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Subsidy Elimination and the Structure of the Government’s Relationship with the People

January 7, 2011 Opinions, Recent Posts No Comments
Subsidy Elimination and the Structure of the Government’s Relationship with the People

Date: December 28th , 2010
Source: Roozonline

Dr. Masoud Nili

Governments are political entities that have a lot of say when it comes to distribution of resources. One can tell what sector of the socio-economic spectrum a government is trying to favour by looking at what resources it makes available to what group. More often than not, governments target a certain socio-economic group by redistributing resources towards that group and hence providing them with beneficial economic opportunities. By evaluating the channels of resource redistribution, we can easily decipher from which socio-economic sector a government is driving most of its support.

We can draw the natural conclusion that by redistributing resources, governments tend to take from one group—i.e. place them at an economic disadvantage—and give to another, more politically favoured group. That is, strengthening one group at the cost of making another group weaker.

In countries that have oil, the story is a little different. The government no longer takes from one group (say, in the form of taxes) and give to another group. In oil-rich countries, re-distribution policies, in effect become distribution policies. The government no longer needs to collect from one group to give to another group; it just sells its natural wealth and directly distributes that wealth to one socio-economic group or another. Oil wealth allows a government to simply ‘give’ equally across the socio-economic spectrum. Therefore, oil-rich countries can gain popular support simply by buying that support from almost all sects of the country.

Continuing this same thought, if we look at Iran, we see that in public policymaking and in the government’s budget, the Islamic Republic of Iran has placed the highest priority on the poorest socio-economic class in the country and has stated time and again that it will provide ample financial support to this class. However, the government in Iran has preferred price control to policies targeting wage adjustment. Therefore, in the past years, by keeping prices artificially low, it has tried to protect those with low incomes by providing everyday goods to them at prices lower than what the market determines. But artificially low prices have not only applied to the poor, they’ve also applied to the rich. The system of subsidies in place has financially benefitted everyone from all across the socioeconomic spectrum. This has given everyone the signal that they can maintain their high rate of consumption. The system of subsidies in place has in effect allowed the current generation to borrow from the future generations.

In other countries, governments need to raise taxes in order to support increased expenditures—thereby irritating one socioeconomic group or another—an oil-rich country like Iran, has never had to do this. No one in the current generation has had to carry the burden of higher taxes. We have just consistently been borrowing from future generations. Or rather, the government has been redistributing resources—taking from the future generation and giving to us. Hence, thus far, we haven’t been complaining.

Furthermore, the system of subsidies in Iran has been essential in determining the structure of the relationship between the government and the people. So now that the subsidies are to be eliminated, the structure of this relationship will undoubtedly change. The actual beneficiaries of subsidy elimination are the future generation. The current generation that has all the political power (while the future generation has none) will not see the direct benefits of subsidy elimination and will only see its purchasing power substantially deteriorate. Hence, there is a probability that the current generation will react negatively to its decreased purchasing power. Usually, governments that engage in price-setting policies need to have a lot of social support and political credibility in order to combat the negative reactions of those who are financially disadvantaged by those price-setting policies.

A more popular government will undoubtedly see an easier period of economic adjustment for the various stratums of society. The current subsidy eliminations in effect present a harsh change for many in Iran. Without the necessary credibility these subsidy eliminations can be dangerous.

While necessary, it is not sufficient that there is now—after twenty years of bickering—consensus amongst our political figures for carrying out subsidy elimination. It is also necessary that the people should be ready to accept such a change. Now the government doesn’t have the credibility that it used to, and testing the already shaky foundations of the relationship between the government and the people could present new challenges to stability.

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