New way out
Gasoline subsidies in Iran

Ebrahim Mohseni
June 30, 2006
iranian.com

As an economist, I will have to disagree with Kianoosh Saadati's piece, "Democracy is not top priority". What the government of Iran is doing in introducing gasoline rationing is in line with the demands from IMF, World bank, Islamic Development Bank, and non-socialist economists. Here's my paper on the subject. Excerpt:

Iran is a classic welfare state.  The economy is run by the government and everything from cheese to electricity is subsidized by it. The subsidies were initially introduced to garner public support for the Shah and where later maintained on social justice grounds.  Gasoline subsidies account for 17% of Iran’s energy subsidies.  It is becoming evermore expensive to maintain and is introducing severe inefficiencies on several grounds.  During the past decade, per capita gasoline consumption and the cost of maintaining relevant subsidies have increased by 98% and 214%, respectively. 

Many measures have been proposed to bring gasoline subsidies under control.  None of the proposed measures, however, were able to overcome the entitlement mentality of the public and as a result failed to survive long enough to be effective.  This paper suggests a new way out.  It proposes to explicitly link and combine unpopular gradual price liberalization schemes, which tend to negatively affect the purchasing power of the public, with other market oriented compensations schemes that would make people feel better-off without the subsidies.  Moreover, it proposes the government to start and intensive public information campaign to introduce the real beneficiaries of the subsidies. 

It must, nevertheless, be understood that Iran’s gasoline subsidies are part of a bigger problem, which is the rentier nature of the government and the society. While targeting individual socioeconomic inefficiencies might be a worthwhile endeavor, such measures need to be combined with more far reaching reform measures to be effective.

Being heavily endowed with point resources is not always a blessing.  A combination of bad policymaking, swelling public expectations, and increasing government intervention in the economy can definitely turn such endowments into a real curse.  Petroleum is an example of a point resource that has not well served its possessors.  Research has shown over and over again that countries heavily endowed with petroleum perform worst than their peers on almost all grounds. 

Subsidy policy making is one of the areas in which oil-based economies have persistently underperformed.  While their lack of success in devising economically sound subsidy policies can be attributed to many indecipherably intertwined factors, being a rentier state can indeed be cited as the primary culprit. 

Rentier states, which by definition lack both the will and the capacity to allow market mechanisms bring about a society wherein wealth and resources are optimally distributed, find themselves politically forced to introduce distributive schemes that have historically and almost without exception been detrimental to the long-term general socioeconomic wellbeing of their public. 

Iran’s gasoline subsidies serve as a great example.  Iran is the world’s 4th largest petroleum exporter.  The government of Iran has monopoly over all petroleum related activities, from production to distribution, and is the sole recipient of the relevant revenues.  Petroleum revenues account for 85% of Iran’s gross annual exports and about 27% of its GDP.  However, relatively very few people are actually involved in generating these revenues. 

Therefore, the government of Iran has from very early on been left to consider different national wealth distribution measures in order to both provide for its citizen’s welfare and the country’s development.  These measures have ranged from those that have had sound economic reasoning, like investment in the country’s infrastructure, to those that have been undertaken purely due to political or ideological considerations.  Iran’s gasoline subsidies are indeed of the latter type.

Massive oil revenues of the second half of the past century, allowed the government of Iran to heavily subsidize all consumer goods.  While not recognized at the time, gasoline subsidies have proven to be the most expensive, least beneficial, and increasingly less sustainable of all.  What has further exacerbated the problem is the fact that the public, auto industries (in terms of design and fuel efficiency), and the market, in general, have all become addictively dependent on these subsidies. 

Thanks to high oil prices, however, the government of Iran has been able to continue on with the subsidies and provide its citizens with cheap gasoline, priced approximately 14 times lower than its neighboring country Turkey.  Cheap available gasoline has made all sectors of the economy and all levels of the society less interested in making fuel efficient choices, engendering grave sociopolitical, environmental, and economic inefficiencies.   

This research paper is divided into four main sections.  It first describes the history and the current status of gasoline subsidies in Iran.  Then it explains in detail the problems associated with the current gasoline subsidy policies of Iran.  Next, it provides a survey of the most frequently mentioned policy options. Finally, it provides a unique policy recommendation designed to be both effective and sustainable...

Gasoline subsidies have been a part of Iran’s economy for the past fifty years. While they have been maintained for different reasons across different regimes and governments, the sheer fact that they have been in place for as long as most people can remember, makes their termination an extremely intricate task.  One thing that is certain is that the termination process must be a gradual one to allow for adaptation.  The mere fact that the process will have to be gradual, moreover, makes it absolutely essential to have it be combined with other measures to ensure it survival.

This paper has suggested a possible set of actions that can lead to a gradual reduction in government expenditures associated with domestic gasoline consumption while at the same time compensating those adversely affected through market oriented schemes.  It must, however, be recognized that Iran’s gasoline subsidies do not exist in a vacuum and targeting it alone might be very difficult to achieve. 

Reforming Iran’s energy sector needs to become part of a broader process of economic and social reform. It must be recognized that the gasoline subsidies to which this entire paper was dedicated, only account for 17% of Iran’s total energy subsidies.  Wheat, rice, oil, sugar, milk, cheese, medical equipments, pharmaceuticals, and fertilizers are among other things that the government of Iran has heavily subsidized.

These subsidies amount to approximately 6% of Iran’s GDP annually, and, as can be imagined, they engender similar sorts of market distortions and socioeconomic inefficiencies as gasoline subsidies where shown to create.  While treating the individual inefficiencies might work in the short-run, without a comprehensive socioeconomic reform, Iran will be forced to deal with the engendered inefficiencies when they turn into full blown crisis in the not very long future >>> Full text document
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Ebrahim Mohseni is a PhD Candidate at the University of Maryland (College Park) School of Public Policy.