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no fear

i am against blanket subsidies for everyone. for example the petrol subsidy. it benefits the rich the most, and makes no economic sense at all, and diverts resources away from productive use especially if the subsidised goods are imported (like petrol and wheat).

i would rather see money put into production, and to have targeted cash support for the poorest at least until income disparities are adequately reduced. 

but i have no problems with direct or indirect state investment in some industries. this is where i find your arguments slightly ideological. how much investment and for how long would depend on the sector and its strategic importance. i hope that clarifies :)

Vargavand,

I am not an economist. Maybe you can shed some light on other countries experiment with the reduction of subsidies on goods and services after the collapse of the soviet union. I think former soviet countries can be a good measure for Iran to compare.

Which method worked? Sudden shock therapy or gradual eliminations? Is there any statistics?

Good luck with your presentation at the MVEA. We need your input on economical matters.

Niloufar,

In short you are saying:

1- The reduction of subsidies should be gradual and by time table.

2- Certain inductries like Agriculture, defense and Oil should continue to receive government support in form of subsidy or grants.

To support your arguement, you are giving examples of current WTO member practices which protect their industries by breaking WTO regulations ( which is fine, but lets see whether it works first, US has applied punitive measures against Canada in your example). Your stance on this issue is strikingly similar to our current parliament and the traditional conservatives headed by the Larijani brothers. They want the exact same thing from Ahmadinejad.

I disagree with the gradual reduction of subsidies and believe a  shorter time-table is needed to eliminate all price controls and subsidies at once. The shorter the timetable, the faster we would recover. This extreme economical pressure has been experienced by other countries as well. Countries like Russia followed this formula and recovered very fast from their previous mistakes. Ahmadinejad tried to push these economical reforms ahead but encountered heavy resistance from our parliament who feared social unrests and uprisings.

Besides, when you subject your people to painful economical reforms, the way Ahmadinejad intended to do ( and hopefully succeeds ), as a politician you must provide your people with more freedoms and rights if you don't want to see the end of your era. This is what our conservative and reformist dominated parliament doesn't want to see. They want the continuation of the current system without giving anything in return.

I agree with you on certain industries to be under protection if the cost of protecting them doesn't exceed the benefit.

Dear Niloufar and No

Dear Niloufar and No Fear,

Thanks for your numerous commnets. I wish I could interject, however, I have been really busy lately with my routine daily work and preparation for a presentation at MVEA in St. Louis on Thursday. I am sure I, as well as other readers,  will benefit from your comments immensely, and will post another one of my own soon

Thanks again, Varjavand 

no fear

you make very good points. but i think you may be forgetting that canadian wheat is so cheap to import because of heavy canadian government subsidies and a myriad of other price fixing tricks.

in essence the difference is in subsidising prices versus subsidising industries. the former is a short-term, lazy approach to reduce prices. the latter is a more rational and effective approach that has the former as one of its results. but Both are anti-market, and both are widely applied across the world in various sectors.

i also suggest that it is not a matter of left or right. it is a matter of best policy choices within a given global environment. many on the left or right would rather go for industrial subsidies that create and nurture production and national wealth. for many sectors such support would best be time-bound. but for many others - such as agriculture - the support pretty much has to be constant.

in short, i hope ahmadinejad will act pragmatically rather than ideologically in deciding which - if any - type of subsidy is to be employed.

Peace

Niloufar,

It is true that many developed countries support their agricultural sector in form of easy bank loans and subsidies costs on fertilizers and pesticides. But these countries do not regulate and control the price on the final product. The market demand will determine the cost of the commodity. 

Unfortunately in Iran, many of the previous governmental policies were to control the cost of the finished product. Take 'bread' for example. We destroyed our entire wheat production sector just trying to keep  the price of bread down. At times, the government was setting quotas and prices to the farmers and buying wheat at set low prices. As a result, wheat farmers became Kiwi farmers in since there were more money in growing kiwi than wheat and Iran became one of the biggest importers of wheat in the world. Now we buy wheat at international rates from Canada and sell it to bakeries at a fraction of the cost and taking a huge loss as a result. We destroyed our Wheat production because we wanted to provide cheap bread to Iranians. As a result of these poor policies, we created more poor people. This is how badly prior leftists economists fucked up in previous administrations in Iran.

