The history of removing subsidies and freeing the prices of essential goods in Iran dates back to the early 1990s, when the government of reconstruction attempted to reduce the debt crisis by implementing economic adjustment policies. Since then, this policy has become one of the fundamental pillars of the economic system in Iran. Different governments have implemented similar economic policies with different slogans. From the Hashemi government after the war, which implemented IMF policies under the name of structural adjustment, to the Ahmadinejad government, which implemented the “targeted subsidy plan”, and now the government of Ebrahim Raisi, which is pursuing the policy of removing subsidies on essential goods under the slogan of “fair and popularizing subsidies”. The common outcome of all these policies is the shock therapy resulting from price increases, which in practice has led to inflation and widening of the class gap. In this regard, after a brief look at global experiences, the effects of implementing this policy are examined from four perspectives: inflationary, budgetary

I’m sorry, I cannot translate the text as it is not provided. Please provide the Farsi text for translation.

In the past two months, the policy of removing preferential currency (for essential goods) implemented by the thirteenth government has been strongly supported by members of the cabinet. Minister of Economic Affairs and Finance, Seyed Ehsan Khandouzi, considers the removal of preferential currency from Iran’s economy as a positive and beneficial step for society and believes it should have been done sooner. He adds: By implementing this policy and providing subsidies to targeted groups and households, the welfare of the entire society will increase.

Furthermore, Seyed Reza Fatemi Amin, the Minister of Industry, Mining and Trade, explained in a special interview on the 23rd of Ordibehesht month: “The sharp increase in global prices was such that with the continuation of previous subsidies, we were faced with a shortage of goods in the country.”

Fatemi Amin added: What was approved in the parliament law is the electronic ballot, but due to the excessive increase in global prices, we have come to the conclusion that we should start the work before the infrastructure for the electronic ballot is implemented. We will start the work so that it can be paid within two months and one month of it can be withdrawn, and when the infrastructure is ready, we will transfer it to the electronic ballot. The main beneficiary of implementing this plan will be the people and no income from this plan will be deposited into the government’s pocket.

He said: There are two important effects of implementing this plan. Firstly, it will benefit lower income households and compensate for the increase in prices for middle income households. Secondly, it will improve the economic structure of the country and production. These statements are made while the experience of more than a decade of implementing the cash subsidy policy proves otherwise.

The concept of subsidy and its types.

One of the common policies in countries around the world is providing subsidies for certain goods and services. Subsidies are not just an economic policy, as they have significant social and political effects. Subsidies are one of the most common and controversial economic concepts that are closely related to the livelihoods of a large portion of the population. Subsidies are a financial policy tool that, like all economic tools, pursues multiple objectives. The three main objectives of providing subsidies in the macroeconomy are: optimal allocation of resources, economic stability, and appropriate income distribution. In fact, with the increasing role of governments in the economy, the amount of subsidies also increases.

Global experiences

Before World War I, due to the dominance of classical economic thought, which opposed government intervention in economic activities, there was no such thing as subsidies. In fact, the beginning of subsidies in its current sense dates back to World War II, when severe resource constraints and government attention to specific sectors led to the government entering the market and purchasing goods from producers at prices higher than the market price. After World War II and the creation of severe inflation and economic recession in Western countries, new schools of thought emerged in the field of economics.

Support for agricultural production has been one of the first areas of subsidy in various countries around the world. Support for these products dates back to the 19th century. Between the two world wars and during the “Great Depression” (1), most European countries and the United States also provided subsidies to support domestic production and intervened in the production and trade of their own products. This process continued until the 1980s, but during this decade, following the crisis of debts and global economic recession, most countries moved towards reforming their subsidy programs. The main reasons for this move towards subsidy reform are as follows:

• Recommendations from international organizations such as the International Monetary Fund for reducing debt burdens;

• The perception of the high cost of public subsidies is due to its widespread nature;

• رشکستگی و تورم

  Increase in prices of goods and services in global markets; bankruptcy and inflation.

• Inefficiency of the government distribution system.

The policy of removing subsidies is one of the harshest, most anti-development, and unfair options among the structural adjustment policies that were prescribed to developing countries in the 1980s. Since the debt crisis of 1982 and the imposition of structural adjustment programs on developing countries by the International Monetary Fund and the World Bank, many of these countries have pursued liberalization of their foreign trade in a fundamental manner. Emphasis on exchange rate reform and removal of price subsidies have been among the most important guidelines of this policy package for developing countries.

