveal the whole truth about Iran's economic situation.


March 22, 2010 | Unregistered CommenterArshama

Well said, Arshama.

March 22, 2010 | Unregistered CommenterObserver

Mr Harris will most likely not read your comments here. I think Scott posted his article at EA with the permission of MER. You should send your feedback to someone (perhaps Chris Toensing - Executive Director and Editor of Middle East Report) on the MEP contact page.

March 23, 2010 | Unregistered CommenterCatherine


Thanks --- I believe Mr Harris is an EA reader so he may have already taken in Arshama's feedback.


March 23, 2010 | Unregistered CommenterScott Lucas

Scott is right - I am an EA reader. (Who isn't these days?) I appreciate Arshama's comments. One of the ironies of writing from Iran is that many older articles I have written under various pseudonyms I cannot even take credit for. One of those was specifically about the etemad-e mobin deal, only days after it made the news. That's the breaks. But I am aware of the deal and its ramifications. I am also currently working on an article on Iran's pseudo-privatization, so please know that I am at least cognizant of your concerns. In the article, I referred to the clique around the president and its usurpation of state resources - you can read that however you want.

On a conceptual note, the word mafia refers to protection networks that exist in the absence of a government. Sicilian mafia, chicago mafia, russian mafia etc - the most famous book on this is by Diego Gambetta and I encourage EA readers to check it out. The term was used in Iran as a political pejorative (against Rafsanjani over twenty years ago), not a term of analysis and understanding. Its continuation in the lexicon has more to do with the factional bickering than with any relation to reality.

I've spent the past year in Iran looking into the private sector, the various public sectors, and the quasi-public sectors. Let me just say that the subject is VERY complex, and requires careful study. When ordinary Iranians say that there is a mafia (which one hears here quite a bit), they are actually referring to all sorts of different networks of economic and political actors, not just the Guards. Also, the relationship between the Guards and the various aforementioned sectors needs to be studied more before one can make a statement such as 60% of the economy is in their hands. This cannot be done from afar, and one also should keep a comparative eye towards other countries who are in very similar situations - Iranian exceptionalism is no boon here.

On an apologetic note, if any expat feels bashed by my piece (though I am not sure why), it was unintended. Everyone keep up the good work at EA!

March 23, 2010 | Unregistered CommenterKevan Harris


Great point about privatization. To many miss that the government actually controls about 70% of the economy. It would also be interesting for them to expand on the:

1) Bonyads(if I am correct they control 20% of the economy) and the tremendous inefficiencies they force on the economy.

2) How government officials and the businesses they own take out loans with no intention of paying them out

3) How government officials demand "Freebies"

4) The net worth of government officials and how they aquired this wealth

It is all quite funny how the regime complains about the evils of captialism while they are literally "fleecing" Iran for all its worth. It would be comical if it didn't have such a negative impact on the common citizen of Iran.


March 23, 2010 | Unregistered Commenterbill


Samuel tells us that AN lives a simple life?? :)

As for KH, I have read all kinds of accusations about his excesses. Don't of course know if they are true - but if they are, one wonders why somebody in his position builds up such wealth. After all, he (probably) can't take it anywhere with him - and you can only eat so many Hummingbird's tongues in one day!! :)


March 23, 2010 | Unregistered CommenterBarry


Amandinejad is the only one and I am not so sure about his simple life. As for the others you will find some of the rabid hardliners have millions if not hundereds of millions stashed away in bank accounts across the world. I'm sorry but for the life of me I can't see how these life time clerics have been able to amass this wealth while so many are below the poverty line in Iran. It smacks of hypocrisy when the regime chides others for excess when in fact they are some of the worst. But to them were infidels and legit targets for scorn anyway. This whole arguement is akin to Defamation of Relgions legislation the OIC is pushing at the UN. The states pushing it, such as Pakistan who started it, are by far some of the worst human and religious rights abusers in the world. In Pakistan recently a Christian farmer was burned alive in front of a police station for refusing to convert(also didn't help that he was doing quite well with his farm.) His wife prostested to the police and the response she got was to have the officers rape her!! Could you imagine if that happned in a Western nation. Millions marching across the Islamic world calling for retribution! Such hypocrisy and they scream bloody murder if we dare question their religion!! Argggh this makes me so pissed off!!!


March 24, 2010 | Unregistered Commenterbill

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