For Iran's revolution, the economic bill comes due
Ahmadinejad finds cheap gasoline comes at a big price
| The writer sees subsidies feeding into a real estate bubble but misses how public recovery of land rent (via taxes, fees, or dues for land ownership) would keep prices stable. The writer was Executive Editor of the Jerusalem Post and is a fellow at the Shalem Center in Jerusalem. |
By Amotz Asa-El
Natural economic law is presenting Irani President Mahmoud Ahmadinejad with the bill for the Islamist Revolution's three decades of economic populism. Insofar as the Islamist Revolution's future is concerned, Iran's stomach may prove more relevant than its muscles.Spiritual leader Ali Khamenei's rare statement last month, in which he backed Ahmadinejad's nuclear policy and called for his re-election, also cautioned him to avoid fanning inflation's flames.
The inflation to which Khamenei was referring is now 27% formally and even higher informally. The policies to which he was alluding are Ahmadinejad's intention to tinker with the subsidies designed to keep the people happy and the economy controlled.
Iran's inflation is made worse by external circumstances but is nonetheless homegrown. It is not cyclical but structural, and in fact ideological. (But what government policy isn’t?)
The revolutionaries were determined to reverse the deposed shah's White Revolution, which sought to economically empower the people, for instance, through a land reform that came at the expense of religious institutions. So the revolutionists lavished subsidies to keep the masses materially content. Thirty years on, and regardless of Western sanctions and global shortages, it is no longer affordable.
The biggest subsidies are handed out in the energy sector. Irani drivers pay less for gasoline than anyone, even Saudis and Kuwaitis, whose rates of roughly 25 cents a liter were more than twice Iran's average rate for 2007. Kerosene is 2 cents a liter, compared with, for example, 44 cents in Syria.
The result of this artificial pricing -- besides waste, illicit exporting, and traffic congestion -- is unrealized national revenues because every liter sold at home for a few pennies could be sold abroad for many dollars. Paradoxically, then, the more oil appreciates, the more Iran loses. Four years ago, Iran lost $22 billion this way. Last year it lost $32 billion, and this year it is expected to lose $61 billion.
This is over and above the fact that due to its limited refining capacity, Iran also imports oil, for which it pays the same astronomic prices that have been weighing on the rest of the global economy.
In all, the Iranian government spent 16.8% of its 2007 budget on energy subsidies. An additional 3% went to assorted agricultural subsidies. Add to that yet more price supports that go to anything from tractors for farmers to medicines for households. All that control of prices comes at the expense of economic vitality and social mobility.
As as private-sector-investment opportunities remain limited, investors pumped surplus capital into property. Tehran has become host to a magnificent real-estate bubble. Some properties that a decade ago sold at $50 a square foot now sell at $1,000.
Demographics also challenge the revolution, as today's population of 70 million is double what it was in 1979 January, when Ayatollah Khomeini seized power. This means that the subsidy system must reach more and more pockets every year, while the controlled economy leaves more and more young adults jobless. Iran's jobless rate is estimated at 15% or more.
Against this backdrop, Ahmadinejad proposes to shrink subsidies and shift funds "directly to the poor." Last year he rationed gasoline and raised its price, albeit slightly.
The abolition of subsidies will raise prices, as long as it is not coupled with the kind of market reforms that allow competition and autonomy. Without that, Ahmadinejad is doomed if he does and doomed if he doesn't.
Inflation is the doing of bad leaders whose policies breed buyers with too much cash, markets with too few goods, and rivals with the motivation and following to unseat governments.
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