Allowing 'wheat' to reach its market value in Iran will definitely raise the cost of bread, but it will encourage farmers to wheat production again. The situation in other productions where government has interfered to control the cost of the finished product is similar to the wheat production in Iran.

 In the energy sector, subsidies finished product cost ( Petrol, natural gas, electricity etc ) for the consumption of our dear hamvatans in Iran has made our country very unattractive to foreign firm to invest. How can you attract investments when the return on the investment would be lower than international rates due to subsidies prices on finished products? Can we ask the chinese to build a power plant with their own money and investment and tell them our people would pay them back at one tenth of the international rate? The only way we can do this now is to pay cash upfront. No one is knocking on our door for investment. We have to eliminate these subsidies NOW!

The arm industry should be treated differently since nothing is more important than our sovereignty. I am a strong believer in increased military spenditure in all aspects of this industry. Many private and semi private firms are working for our defense industries and they should be supported by easy loans and grants. I don't think the Military or IRGC are paying for the final product at fraction of the cost, it is quite the contrary from what i heard. The defense industry in Iran has been one of the few successful industries in the recent years. We have began exporting our hardwares ( Africa, central America, possibly Lebanon ) and soon it will become profitable. But this is not an industry to be profit oriented. We should be defense oriented here. We are paying a lot more on our energy subsidies than our entire defense budget. ( 25 billion dollars spent on fuel subsides alone last year, that is 25000 millions of dollars!).

We should all hail Ahmadinejad for making these decisions and implementing it. Ofcourse in the process he would be the one that people would cuss and curse, but he genuinely cares for Iran and is not sacrificing our future to being popular at the present time.

PS: sorry for the long reply.

no fear

in principle, yes i agree that unprofitable enterprises dependent on state subsidies for too long should be shut down. how long is 'too long' is a matter of judgement, but there is enough comparative analysis to make a fairly good judgement on this for various sectors. similarly, ahmadinejad certainly made the right decision based on what you are saying and if we are not missing any other factors from the picture (i am not familiar with the details).

but then there are strategic sectors that deserve special support. food production is one of them. water and energy are others. OECD countries - including all the rich 'jomhooris' you can think of - pay around $250 billion a year in subsidies to agriculture alone, and have done so for decades. how can any country's agriculture sector be competitive in such a global environment?

for energy consider the case of ethanol production, which is a relatively new growth area. brazil spent decades developing the infrastructure and technology associated with sugar cane, and this has only in recent years paid real dividend. in usa, huge subsidies have gone into maize-based ethanol production with poor results - in terms of economic and environmental viability - so far. the first impact was to drive up the price of food in 2007-8.

then there is the arms industry. this is one of those sectors where you are damned if you do and damned if you don't! but i would guess that no other sector gets as much subsidy as this one - often disguised as 'defence contracts' that never result in any returns for the tax-paying 'investor' - in most countries.

problem is that the 'market' is neither free nor fair in several sectors. i am sure you would agree that the price of oil is not set by any real market forces either - in part because the costs of associated wars and other military expenditures are not factored in.

imagine adding the monthly cost of the american military based in the middle east to the monthly consumption of fuel, and then presenting that as the price per gallon at the gas station! that would perhaps be a more 'real' market price...

so with food and fuel having no real 'free markets', we have almost nothing but pragmatism left in coping with the situtation...

Peace

varjavand khan

thanks for a very interesting response. i had gotten a wrong impression of your message and your answer helps clarify to some extent. the nature of the subject, however, is far too complex to settle questions in such a space. but i agree with you about the role of the middle class and problems with the place of wall street.

i am still not sure how one would free 'government' - the best thing money can buy - from the locked jaws of the 'market' especially as capital appears to only grow stronger and more concentrated in time. perhaps we are heading toward another major shock to the system...

Peace

Niloufar,

You said:

"targeted and time-bound support to infant industries is generally thought to be helpful especially in the first few years of operation and until certain targets are met."

