Subsidy, also known as “sobside”, is a financial assistance provided by a government to improve the well-being of citizens or strengthen various economic sectors. Many economic experts consider subsidies as negative taxes paid by governments. Subsidies can be provided directly (in the form of cash, essential goods and supplies for citizens) or indirectly (through services, discounts, etc. to empower citizens).

Many countries provide support to their citizens in various forms by giving subsidies. Some countries allocate these aids to the upper levels of the economy, while others pay them to the lower levels and consumers. In general, providing subsidies, especially in the form of cash, is the simplest form of government assistance for the welfare of society and improving the living conditions of citizens, although it is not without negative economic consequences.

Before the 20th century, there was no such thing as subsidies in the world of economics. It was after World War II that due to the very poor economic and social conditions of countries, especially European countries, governments tried to directly or indirectly help their citizens. The system of rationing and distribution of ration coupons during the war is an example of the managed distribution of subsidies in the form of goods to different segments of society, which expanded after World War II.

Although the history of subsidies for various goods and services in Iran dates back to the 1330s, it was during the 84 presidential election that the discussion of direct subsidies of 50,000 tomans to all citizens was brought up by Mehdi Karroubi, one of the candidates. However, it was implemented by Mahmoud Ahmadinejad, the winner of that election.

The topic of cash subsidies to all sectors of society has been heavily criticized by experts and economists since the beginning of its implementation. Prior to this plan, the government used to provide indirect subsidies, mainly in the energy sector, in order to provide energy carriers at a lower price to the people. This practice, despite being wrong for many years and continued by all governments, was still in place. In 2010, the implementation of this plan began in order to support low-income groups who do not consume much energy, but in reality, cash payments were made to all social classes. This deceptive and populist approach caused the targeted plan to act against its own goals.

Basically, the implementation of the targeted subsidy plan was a populist method to attract the people. Representatives at that time, despite being aware of the flaws of the plan, remained silent. And it wasn’t just this plan that they didn’t protest against; the Mehr housing plan was also one of the plans that became a problem due to the silence of the representatives and now it remains a burden on the current government.

The current political structure in Iran is in a situation where even the most important economic and livelihood issues of the people are overshadowed by political competition. Well, despite the economic goals that were initially announced, this plan never followed the path of justice and ultimately failed to achieve any of its stated objectives. Now it does not seem possible for such hasty prescriptions to solve the problems caused by its non-expert implementation, unless it creates new problems itself. At least one of the goals of implementing this plan was to exclude the affluent classes, who consume the most energy and fuel, from receiving indirect energy subsidies. In other words, the government used to give subsidies for fuel and energy, especially gasoline, before the targeted subsidy plan; meaning that it would buy these energy carriers at a certain price, but sell them cheaper to the people. In this situation, both high and low consumers were using a certain amount of government subsidies, while the needy were supposed to receive these subsidies; but in practice, the targeted

What do global experiences show?

Many governments use subsidies as a tool to achieve economic, social, and political goals. In this regard, price stabilization or, in other words, keeping the prices of essential goods under control, which is under government control, is one of the government’s economic approaches to improve the standard of living for people. One of the most important objectives that policymakers have in mind for targeted subsidies is the management and optimization of energy consumption in the country and reducing dependence on imported energy carriers, especially standard gasoline.

Until 2008, some countries in the world have implemented targeted subsidy laws and in most cases, they have initially faced economic problems, including uncontrollable inflation. These problems have been resolved by adopting proper policies and cooperation and convergence of all power institutions in those countries. Generally, in these countries, the collected funds from targeted subsidies are allocated towards reducing production costs and creating technology for less energy consumption, and are allocated more than ever to the country’s infrastructure.

In a country like Turkey, the energy market was under the complete control of government companies before the reform of fuel prices. However, from the 1980s, efforts were made to reform subsidies in the fuel sector as part of the country’s overall economic reforms. (3) As a result, the reform of fuel subsidy payments was planned in order to improve the government’s income, increase productivity in the industrial sector, and pave the way for Turkey’s membership in the European Union. In this framework, prices were determined by the private sector and in 1998, the process of automatic pricing based on international prices was implemented.

In continuation, from 2003 onwards, the management and legislation of the oil production market was also entrusted to independent sectors separate from the government. In 2005, complete liberalization of fuel was implemented in Turkey. In 2004, the Turkish Parliament passed a bill that reformed the production costs of oil in the country, allowing for free pricing for consumers and privatization of state-owned oil refineries. For example, 31.5% of the Turkish oil refinery company, which refines 80% of the country’s oil, was sold to private investors in 2007.

