Saturday, November 6, 2010

Subsidy Reforms, ctd

Iran’s Minister of Economy and Finance Shamsodin Hosseini announced in Tehran the government’s plan on redistribution of the monies saved as the result of the gradual removal of the government subsidies of the essential goods and services. In the most detailed account offered so far by the government, Hossieni said 50% of the savings will be redistributed directly to the people (which includes monthly cash handouts), 30% will be used to boost the invesments in agriculture and industry, and 20% will be allocated to the government for its general budget [Kayhan, 6 November].

If indeed 80% of all the savings generated by the subsidy reforms are allocated to non-productive sectors, away from the long-term investment and development projects, then disater is already written all over these “reforms.” Injecting back the cash directly into the economy to boost the public consumptions and the government’s general budget would not lead to job-creating investment projects, and would raise the inflation rate to the levels not seen since the end of the eight-year war with iraq.

To read the Kayhan article, click here.


Anonymous said...

Whatever ills we see in China, the oppression, the paranoia, the crude controls over the population, Iran’s leaders have one aim, one goal, one desire: a stronger IRAN.

Since over 50% of our elites are either foreigners or swear fealty to Israel, they see nothing wrong with simply kicking the European public to the curb. That is, they are more interested in their foreign alliances and holdings and when given a choice between enriching Europeans and enriching their true loves, they choose the latter. Seeing the European public as an entity to exploit, they have no native desire to protect, only loot. The Iranian leaders want Iran to grow and prosper, under the leadership of EL Magnifico this will help move Iran's economic direction similar to China's

Anonymous said...

Dear Uskowi.

It is not a really good article

I try to suuarize the Keyhan numbers
The subside reform

50% back to people
30% goes to Production sector(Industry, Agriculture)
20% goes to Government.

with other words Ordinary Iranian will receice only Half Subside as before the reform.

why you belive the 80%( which should of saving goes to non
productive sector and consume ?

at first it is 70% goes to non-production and not 80%.

second :
do you believe you can reduce the people subside to nuill, without
making a disaster for poorer Iranian ?
do you want the people to strave ?
they lost already 50% of their income

Nader Uskowi said...

It is indeed 70%, sorry for the mistake. My apologies. But this is the problem: An economic reform is not cash handout to the population, but creating jobs for the population. When only 30% of the savings is earmarked for job-creating investment projects, there is inherenly something wrong with the plan. If the idea was to spend the saving maily on cash handouts and government general budget, then why did they want to remove the subsidies in the first place?

I do agree with you that people cannot bear the impact of the hardship created by subsidy removals. That's precisely while the removals should be gradual and not overnight. By scheduling the removals according to a timetable that protected the citizens, but at the same time was spread enough for new jobs to be created in each phase, the government could have pulled this off.

Needless to say, under any structructual reforms, the people and the government will both feel the pain. Otherwise there was no need to call these reforms historic and corageous, as I have done so in the past. The nation has used its high oil revenues since 1970s to subsidies its essential goods and services, instead of having invested a large part of the oil revenues investing for future. These subsidies have become "entitlements." the country cannot afford continuing on that road, it needs corageous leaders to correct the mistakes of the past and move the country forward.

Unknown said...

Uskowi even if 70% right now would be spend upon non-productive expenditure it is there for few years, secondly if govt does not remove subsidies at all the subsidies contribution is other wise increasing every year.

Don Cox said...

Subsidies are a bad thing in principle. If people are too poor to buy necessities, they should be given money directly. Subsidies benefit the rich as well as the poor.

Removing subsidies is one of the very few good policies on Ahmedinejad.

reader said...

Don is right, subsidies is good only if it is targeted at the poor and needy as safety net to strengthen social coherence. Giving cash to 80% of population without proper mean testing is madness. The money saved on food and fuel subsidies should be invested directly into infrastructure projects such as roads and public transport.

Azar in Maryland said...

Nader Jaan,
For those of us who believe subsidies can be removed fully and instantaneously, without any spill over of benefits and redistribution to others, I refer you what has been the case in advanced economies. Let's be fair on this issue and do not expect a 100 percent redirection of resources saved in this way from a government that has surmounting governance difficulties in many other areas. The fact that 30% of saved resources can be redirected to "productive" uses is not a bad start. I certainly cannot call this "disaster" if the promised 30% can be realized. Can this level be increased overtime and can it be claimed that redirection to "productive" uses are not themselves in the form of subsidies to mentioned sectors remains to be seen. Azar in Bethesd,MD

Nader Uskowi said...

Azar jan,

30% in investment of course is not a disaster, and it is a good move. By disaster, I was clearly referring to 50% cash handouts and 20% in government general budget. They are so many projects whose studies have already been completed and create jobs in short periods, and the government has all those proposed projects on hand, that investing in them would have made much more sense, less inflationary and putting people at work instead of giving them handouts.

I've been calling for the gradual removal of subsidies, and gradual investment in job-creating projects. In this case, the government might pull this off, without too much inflationary pressure. In any case, even a half-herated plan might work to some extend. The most important criteria here is the acceptance by the government and the public that these subsidies are not sustainable and impede economic growth.

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