Agreed, but do you also agree that manufactures who were receiving government grant and support with subsidized raw material and were still unprofitable, should be shut down immidiately?

Ahmadinejad shut down many of these unprofitable manufactures when he was elected. The left wing groups and personalities critisized his decisions. But what do you think? Don't you agree that "targeted" government supports for these manufactures eventually led to their demise by making these manufactures ( even industries in some examples, like the oil industry) less competitive with other manufactures?

As a right wing Iranian 'Jomhoori Khah', I wish to see the elimination of ALL subsidies for all the manufactures and industries. I do support some sort of " protectionism" for some of our local products in form of implementing tarifs over some imported products, but that would be the extend that the government should interfere with market laws.

Our economy has been tainted and infected with too many leftist ideas along with traditional methods of a " buying low, selling high " which has caused our production sector to suffer greatly. Its time to put an end to this cycle.

Niloufar

Thanks for your comments, this my response to the second one.

Government alleged success, through its rescue plan, in
preventing another depression dissipated the need for dealing with a much
bigger challenge which is to deal with a rigged economic system that has
resulted in a badly skewed wealth distribution and heavy concentration of
income and wealth in the hands of one percent of US richest. Currently, about
24% of total income is in the hands of top one percent income earners. The results,
not enough is left for middle class that has been losing its economic power
over the past three decades.

Capitalism survival depends on middle class,
if it goes so goes the capitalism.
There is enough money in the hands of the richest, especially
institutions, the problem is that money is not plowed back to the system. It is
used for speculation with no benefit to the real economy, spending on luxuries,
and/or investment abroad. Warren Buffet once said if I want to “I can hire
10,000 people to paint my picture every day for the rest of my life” had he
done that, at least 10,000 individuals would have a job. But, he didn’t, his
money instead in invested in hedge funds catering to the wealthy.
To me, market system works best if it is policed by a sophisticated
impartial regulatory system, we don’t have an independent regulatory system in
the US. There is a symbiotic relationship between politicians and those who are
supposed to be regulated, especially the wealthy Wall Street firms. Will Rogers once said “politicians is the best
thing money can buy”. We need to take money out of politics.

There is an ill-conceived belief among some economists that
the survival of the US economy depends on the health of Wall Street. The business
people may need the financial resources of financial sector t, but the overwhelming
reliance on Wall Street is counterproductive. It diverts attention of business
firms from what they are supposed to do which is creating good products and
serving the inhabitants of the Main Street.
“Too-big-to-fail” served as justification tool for
government to bail out Goldman Sachs and other big WS banks in recent crisis. Those
who engineered the bail-out plan used it to sell it to the public. However, what
public did not know was that the bailout plan was crafted by the person who
used be the head of Goldman Sachs, Hank Paulson. No matter how well-intentioned
is too-big-to-fail; it has serious drawbacks and must be either totally scraped
or reformed.

We must make distinction between commercial banks and
investment banks. The bailed out institutions were all investment banks, the
major monetary contributors to important members of the Congress. Wall Street executives
contributed $42 million to the lawmakers in 2009 was, the contribution of the
whole financial industry to Congress was $300 million.

no fear

the sanctions challenge has no doubt provided opportunities of its own, and this is one of them. sanctions push countries to become more self-reliant. unfortunately, this in turn causes the war rhetoric to gain momentum as sanctions inevitably fail to produce stated goals.

i am aware that subsidies have been reduced in a phased manner in recent years, but this final push is quite a big one to do all in one go. it could have been less abrupt. i would guess that the push is related to sanctions.

iranian people are being forced to find alternatives to trade partners and international banking systems in place. i hear that iranians in dubai are quite nervous while china is hosting a far greater number of iranian business people.

and the iranian government is perhaps being forced to cut spending on basic commmodities in order to be able to invest in solutions to the sanctions. this is reflected in how petrochemicals production, exports and earnings have been cut in order to produce more petrol and reduce dependence on imported fuel. this would result in a net loss in earnings for the petrochemicals industry, but greater independence from petrol imports. 