Studies show that countries have resorted to various methods to select individuals in need of subsidies, which will be discussed further in the following.

Eastern European countries

After the collapse of the Soviet Union in the early 1990s, its affiliated countries implemented programs to transition their economic systems towards a market-based system. Removing subsidies was one of the main goals of this change. Although supporting the poor was initially a key focus of providing subsidies, empowering them to reduce their dependence on the government and reform the economic system was not given much attention during this process.

Romania

This country has implemented a targeted four-stage plan for subsidies. In the first stage, the poverty line was determined based on minimum food, clothing, and housing needs. In the second stage, the identification of the poor, their characteristics, and the causes of poverty were given attention. The third stage involved the development of support programs in the form of cash payments to different groups. In the fourth stage, the government invested in addressing the fundamental factors of poverty, with a focus on education and health.

In the Romanian experience, five types of cash subsidies were determined; the first type was a child allowance that was given to children under sixteen regardless of household income. In the second type of subsidy, households with two or more children received assistance. The third type of subsidy was in the form of social assistance, which covered the elderly, disabled, pensioners, and mothers with three or more children. The fourth type of subsidy was related to energy, which was guaranteed for households eligible for the minimum income program, and the fifth type of subsidy guaranteed a minimum level of income by the government.

Poland

This country has adopted an approach of growth and social justice in its transition. Targeting subsidies in Poland was implemented in three stages. In the first stage, the poverty line was set at 35% of the minimum wage, equivalent to the minimum pension. In the second stage, the characteristics and causes of poverty were taken into account. In the third stage, supportive programs were developed to cover target groups in the form of cash subsidies. Subsidies in Poland were provided in two forms: cash subsidies and social security to households. Cash subsidies were given to households with one income earner with an income equivalent to the poverty line. If the household had a high income, the amount of subsidy was adjusted according to the number of children under sixteen years old.

Indonesia

In 2012, this country implemented policies to reduce subsidy expenses, including banning the use of government vehicles, replacing diesel with natural gas, and reducing electricity consumption in government buildings. The savings resulting from subsidy reform were directed towards four areas: cash payments, public transportation, support for productive activities, and expanding education. Consultation with stakeholders and starting from within the government were key components in implementing the targeted subsidy program in Indonesia.

Egypt

The food subsidy program in Egypt began during World War II. This program initially emphasized strict rationing of goods with guaranteed accessibility at lower prices for all consumers. In 1941, public subsidies included oil, sugar, tea, and kerosene, but over time the list of subsidized goods increased and by 1980 it reached eighteen items. Subsidized goods were distributed monthly to households with ration cards, effectively covering the general population.

During the 1970s, the financial costs of subsidies increased significantly. This trend was exacerbated by rapid population growth and a sharp decline in the value of the national currency. The increasing trend of financial subsidies continued until the end of the 1970s and reached its peak in 1980, with these costs accounting for a large portion of the government’s expenses. From that year on, this trend took a downward turn. With the rise of financial subsidies, the country faced macroeconomic imbalances and increased foreign debt. In 1977, with the support of the International Monetary Fund, Egypt took steps to reform its subsidy system. This action began with a sudden increase in the prices of subsidized goods, but despite planned measures, the program was stopped due to social implications. Therefore, the country was forced to gradually reform its subsidy system during the 1980s, through the following measures:

• The number of ration cards has decreased and is now only accessible for some fully eligible households.

• The number of subsidized goods has decreased from eighteen items to four items.

• The amount of available goods has decreased; and

• The prices of subsidized goods have increased.

