The government of the IRI is phasing out its broad based subsidies and replacing them with cash payments of about $40 a month per eligible citizen. The cash payments are designed to mitigate the pressure of higher prices on low income families and hopefully smooth out the transition to the new system. According to a report by WSJ “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.” My guess is that this cannot be accurate. If it is, the cost of such a huge undertaking will be astronomical, as much as $2.4 billion a month, almost $29 billion annually.
The good thing is that the cut in subsidies are not sudden “The phase-out will occur over five years” As far as the overall impact of removal of subsidies on prices is concerned, we should not anticipate much for food items, most people buy them in free market anyway. However, a hefty increase in price of gasoline, may wreck havoc on the economy since gasoline 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.From economic standpoint, cash payments are more welfare enhancing because they allow the recipients to buy whatever they chose to instead of being forced to purchase subsidized goods. However, the new program may open the door to misuse and further corruption.
Obviously, poverty is the only reason why some Iranian households depend on subsidies or government’s handouts, it cannot be, however, dealt with effectively through government handouts. If subsidies or cash payments to the poor were good solutions to poverty, we should have eradicated it in Iran years ago. However, poverty is still a widespread problem. Government cannot deal with poverty, and other socioeconomic ills for that matter, successfully because of inherent inefficiency, bureaucratic nature of its operation, corruption, lack of accountability, and more importantly 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 and 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 do not have the necessary financial resources to utilize them. Handouts, may also serve as deterrent to the radical structural reforms needed to alleviate/eradicate poverty in economically-challenged countries. While cash payments may not have the distortionary welfare effects of subsidies, they will not serve as effective solutions to poverty. Furthermore, thus far prolong subsidies failed to alleviate poverty in Iran, why we should assume that repackaging them in form of cash payments will be successful. Handouts deprive the poor from standing on their own feet, taking responsibility, and creating their own income-producing initiatives. Cash payments will promote dependency on government instead of autonomy and self-supporting endeavors.