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Iran's plan to phase out subsidies for staple items holds risks


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POSTED: Wednesday, December 02, 2009

BEIRUT, Lebanon » The outside world may be focused on Iran's intensifying confrontation with the West over its nuclear program. But at home, Iranians are more concerned with an ambitious and risky new effort to overhaul the country's troubled economy.

If it goes awry, the plan to phase out Iran's system of state subsidies, which has existed for decades, could profoundly destabilize the government of Mahmoud Ahmadinejad, who has aggressively championed change. But it could also help wean Iran from its dependence on foreign gasoline and insulate the economy from new sanctions - which are a strong possibility if Iran continues to defy Western pressure over its nuclear program.

The new plan has been the subject of frenzied debate in shops, blogs and homes across Iran, not to mention the Parliament. Lawmakers across the political spectrum have warned of catastrophic price shocks once subsidies are lifted. Conservatives seem deeply worried about the repercussions, with some saying the plan could lead to a crime wave, or worse. Opposition leaders like Mir Hussein Moussavi have begun hinting that the government's failure to stem economic pain could become their new rallying cry.

There is widespread agreement that selling everyday goods at far below market prices, which costs the Iranian government an estimated $100 billion a year, makes little economic sense. It encourages overconsumption of gasoline and other products, discourages domestic production and makes Iran more dependent on imports, economists say. The subsidies are also regressive, because the rich pay the same artificially low prices as the poor and consume far more. And they encourage smuggling.

Previous governments have tried to eliminate subsidies and build a more dynamic, market-oriented economy, but retreated in the face of popular pressure. Ahmadinejad - who has long cast himself as a champion of the poor and a scourge of Iran's privileged elite - has pushed hard on the issue, and last month Iran's Parliament gave him full authority to begin paring back the subsidies this year.

Ahmadinejad, not known in the past for favoring strong pro-market medicine for Iran's ailing economy, has presented the measure as a matter of economic justice. He says half of the money the government saves by eliminating subsidies will go to helping poorer Iranians adjust to higher prices.

But the measure also has clear political motives. The changes would hit hardest at the urban middle class, which has tended to favor Ahmadinejad's opponents. And the president clearly hopes to carry out an important policy change that two predecessors, Mohammad Khatami and Ali Akbar Hashemi Rafsanjani - now leaders of the opposition - tried and failed to achieve.

The risks are serious, however, and lately even some conservatives have hinted that Ahmadinejad may not be up to the task.

“;The reality is that with subsidies reform, you will put a lot of pressure on the population, and Ahmadinejad will be walking a fine line,”; said Trita Parsi, the president of the National Iranian American Council.

Removing price supports would instantly quadruple the price of gasoline, and the follow-on effects could result in similar increases for basic goods and an inflation rate of 60 percent or more, according to the Majlis Research Center, the research arm of Parliament, which is run by a conservative lawmaker, Ahmad Tavakoli.

In addition to the effect on consumers, Iran's ailing industrial sector could suffer. The head of the chamber of commerce in the northern city of Sari, Mousa Vafayan, recently told the Khabaronline news Web site that 30 percent of factories had already been forced to suspend production because of rising prices, indiscriminate import policies and inflexible interest rates. The government's own refineries depend on artificially low prices, making it harder to predict the overall effects on the economy when they are removed.

Some lawmakers have called the overhaul a betrayal of Ayatollah Ruhollah Khomeini, founder of Iran's Islamic Revolution, who promised: “;We will build real estate, make water and power free, and make buses free.”;

Even those who favor an overhaul tend to distrust Ahmadinejad's ability to carry out such vital economic surgery. Some in Parliament insisted at first that the legislative body supervise the process, but last month it gave Ahmadinejad the leeway he requested to pursue the changes.

The distrust is rooted in experience. In May 2007, the government raised the price of gasoline 25 percent, and a month later it introduced gas rationing. The plan was widely considered an effective one, but it was introduced ineptly, setting off panicky rumors, widespread anti-government protests, and the burning of at least 19 gas stations.

This time, the changes are far more sweeping, and less predictable. There are serious questions about the reliability of the government's data for a crucial element: identifying those who would receive financial help under the proposed law, said Farideh Farhi, an Iran expert at the University of Hawaii, Manoa.

Even if poorer Iranians get the help they need, most of the urban middle class - with just enough income to be exempt from assistance - will suffer most from higher prices. That group is already the backbone of the opposition to Ahmadinejad, Farhi said, and more economic pain could further alienate them.

Oddly, one thing that might make subsidies reform easier is more sanctions, the tool mostly widely discussed by Western leaders as a final option to put pressure on Iran if current nuclear negotiations fail. Economic sanctions or a gasoline embargo (assuming one could even be organized) would force down consumption and help the Iranian government's finances, because there would be no more need to pay for gasoline imports, Parsi said. That could disguise the pain of subsidies reform, allowing the government to peel away price supports while blaming the West for any ensuing inflation.

In the meantime, the high stakes of the changes can be witnessed in small businesses like the Zafaranieh Sweet Shop, a popular neighborhood bakery in north Tehran.

The owner, a bald, sleepy-faced little man known locally as Dahi, weathered Iran's devastating eight-year war with Iraq, and the painful economic reconstruction afterward. Now he fears that subsidies reform could drive the price of flour, sugar, eggs and other goods so high it would put him out of business.

“;When the subsidies are removed, things will get worse,”; Dahi said, as a warm, buttery smell of fresh-baked pastries emerged from the Italian-made ovens. “;Our suppliers will start to charge whatever they want. It will be chaos. At that point I don't know what we will do.”;

The sales price of many of his products is fixed by a semi-governmental cooperative that has not allowed him to pass on his increased costs to the consumer, Dahi said. So he is operating at a loss, with his debts to suppliers mounting.

“;I don't know how much prices will rise, or when they will rise,”; Dahi said, his voice sounding resigned and dryly amused. “;No one knows anything. You think Ahmadinejad is an economist?”;