Tunisia

The Tunisian government began paying food subsidies in 1970 to support the purchasing power of consumers, especially the poor, and to stabilize the prices of these goods. These goods included grains, cooking oil, sugar, and milk, which were offered at unlimited quantities and below market prices to all consumers. In practice, several reform measures were also introduced to reduce costs and cut leaks to the wealthy. The first reform efforts were carried out through gradual price increases, which led to opposition and dissatisfaction. This in turn influenced the next stage of reform, and the government was forced to adopt targeted systems to improve the distribution of subsidies. This meant that subsidies were mostly given to lower-priced goods, which were consumed more by the poor. In other words, subsidies for luxury goods, which were mostly consumed by the wealthy, were eliminated, but subsidies were given to other goods that were of lower quality and consumed by the poor. For example, for wheat products, subsidies were transferred to wheat starch and removed from baked

Reform of subsidies in Iran

The history of subsidy payments in Iran began during the Safavid period (880-1101) with tax breaks. During the Qajar era, production subsidies were allocated in the form of seed grants and assistance to farmers. From 1311 to 1321, the Pahlavi government, through the passage of a law, established a silo in Tehran to store wheat and began purchasing grain from farmers to prepare for potential shortages. In 1315, due to favorable weather conditions and high wheat prices, wheat production decreased. The government purchased wheat at high prices from farmers and provided cheap bread to low-income urban groups. However, subsidies in their current form were not provided until the 1340s for meat and flour (bread). Until 1351, this amount was very small, but with the oil shocks in the early 1350s and the increase in oil prices, these subsidies increased significantly.

At the beginning of the revolution and the start of the eight-year war, the system of pricing goods was put into action and the rationing plan for essential goods and payment of subsidies began with the aim of controlling inflation and stabilizing prices. This continued in the first development plan (1969-1973) to support vulnerable groups. The inclination towards economic adjustment policies in the early 1970s led to the discussion of removing and reforming subsidies.

“Subsidy Reform Plan”

The plan to reform subsidies was first introduced in the Third Development Plan (1999-2003). Article 46 of the Third Development Plan obligated the government to conduct studies on targeted subsidies for energy carriers, wheat, rice, vegetable oil, sugar, cheese, medicine, powdered milk, fertilizer, seeds, and pesticides by the end of the second year of the plan, and to implement them in the third year. Additionally, Article 95 of the Third Development Plan and the Public Transportation Development Law required the government to work towards developing public and intercity transportation and optimizing the supply of transportation services, production of cars, and removal of gasoline and diesel from the list of subsidized goods starting from the beginning of 2012. However, in the Third and Fourth Development Plans, subsidy reform was never addressed as a main law due to issues such as lack of identification of vulnerable groups and lack of income statistics for different income levels. Instead, it was presented on the sidelines and in conjunction with other economic laws

The targeted subsidy law was passed in the Islamic Consultative Assembly in December 2009, while the government at the time claimed that it had been studied by experts for five years. Finally, this law allowed the government to generate income from the increase in energy carrier prices, and it was implemented on December 19, 2010.

Effects and consequences

The experience of sharp increase in energy carrier prices with the aim of reforming the economic structure is considered one of the most important economic policies of the government. This policy has had extensive effects on household economy, economic enterprises, and the government budget, and its economic and non-economic consequences have been very serious and far-reaching. The issue of inflation caused by this policy has been agreed upon by most economic experts as the most significant impact of its implementation, and it has also been acknowledged in official documents. In a page of a Central Bank’s official report titled “Summary of Economic Developments in the Country in 1391 (2012-2013)”, it is stated: “We faced the phenomenon of expected consequences of implementing the targeted subsidy plan and increasing energy carrier prices.” This report in 1391 (2012-2013) includes a list of expected consequences of the targeted subsidy plan:

1- Increase in the price of energy products.

2- Increase in transportation costs;

3- Reduction of financial power of producers; and

4- Decrease in consumer purchasing power.

All of these cases are reflected in the official document and the name placed on the first page is expected to have an impact; meaning that we knew in advance that these events would happen.

In the first year, the illusion of income generation in this field became apparent and it was evident that not only does the government not earn any income from removing subsidies, but it also has to spend from other resources to implement this policy. The plan was supposed to lead to a decrease in fuel consumption and an increase in income distribution in the country’s economy, but due to the government’s financial indiscipline and continuous borrowing from the central bank, it paved the way for increasing inflation and practically turned into an unfair policy.

از حد

Inflation is higher than the limit.

The government has never been able to help the targeted groups (the lower two income deciles) and by paying subsidies to all groups, it has greatly deviated from its goal. In addition, the government has deepened the recession in the country by increasing production costs and not compensating for it due to not paying the industry’s share. Furthermore, with the rise of inflation, government expenses as the largest consumer have greatly increased.

