By: Abdolreza Ghofrani*

Subsidies bill has been turned into a controversial topic in domestic circles, and it is expected to gain momentum over the weeks and even months to come. This bill has been fully debated within the past couple of months with economists, analysts, universities professors and the majority of people uttering their points of views on the issue. Certainly, this can not be surprising, because if the bill is passed by the parliament and becomes law, its economic consequences that directly impact all walks of society is not an ignorable episode.

The Economic Reform Plan, encompassing targeting the goods subsidies, is probably one of the most important undertakings in Iran's recent economic history. Reorientation of subsidies, given its implications on people's lives, is also of great significance.
Subsidy is a system that is used in special circumstances for particular economic sections of a country. So it needs both objectivity and a time limit. The objectivity can contribute to a revitalization or recovery of a section of the economy, pre-empting economic crisis, fighting natural disasters and the consequences of wars in a particular time, assisting social welfare or helping to develop an economic section that may impact the progress of others.

Perhaps the worst type of subsidizing is the consumption good subsidies. Being unavoidable in crises such as wars and natural disasters, these types do have adverse consequences and have to be temporary, and must be cut gradually after the urgent situation no longer prevails. It is important to note that the coupons, rationing and cash subsidies systems are different forms of subsidies being applied in the economies. Naturally, the lion's portion of subsidies in the world is earmarked to education, health care, infrastructure, and some essential goods (in particular wheat, rice, sugar and……).

We can universally admit that there is no economy without subsidies in the world. However, there are essential differences that deserve to be contemplated; in the third world countries subsidies are granted to the poorest living levels just to aid livelihood of the people and to eliminate hunger. This situation has further been complicated because of the presence of other socio-economic elements such as disproportionate increase of population, poor culture and the lack of employment structures, whereas in developed countries subsidies are targeted to the running and development of advanced production sectors.

An economy without subsidies sounds a somewhat difficult job that governments take as a wise policy. Essentially some governments have no obligations to grant subsidies and thus institutionalize the culture of economizing in their own people. For instance, in times of draught, governments try to make the people understand that the country is facing water shortages and thus encourages them to apply mechanisms in order to optimize the use of existing water supplies. Such policies may rectify the immature behavior of the people. The best historical example is the Arabs oil sanction against Europeans in early 1970s; during that period some European governments urged their citizens to strictly cut back gasoline consumption. The governments priced energy carriers higher than the cost prices. This forced people to economize.

Some economists believe that subsidies harm the economy more than it helps. Subsidies for consumption goods granted by the government to the people, just to win their sympathy and satisfaction, will make them the greatest loser over time. This is perhaps the worst kind of subsidy although sometimes it is unavoidable. However, the fact is that by granting subsidies, the governments are expensing now at the cost of the future of the people. This not only spreads speculations, but pushes the people into more consumption as well as smuggling out of goods including energy.

With the elapse of time the governments will find themselves in a dire situation in which the nation's incomes begin melting down apparently with no way out. And then a desperate move on the part of governments is inevitable, and as one expert puts it a so called great surgery and a courageous management seems quite necessary.
In fact, when subsidies systems are distorted or recipients can not achieve the set objectives overtime, the economy will be seized by so called “subsidies disease “. Comparing the consumption mediums of the different countries where many sectors are covered and supported by subsidies is an indication of this ruthless fact.

During 1970s Tunisia granted essential consumption goods subsidies to lower income classes of the society, and even in some cases these subsidies were lower than the cost prices. In some countries the farmers were supplied with free water and electricity power. Through the 1980s, the Tunisian Government was grappling with the hectic burden of subsidies for which 72 per cent of the budget was allocated. So the government decided to undertake a subsidies reform plan. In this, the subsidies solely were granted to the poor and lower income classes, and the rich and to some extent middle classes of the society were no longer given financial support. This reform plan caused public discontent; however all in all, it was an achievement for the government.

In a comparison, the harmful implications of subsidies system running through the past thirty years in Iran have now been surfaced. Currently, the Iranian government is annually granting 90 thousand billion Toomans (US$90 billion) of subsidies. It seems this will lead to a serious crisis. Mass consumption, energy and foodstuff waste, especially in the course of processing and transferring, and none use of technology and innovation are the immediate and obvious results of generous financial support offered by the Iranian Government to different economic sectors.
Iranians are using up electric power as much as three times the average global rate making Iran the 19th largest global power consumer. The government, therefore, has to pay US$ 4 billion annually in subsidies. Iranians are also the greatest bread consumers in the world. Per capita energy consumption in Iran is five times higher than Indonesia, four times more than India and twice as much as China, the three most populated countries in Asia. Besides, energy consumption in Iran has doubled in every ten years, whereas the global energy consumption has doubled every 50 years. Nearly 38 percent of the annual budget is allocated to gasoline subsidies while Iran is the third greatest gas consumer in the world. (See Tehran's morning newspaper, Hamshahri, dated 26 April 2009)

In this situation, given the global economic recession and the declining oil prices causing revenue reductions, Iranian Government has worked out a reform plan and has submitted the “ targeted subsidies” bill to the Parliament. The law makers are now working on the bill.

The purpose of the bill is to gradually readjust the prices in the span of 3- 5 years in order to bring them closer to international markets.

The subsidies reorientation plan is not intended to cut them indefinitely, but it is to optimize the spending of the country's financial resources and to redistribute those resources to the varied production sectors. Of course, the gradual cutting of the subsidies will entail price hikes that are temporary. The first sector that will be impacted by the subsidy cuts is that of transportation. The more expensive energy carriers will make people to use the public transportation network instead of their personal vehicles. Then the demand for vehicles may decline and the public transportation will have an all out challenge, or in a better word, shock and then the government can not but develop and renovate the network.

In the first year of slashing the subsidies, the government is to recover 10 to 20 trillion Iranian Toomans. Then the price of gasoline will be tripled and gas oil prices will rise fivefold. If the gasoline prices are brought closer to the international markets and crude prices stands at $ 70 per barrel, then the government revenues will be as high as 50 thousand billion Tooman.
Reorientation of the subsidies needs frames and structures. Some hesitates if these essential cultural and economic structures do exist in Iran. It takes time requiring a comprehensive study, integral management as well as proper action with careful monitoring, and finally, a national will and devotion. If Iran achieves the goals set for this purpose, it can set a good example for other countries seized by subsidies to follow.

The author is a senior international and economic expert