i do see the argument for cutting subsidies, but am not so sure about their 'elimination'. it then boils down to a question of definitions.

targeted and time-bound support to infant industries is generally thought to be helpful especially in the first few years of operation and until certain targets are met. this is how korea managed to move up the economic order among nations. korea did it with help of foreign investors and technology, but concentrated on technology and know-how transfer in all its projects. iran is largely left alone to do this. because of oil money and exploitable divisions within the UN, it is doable. 

varjavand khan

i must admit, in light of events in recent years, and with a growing body of evidence on how capitalism (or what is known as 'capitalism' in western discourse) was spread to other parts of the world, i am quite confused about what the term 'market' actually means. it almost seems spiritual and 'from above' with its own intelligence.

your statement: "[some believe that] if market system cannot solve our socioeconomic problems, government can" for example seems to imply that the market comes with a system that is underestimated in its capacity to resolve economic problems that may arise.

but had it not been for the 'government' intervening in 2008-9, would the 'market' not have collapsed totally? it was said that the banks were 'too big' to fail. meaning we would all lose if the banks failed. so the market allegedly had to be supported by the government in order to save us all.

to me, it looks more like the banks misused people's money, and governments took even more money from people and gave it to the banks to 'solve' the probem.

why did governments not let the banks fail and give the money to people (to safeguard their savings deposited with failed banks) instead? this way, those who were inept at running banks would have been sacked and/or put away in jail for theft and fraud, and those who had done nothing wrong would have saved their own assets.

regardless, doesn't all this make the distinction between 'government' and 'market' somehow weak?

Handouts

We are under an erroneous impression that if market system
cannot solve our socioeconomic problems, government can. While a benevolent
government may be able to solve some of such problems, it cannot deal effectively
with poverty which is the only reason why some people depend on government
handouts. If subsidy or cash payments to poor were the solution, we should have
eradicated poverty in Iran
years ago. However, according to available statistics, poverty is still widespread.
Government cannot deal with poverty and other socioeconomic problems successfully
because of inherent inefficiency and bureaucratic nature of government
operation, corruption, lack of accountability, and focusing on political goals
rather than the interests of the public to say the least.
To solve poverty, we should focus on its root cause, not its
manifestation which is low income thus inability to attain a decent level of
living. Often, rigged economic system, lack of education and proper training,
and inadequate access to financial resources are the main causes of poverty.
The last one is especially of particular importance in Iran. Poor people
often have talent, and survival skills, however, they may not know, or have not
the necessary means to utilize them.

Handouts, may serve as a deterrent to a much needed reform
and radical structural  changes in order
to alleviate/eradicate poverty. While cash payments may not have the distortionary
effects of subsidies, they still are not the solution to poverty. If subsidies
failed to alleviate poverty in Iran,
it is wrong to mess around wit them, repackage them and assume that they will
work this time. Handouts deprive the poor from standing on their own feet, taking
responsibility, and creating their own initiatives. They will promote dependency
on government instead of self-support and autonomy.

In other words, instead of

In other words, instead of creating jobs and providing income security and diversifying the economy, the IRI is creating more welfare queens and welfare kings dependent on the state for survival in the hopes of bying their loyalty to the regime. Truly a shameful scheme to systematically perpetuate poverty and backwardness robbing the future generations of prosperity and freedom.

Well done, USA and the Brits...

This was decided a long long time ago

This debate over subsidies has been going on for quite a few years. It isn't something that they are doing just because the US sanctions lately.

Anyway from an economic standpoint it makes total sense. Unfortunately it will lead to some hardships. Subsidies create a false sense of reality. 

Additionally now the rich do not benefit from the subsidies and the cash handouts help the poor.

The key though is if the government will start acting properly and liberalize the economy and let Iranians unleash their talents on the world. 