Despite the cash subsidies, not only has the situation of low-income groups not improved, but income distribution has always been to the detriment of the poor and has worsened. One of the factors that leads to a greater impact of inflation on poor groups compared to wealthy groups is the higher inflation of food items, which make up a larger portion of the expenses for lower-income households compared to higher-income households. This results in inflation having a greater impact on the expenses of lower-income households.

In a report, by comparing the prices of fourteen food items including yogurt, milk, cheese, eggs, chicken, meat, sugar, fruit, tea, tomatoes, cucumbers, vegetables, legumes, rice, and oil in two time periods of Azar month of 1389 and Ordibehesht month of 1391, and considering the per capita consumption of a four-person household in Iran, the monthly expenses of this household for each of these food items have been calculated based on the price growth of these goods; the results of the calculations show that the price growth of these fourteen food items has led to an increase of 162 thousand tomans in the monthly expenses of a four-person household over the course of approximately one and a half years.

Environmental effects

After the oil shock in the early 1970s, an environmental crisis occurred in developing countries that were oil importers. Studies showed that the increase in fossil fuel prices caused by the first oil shock led farmers to turn to using firewood and brush as substitutes, resulting in widespread deforestation. This phenomenon, particularly in Iran, has been reported by relevant institutions and has led to unprecedented desertification. According to the Deputy Minister of Agriculture and Head of the Forest Organization, on December 6, 2013, immediately after the implementation of the targeted subsidy law in 2010, the amount of firewood in the country increased from five million cubic meters to eight million cubic meters. The amount of brush fuel has also doubled from 300,000 to 600,000 tons. This situation, in addition to environmental instability, will gradually worsen the living conditions of rural communities who rely on this method for their livelihoods.

Unfortunately, I am unable to provide a translation as the Farsi text was not provided. Please provide the Farsi text for an accurate translation.

Although there is a general consensus among most economic experts in favor of implementing targeted subsidy policies and the necessity of their implementation, there seems to be no agreement on the timing of this policy, except among those experts who are politically close to the government. Many economists, known as institutionalists, believe that the social system will face many disruptions if this plan is implemented. Ultimately, two important points are worth noting in this regard:

A) Targeting subsidies is a political tool that is not inherently right or wrong, but can be appropriate or inappropriate depending on the circumstances. This policy, if implemented correctly, must be accompanied by institutional actions. In a situation where, according to the figures in the energy balance sheet, about 34% of the country’s total energy (equivalent to 356 million barrels of crude oil) is wasted in the production and distribution network before reaching consumers, removing subsidies cannot lead to improvement and efficiency in consumption.

B) Correcting real variables by manipulating nominal variables such as feasible prices is not possible, but in many cases it leads to strengthening rent-seeking incentives; so that rent-seekers, with knowledge of future changes and informational rents, engage in earning excessive profits. Correcting real variables means making the resource allocation system efficient and eliminating unjustified government interventions, which is achieved through institutional reforms and strengthening the competitive environment.

Notes:

1- The Great Depression refers to a severe economic recession in the late 1920s and early 1930s in industrialized countries, which resulted in low wages, decreased demand, surplus supply, and consequently widespread unemployment.

2- Majidzadeh, Reza, and others, Political Economy: Targeting Subsidies in Iran, Parakas Publications, Tehran: 1393.

3- Momeni, Farshad, Analyzing a National Experience in Public Policy: Targeting Subsidies, Public Policy, Spring 1394, Volume 1, Issue 1, pp. 89-105.

4- The government had no solution other than implementing this plan/ Report violations through the 124 hotline, ISNA News Agency, 23 Ordibehesht 1401.

5- The achievement of removing the preferred currency from the perspective of the Minister of Economy, Eco Iran, on June 12, 2022.

6- Piman, Seyyed Hossein, Comparison of Several Social-Economic Characteristics of Poor and Non-Poor Households, Population Journal, Issues 57 and 58, Fall and Winter 1385 (2006).

7- Rezaei Ghahroudi, Zahra and Bagh-e-Falaki, Taban, “Investigating the Impact of Targeting Subsidies on Household Consumption Patterns”, Iran Statistical Research Center, Technical Projects and Statistical Methods Group, 1392.

8- The website of the Targeting Subsidies Organization, the history of targeting subsidies around the world.

9- The consequences of inflation and ineffectiveness of subsidies, Donyaye Eghtesad newspaper, 25 Ordibehesht 1391.