Turkey’s success in reforming the fuel subsidy system was due to its commitment to market reforms. The economic development of this country was also aided by the success of these reforms in subsidies. The creation of independent institutions to determine energy policies was beneficial, as Turkey also acted in a logical and transparent manner in terms of privatization.

In the report of the International Monetary Fund on Indonesia, it has been mentioned as a successful country in the policy of subsidy payments. This Asian country initiated its fuel subsidy reform program in 1997 during the East Asian financial crisis, which also led to a political crisis. However, in the following years, gradual price increases resulted in successes from 2000 to 2003. Generally, Indonesia shifted more of its subsidy payments from the energy sector to essential consumer goods such as rice, healthcare, education, social welfare, and support for small businesses through low-interest loans. The lessons learned from subsidy reform in Indonesia show that targeted cash payments result in the least challenges in the process of subsidy reform.

Structural surgery; government’s secret name.

The government claims that the removal of the four thousand and two hundred tomans currency and the directive pricing of goods are part of the economic reforms that have been implemented in the thirteenth government. However, this claim has been met with criticism from some economists who argue that the recent actions of the government are not economic surgery, but rather a reactive response to the current situation. Statistics show that people’s tables have become smaller and the purchasing power of households has decreased, but governments believe that these actions are the starting point for some changes to reduce poverty and improve economic conditions. People just need to be patient. (5).

What the thirteenth government has done during this period is reactive responses and not economic reforms. Some are trying to present the issue of increasing the price of flour and its reflection on the price of fantasy bread and macaroni as economic reforms. There are other cases of price adjustments that have been presented as economic reforms, but these are reactive responses of the government and are not called economic reforms. The current government is repeating the experience of the previous government in a different way; a move that the previous government did with gasoline and now another government is doing with bread. The reason for this government’s action is not to implement reforms, but rather because it no longer has the ability to pay for previous subsidies; however, it should be noted that this is a short-term and possibly ineffective decision made to compensate for the lack of financial resources.

The government could not continue in this situation, because the demand for four thousand and two hundred tomans of currency had exceeded the government’s capacity and the budget deficit caused by it had led to corruption and embezzlement, but the government had no choice but to eliminate the four thousand and two hundred tomans currency. (6) There was no other option for the government but to eliminate the four thousand and two hundred tomans currency, but simply increasing the prices of goods without structural reforms does not solve the pain of the economy and does not create any benefits other than creating a crisis. The only option in front of the government is a wrong option that does not solve the pain of the economy and the people. In the past months, the government tried to control the inflationary effects of its decisions and plans through a command economy, money printing, and controlling management; a method that not only failed in previous governments, but also led to high inflation rates and worsened the economic instability.

Given the total factors and considering the impact of removing preferential currency, increasing energy carrier prices, and intensifying monetary policies, even if the JCPOA is signed and oil exports increase and export barriers are removed, it cannot be expected that inflation in Iran will decrease.

The disease is called “meli”.

To.

There is no cure.

The thirteenth government, unlike the tenth government, which focused on populist and demagogic measures to attract the attention and support of the working class and the lower classes, and implemented plans such as targeted subsidies, Mehr housing, and Justice Shares, was drawn towards these measures passively and by force. Now, the budget of the government is no longer sufficient to cover the extravagant actions of the government and the accumulated demands of various segments of society, and with the continuation of international sanctions and the lack of agreement with the United States over the revival of the JCPOA, the financial difficulties of the government are increasing day by day. The new policy of the government, under the code name “structural surgery”, has been adopted by the young ministers and graduates of the Imam Sadeq School to find a logical justification and be accepted by the elites and various segments of society. Although economic experts warned from the beginning about the timing and implementation of the policy of eliminating preferential currency and increasing prices,

First, it must be clarified that the new government policy, given the absence of economic reform indicators, cannot be considered a true reform policy; as the experience of countries like Turkey has shown, a successful structural policy requires groundwork and preliminary measures. In 2001, Turkey was facing numerous problems, including a 64% inflation rate, negative economic growth, and increasing unemployment. National consensus on economic reforms was the most important prerequisite for initiating a structural surgery policy, which Turkey achieved after many trial and error attempts under various governments. The wise choice of Kemal Derviş as the head of the Central Bank to implement structural reform policies, given his previous experience at the World Bank and the International Monetary Fund, was the best decision made by Turkish policymakers.