It seems to me, if the

It seems to me, if the report is accurate, that government is replacing the subsidies on selected commodities with cash payment. “The payouts, equal to about $40 a month per eligible citizen, are designed to soften the impact of higher prices to come, according to Iranian officials.” This allows the recipients to buy whatever they like on their own instead of being forced to purchase subsidized goods. It is more welfare enhancing from strict economics standpoint. The report says “Iran's government has said 60 million of its 75 million people are eligible for cash payments in lieu of subsidies for energy, fuel and food.” I guess this cannot be the case since Iran’s total population is less than 75 million. However, the cost of such entitlement programs will be astronomical and it may also open the door to further misuse and corruption. The good thing is that the cut in subsidies are not sudden “The phase-out will occur over five years” as indicated by the report

As far as the overall impact of removal is concerned, I don’t anticipate much for food items. Most people buy these items from free market anyway. However, a 20% increase in price of gasoline, as suggested by the report, may wreck havoc on the economy since it is a strategic commodity. In addition to escalating the cost of transportation for consumers, there are many industries that will be hurt since they are sensitive to cost of transportation and energy.  

Nilo, phased approach is currently underway.

We are entering the phase which pays a portion of government's savings in energy commodities back to the public. Eventually these payments should stop and we should be able to pay for our services and products based on international prices set by market laws.

Your angle to suggest Ahmadinejad could use the foreign imposed sanction to blame the hardship on, is interesting. I would have done the same. Its a perfect opportunity for a crafty politician. The elimination of subsidies is an important step that we must take. We must use all our resources to make this as smooth as possible.

yes we are

at a crucial crossroads. this kind of change could tip an unpopular 'regime' over the edge. 

question is why a more phased approach was not followed. perhaps everyone on all sides got fed up with waiting? are sanctions making these cutbacks more imperative? or perhaps the foreign sanctions provide a cover for the expected hardship to be blamed on foreigners? 

no matter, the government will be able to argue that the world is going through major adjustments right now, and iran needs to do the same.

Vargavand, ( on subsidies )

I'm glad you brought this up.

There is no doubt that the elimination of subsidies would be a huge correctional step which will impose hardship on the majority of Iranians for some years to come. But the fact remains, this step should be taken, whether it is now or down the road, makes no differences.

It is highly likely that the government who knows very well about the hardship its imposing due to economical corrections, would offer a broader range of freedoms and rights to its citizens to counter the negative effects of such economical policies. It is unlikely that Ahmadinejad would  push this policy forward without planning ahead for social and economical pressure valves.  I predict more relaxations over social laws and greater freedoms for political expressions while we might see a tighter control over economical criticism. I wouldn't be surprised if leftists islamists with their outdated economical policies be the first victims of such a clamp down by the current governmental forces.

The entire socio- political structure of Iran is about to change ( or changing ). New political forces are replacing old school traditionalists. We are witnessing a strong new wave with a strong leader who is making the most difficult decisions postponded by many gutless leaders before him. 

We are on the right track , for now. 

Here is my opinion about

Here is my opinion about subsidy in a nutshell,

When it comes to economic matters, government can play a successful role, especially with respect to more equitable distribution of income, alleviating poverty, and generating economic opportunities. There e are several channels though which government can influence the economy, sometimes effectively but often unsuccessfully. It may be imperative for government to use its perpetual economic and financial power to influence the outcome of the market system for the betterment of those who could not attain their fair share without such interventions; subsidy is one way to achieve this goal. However, given the inherent inefficiency of government stemming from pervasive bureaucracy, the lack of expertise, the culture of bribery and corruption, and the possibility of conflict between politics and the public interest, government cannot always be a Nirvana. This is especially true in lesser developed countries with a network of government enterprises that lack accountability and a proper system of assessment with checks and balances.

In addition, government is not good at ending things it started, even when these things are no longer needed or affordable. This is the case in point, the widespread government subsidy programs implemented by governments in Iran, and the protective tariffs that support domestic industries. In addition to promoting inefficiency and corruption that distort the intended effects of such programs, government may have a really hard time to terminate them despite the fact they heavily burden the its budget. Even if government does terminate such programs totally, the unavoidable consequences would be skyrocketing prices of staple food items, energy, and other basic necessities and imminent inflation. It is like pulling those who have depended on such systems for so long off their life support system. Massive public dissatisfaction, and even uprisings, would also likely result.