No Economic Justice With Hidden Subsidies

EghtesadOnline: Forty young researchers, along with a group of renowned economic experts, including Masoud Nili, former special presidential aide for economic affairs; Mohsen Jalalpour, former president of Iran Chamber of Commerce, Industries, Mines and Agriculture; and Hossein Abdoh-Tabrizi, former secretary-general of the Securities and Exchange Brokers Organization, recently released a statement calling for an end to indirect and hidden subsidies doled out by the government.

News ID: ۷۴۶۸۴۵

05 March 2019

The statement, which was also signed by Ali Sarzaeem, deputy cooperatives minister; Mohammad Fazeli, sociologist and assistant professor at Shahid Beheshti University; and Pouya Nazeran, economics professor at Ohio State University, starts off by quoting the remarks of the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei on Feb. 15, 2018, in Tabriz.

“[A society run on the principles of equity and] justice is one of the ideals of the Islamic Revolution. Despite the great deal of efforts made, justice remains a far cry from what we first expected,” the Leader said.

The statement published on Iran Chamber of Commerce, Industries, Mines and Trade's website noted that hidden subsidies are wrong turns the governments can take off the road toward equity, Financial Tribune reported.

"Supporting consumers by providing subsidized goods and pricing has been the bedrock of the governments’ welfare policies over the past 40 years. Fuel subsidies paid by the government each year, according to different estimates, is between 6,000 and 9,000 trillion rials ($44.94-$67.41 billion), or as much as two to three dollars a day for each Iranian. However, the way these hidden subsidies are distributed is hugely unequal. Residents of major cities like Tehran are enjoying the hidden subsidies many times more than blue-collar workers living in rural areas," the statement said.

According to an analytical report by the Persian daily Donya-e-Eqtesad, The share of people in the highest income decile, the richest in the country, from energy subsidies stands at 1,000 billion rials ($7.5 million) while households of the lowest income decile, the poorest, receive close to 100 billion rials (about $750,000) of the government’s energy subsidies daily.

The Reasons Why

The statement noted that for three reasons, subsidized prices are to blame for the country falling off track when it comes to achieving economic justice.

"First, the true beneficiaries of subsidies are the high-end consumers and not the neediest. Second, subsidized prices disrupt relative advantages and reduce manufacturing productivity, and third, black market is the byproduct of subsidizing prices and therefore a motive for rent-seeking and smuggling," it added.

According to the International Energy Agency, the Iranian government paid $45 billion in energy subsidies in 2017 to rank first globally.

In contrast, China paid $38 billion in energy subsidies in 2017. This is while the population of Iran is over 80 million but China has 1.5 billion citizens.

Fossil fuel subsidies paid by the Iranian government are 21 times more than its direct subsidy payments, Parliament Speaker Ali Larijani said recently.

What's the Remedy?

The gradual removal of hidden subsidies on energy carriers and equal distribution of cash subsidies in the form of universal basic income (an unconditional government payment made to all citizens as a supplement or replacement for wages) are the most effective way to achieve economic justice, the economists said.

“Universal basic income should be independent from budget and rely on resources gained from reforming the energy prices. A budget-reliant UBI will end in budget deficit and consequently prove to be disruptive to budgetary and monetary policymaking. Therefore, we recommend the establishment of a single energy fund that benefits each and every Iranian on a weekly and equal basis," the statement read.

"In doing so, the amount of UBI should not be a predetermined, fixed figure. Rather it needs to have a positive correlation with the sum of energy prices after undergoing reforms."

The experts believed that the removal of hidden subsidies on energy prices must take place in a piecemeal fashion.

"An abrupt change in prices would leave no room for reform of consumption patterns and therefore, it will induce recession. Strong commitment to the constant elimination of pricing interventions will clarify the long-term vision and encourage optimization of energy consumption," they said.

“A shift from subsidized prices to UBI must be followed by discontinuing hidden subsidies on other goods and then supporting consumers by improving manufacturing and consumption productivity through supervising quality and competition. "

They were of the opinion that when hidden subsidies are phased out, the ban on exports and hurdles in the way of imports turn out to be irrational.

"Trade facilitation, focus on quality and competition, case-by-case removal of government intervention and ending subsidized imports as a tool to regulate markets are the most effective ways of boosting productivity and reducing smuggling and rent-seeking behaviors," the economists concluded.