A recent article in the New York Times brought to light the growing debate in Iran about the government’s plans to phase out subsidies, as they constitute an unsustainable burden on the state budget. Subsidies have been a legacy of the 1979 Islamic Revolution which ingrained the government responsibility to “distribute the oil wealth” into the state system.
Offering unrealistically low consumer prices for energy and food products has been the Islamic government’s approach to distributing the oil wealth among the people. However, the policy has failed and it is clear that the current approach is working against the interests of lower income classes.
As one Iranian expert notes, over the next few years, the plan to shift subsidies will be the core process to influence the country’s economic realities. Essentially, the original revolutionary objective of “social justice” was never achieved through blanket subsidies and it was clear at a very early stage. Now, President Ahmadinejad has presented the measure of eliminating subsidies as a matter of “economic justice.”
Dissatisfaction with the distribution of the country’s oil wealth is fueled by ignorance about its real wealth, which is often exaggerated, and by lack of transparency in using it. There is a myth that if the wealth were properly distributed, it would wipe out poverty and inequality. An equitable distribution of oil revenues—or for that matter, all government spending—is a desirable end in itself, but oil revenues by themselves are not large enough to eradicate poverty or improve income equality by much.
No doubt effective use of oil income to promote economic growth can reduce unemployment substantially, but foreign-exchange inflows from oil are generally not good for job growth, as they cause real appreciation, which places tradable sectors such as agriculture and manufacturing at a disadvantage.
A more equal distribution of the oil wealth would not solve this problem; the recipients of government handouts most likely will choose to spend most of their windfall on imports rather than invest it in productive activities that create jobs. As a result, the policy of taking oil money to people’s dinner table could end being a mixed blessing, as it may take away the job of the guy sitting at the head of that table.