At first, Darvish recognized that inflation in Turkey had its roots in the improper activities of so-called “bad” banks in the country, which had strayed from their main duties of equipping resources for the productive sector and the country’s production. Therefore, the sword of reforms turned towards the banking system and inflation was temporarily controlled by reforming the banks, leading to economic stability. This was necessary for economic growth and attracting foreign investments. Just as surgery for a cancer patient is accompanied by pain and bleeding, and is commonly referred to as “painful”, Darvish believed that the burden of this economic surgery should not fall on the weak and working classes, but rather on the beneficiaries of the current situation and various rents, who should take on this responsibility. Just as they have benefited from the rent-seeking environment in the past. The results of Darvish’s reform policies were evident within a year, with Turkey’s economic growth reaching 2.5 times and inflation being reduced to

If the thirteenth government was truly after deep and structural reforms, it should have first properly diagnosed the situation and chosen the key and sensitive sector of the economy for surgery. A disease suffering from chronic cancers should first reach relative stability and then begin the treatment process. The economy of Iran is currently in a state of hyperinflation and instability, so any kind of treatment or so-called structural surgery may lead to the patient’s coma, a phenomenon known as “collapse”. Another important point is choosing the right policy and appropriate timing for surgery. The government could have initiated economic reforms itself and reduced its own high costs instead of increasing the prices of essential goods.

Economic surgery begins with the budget; by reducing the costs of government agencies; first by reducing the budget of the parliament, the Guardian Council, the presidency, etc., reducing the budget of advertising agencies that have not had a positive impact, reducing and eliminating specific items for influential individuals, reducing the budget of centers whose work has never been analyzed for cost-effectiveness or efficiency…

The government, as the executive arm of sovereignty, has chosen the easiest way instead of reforming the budget structure and reducing the current expenses of its own companies, which account for eighty percent of the annual budget, or collecting taxes from semi-governmental companies, foundations, and institutions such as Khatam al-Anbiya, Jihad Nasr, and others. This is the same manipulation of people’s resources and imposing rampant inflation on society to cover its budget deficits in the billions. The conflict of interests has closed the door to any possibility of structural reforms in the Iranian economy, and what has been presented by the government as structural reforms is nothing but lies. The people, aware of these contradictions and systemic injustices in the Islamic Republic, look at the government’s plans and programs with doubt and suspicion; for example, in recent days, traders in Tehran and some cities have taken to widespread protests.

The government has suddenly decided to make reforms in structures and processes, which will directly affect the people; they have suddenly removed the preferred currency for essential goods and transferred all the pressure to the people. What kind of economic thinking and rationality is it to say that the price of four essential goods can suddenly triple, but the prices of other goods remain fixed and unchanged? Can the price of flour, oil, eggs, and chicken be increased and then order that the prices of other goods not rise? Can the price of food not increase?

Economic movements occur in the entire world with proper policies. One of these policies is foreign investment. In order to attract foreign investment, we must support fundamental reforms in diplomacy; a matter that has been deliberately overlooked.

Does targeting subsidies make society poorer?

The government and some experts who support it believe that the targeted subsidies will lead to a reduction in class disparities and improve the living and welfare conditions of the weaker segments of society. However, the experience of implementing targeted subsidy policies is clear evidence of the fallacy of this statement.

The targeted subsidy law, which was supposed to help low-income groups and those affected by the liberalization of subsidized goods, especially fuel, by distributing cash subsidies, has apparently turned into a factor for the expansion of poverty and socioeconomic inequality, contrary to its intended goals.

The “Shada” magazine, the publication of the Ministry of Economic Affairs and Finance, announced in a report published in 1393 (2014-2015) that although the method of income distribution among different segments of society may show improvement following the implementation of the first phase of targeted subsidy law, this indicator cannot be considered as a measure for improving family welfare. In fact, during the eight years of Mahmoud Ahmadinejad’s presidency in Iran, the overall economic indicators decreased and the purchasing power of households for essential goods decreased by 60%, the purchasing power for housing decreased by 25%, and the rental power for housing decreased by 40% compared to the last year of the eighth government (Mohammad Khatami’s government). (7).

According to official reports, the cost of providing food, clothing, and housing as primary needs for households during the eight years of Mahmoud Ahmadinejad’s presidency, from 2005 to 2013, has increased by over three hundred percent, meaning that family expenses have multiplied.

However, the only issue is not the targeted allocation of subsidies, but rather a series of policies implemented by the Ahmadinejad government that caused the problem; meaning that Ahmadinejad had chosen a populist policy; in such a way that firstly, a large amount of money was poured into the market, or to put it more simply, it was distributed among the people. During this period, the amount of liquidity increased by more than six times. If this is done in any part of the world, inflation will inevitably occur and when inflation occurs, it will naturally harm the poor classes; and all prices will also experience an upward trend.

The second issue that Ahmadinejad caused was the lack of confidence in Iran’s economy; meaning that with his words and policies, he added to the distrust. Investment and other economic matters were not being addressed and what should have been done in terms of production was not being carried out. The recession that occurred during this period was a result of the government’s actions, which led to a continuous increase in sanctions. With the sanctions, economic problems arose and the issues of corruption and rent-seeking took hold of Iran’s economy. These problems caused prices to skyrocket. When inflation occurs, it naturally affects the weaker classes more. The reality is that indirect subsidies should have been removed, but direct subsidies should have been clearly given only to those who truly needed them during the transition period and afterwards.

According to the publication of the Ministry of Economic Affairs and Finance, the latest information released from the implementation of the targeted subsidy plan shows that the people of Iran have become poorer after the implementation of the targeting law, and the purchasing power of Iranian households during the first phase of the targeted subsidy plan has decreased by about 10 percent. (8).

Economic statesmen of the ninth and tenth governments believed that targeting subsidies would lead to price correction, increased efficiency, reduced costs, and ultimately decreased inflation. They also stated that they were never seeking to implement an economic adjustment plan or eliminate subsidies, but rather to target subsidies and fairly distribute them, and to take steps towards the fifth development plan.

According to the resolution of the 1388 Islamic Consultative Assembly, the amount of income from targeted subsidies from December 19, 2009 to June 20, 2012 was a total of 30 trillion tomans, and due to the non-implementation of the approved laws, the amount of expenditures was 62 trillion tomans. In other words, the Ahmadinejad government, by not implementing the law at the beginning of its term, faced a deficit of 62 trillion tomans and without consulting the Assembly, paid this amount from the revenues of the Water and Sewerage Company and the Gas Company, which were supposed to invest in their infrastructure. The Central Bank was also forced to print and produce 5.7 trillion tomans of banknotes without backing to pay for cash subsidies, which burdened the people with inflation.

According to the laws of Iran, five years after the implementation of the targeted subsidy law, the country’s budget should be independent from oil; therefore, it seems that with such a situation and existing economic structure, the implementation of this law will definitely pose challenges, both economically and politically, for the government.

The last refuge.

Structural reforms are the last line of defense for countries to prevent complete collapse. The fundamental question that arises is when do countries implement structural reforms and which macroeconomic, policy-related, and institutional factors drive policymakers to undertake these reforms.

By examining a series of structural reforms implemented over the past three decades in more than forty member countries of the European Union and the OECD, clear answers can be found to these questions. The results of these investigations have shown that implementing structural reforms during times of deep recession and high unemployment rates is more likely. Additionally, the worse a country’s economic performance is, the more likely it is to implement structural reforms. (10) If the problem of discrimination and inequality is explained by macro and structural variables, it cannot be solved through populist policies, forceful measures, or redistributing money. Forceful policies and resource redistribution may reduce or conceal the negative effects of discrimination and poverty, but they do not have sustainable positive outcomes unless there is a fundamental change in the legal and social structures.

Since the main source of income in Iran, namely oil income and related rents, is under the control of the government, the distribution of resources, including wealth and income, power, status, knowledge, and information, is also monopolized by them. Therefore, the main condition for eliminating discrimination and poverty is the fair distribution of wealth and income and reducing the class gap, which also includes the economic distribution of power and the participation of the public in the distribution of power.

Experience shows that in the absence of widespread and institutionalized participation of the general public in political power, wealth and income will ultimately benefit dominant religious, political, administrative, and economic groups, namely clerics and their allies, namely military and government officials, and affiliated private sector and distribution networks.

Notes:

1- Beginning of payment of 300 and 400 thousand tomans subsidies, ISNA, 19 Ordibehesht 1401.

2- Reforming subsidies in three steps, Center for Development and Future Studies, Organization for Planning and Budget.

3. How did the targeting of subsidies in Turkey begin?, Shana, 24 Esfand 1393.

4- Babiyordi, Ismail, and Khosh Heykal Azad, Mohammad, a rising power in Asia and dynamic in the international system, International Studies Quarterly, Volume 5, Issue 20 (Issue 20), December 2012, pp. 41-64.

5- How did Iranian tables become smaller? Website Entekhab, 11 Mehr month 1393.

6- Reforming food subsidies in the current government, personal website of Javad Salehi Isfahani, May 2022.

7- Targeting of subsidies, Ministry of Economic Affairs and Finance, Economic World, 29 Ordibehesht 1401.

8- Same…

9- Yousefi, Mohammad Reza, The Consequences of Shock Therapy, Our Economy.

10- Time for structural reforms, commerce of tomorrow, 25 Ordibehesht 1400.