Iran Confronts an 'Economic Evolution'
Ahmadinejad's Plan to Curb Government Subsidies Threatens to Alienate Recipients

By Thomas Erdbrink
Washington Post Foreign Service
Thursday, December 4, 2008

TEHRAN, Dec. 3 -- Gasoline? It's 36 cents a gallon. Laundry detergent? Fifty cents for a standard-size box. Milk? About 20 cents a quart. These prices are so low because Iran's government spends half its national budget to subsidize many of life's necessities. Not for long.

President Mahmoud Ahmadinejad has launched a sweeping economic restructuring plan that would end many of these subsidies within a couple of months. To blunt the blow of gasoline prices quadrupling and similar increases for other goods, he also proposes to give as much as $70 a month to poor Iranians.

Ahmadinejad, a populist leader with a working-class background who came to power three years ago, is staking his political future on his ambitious plan, which threatens to alienate Iranians who have benefited from the subsidies. Known abroad for incendiary rhetoric and his defense of Iran's nuclear program, Ahmadinejad's domestic political standing relies more on his largely unfulfilled promises to use Iran's oil wealth to improve the lives of poor people.

Some aspects of the plan, such as a sales tax, have provoked unrest, forcing Ahmadinejad to slow its implementation. The president had said he would present a bill on subsidies to parliament on Wednesday, but the introduction of the legislation was postponed without explanation.

Many members of Iran's urban middle class fear that the plan will ruin them. "If the subsidies are stopped, my family will be pushed into poverty. What the president plans to pay us in return will be far too little," said Payman Vatandoust, a technical manager at a battery factory in Tehran who like many highly educated Iranians did not support Ahmadinejad in 2005.

Vatandoust's worries are shared by several Iranian leaders, many of them adversaries of Ahmadinejad who accuse the president of proposing the cash handouts to boost his popularity in advance of presidential elections set for June.

Ahmadinejad says his "economic evolution" plan will narrow the gap between rich and poor and eventually will help bring down inflation, which has risen to an annual rate of 24 percent, according to Iran's Central Bank.

By opening up Iran's closed economy, making trade easier and promoting privatization, Ahmadinejad wants to turn the country into a regional powerhouse, echoing the economic transformation that China began three decades ago. Ahmadinejad says he will bring about similar changes in Iran in three years.

The rapidly falling price of oil presents the opponents of Ahmadinejad's plan with a dilemma. Either they relent and support the proposal or they press the government to continue spending $90 billion a year -- half of the country's national income -- to pay for the subsidies. Economists contend the status quo is untenable.

In October, when oil was selling for $70 a barrel, Central Bank governor Mahmoud Bahmani warned of a huge budget deficit if the price did not rise. "If this rate continues until the end of the year, $54 billion of expected oil income won't materialize," he told the official Islamic Republic News Agency. On Wednesday, Iranian oil was selling for $42.

Ahmadinejad says his plan will allow the government to save what it spends on subsidies and raise revenue through more aggressive taxation. "Because of this plan, the main part of our dependency on oil price fluctuations will be cut," the president said Tuesday on state television.

Ahmadinejad's plan also serves his political agenda, analysts said. Iran's 1979 Islamic revolution brought to power Shiite clerics and their supporters, who relied on an unorthodox mix of capitalism and socialism in their attempts to make the economy less reliant on the West.

To show the benefits of the revolution, Ayatollah Ruhollah Khomeini promised oil money and free utilities to the "barefooted masses" who had toppled Shah Mohammad Reza Pahlavi. The Iran-Iraq war, international economic boycotts and internal corruption pushed the new government to do more for the poor, resulting in a system of state intervention to keep the prices of basic goods artificially low.

At the same time, wealthy merchants who had backed the revolutionaries because the shah had threatened to break up their monopolies formed lucrative alliances with some of the new leaders.

Ahmadinejad has succeeded in ousting several influential revolutionaries from Iran's small circle of decision-makers, but restructuring the economy would dismantle the system that provided the first generation of revolutionaries with power and money.

"The plan will hurt the bourgeois merchant sector, which has deep links with this group," said Ahmad Zeidabadi, a journalist with Shahrvand-e Emrooz, which published articles critical of the government until authorities closed the magazine in November.

Many merchants oppose Ahmadinejad's plan to broaden taxation.

"The government has the oil, is that not enough? When they want us to pay taxes, the officials should also be transparent on what they do with our money," said Mahmoud Askari, who owns a carpet shop at the Tehran bazaar.

In October, merchants of the country's biggest bazaars closed their stores to protest a 3 percent sales tax, a first step in the economic evolution plan, prompting the government to delay implementing the tax for a year.

"We showed them that we are serious about this. If they try again in a year, we will again close our shops," Askari said. "Life is hard enough without taxes."

But there are signs that Iran's wealthier consumers can withstand sudden shocks. In July 2007, the government instituted gasoline rationing, giving every car owner a monthly allotment of 30 gallons at 36 cents a gallon. Then officials set the price of unrationed gasoline at $1.44 a gallon. Rioters burned several gas stations, but the rationing system and the new prices stayed. Gasoline consumption is higher this year than in 2007.

To decide who is entitled to cash payments under the restructuring plan, the government has divided Iranian society into 10 levels, by income. People in the bottom seven groups will receive the direct payments, to a maximum of $70 a month each.

Those in the lower-middle class, the bulk of people in the capital, will receive less than that. Vatandoust and his wife filled out a form a few months ago so officials could determine the size of their monthly payments. Ahmadinejad has claimed that 65 million Iranians -- virtually the entire population of the country of about 70 million -- have filled in the forms, which he calls a "public referendum" on the plan. The voluntary questionnaires, however, did not give Iranians the option to vote in favor or against the plan.

Together, the Vatandousts bring home about $500 a month and expect to receive a monthly payment of $40 each. They say the cash will do little to offset what they fear will be stunning increases in their utility bills.

The Vatandousts' apartment, in a middle-class neighborhood in western Tehran, is crowded with furniture. "I apologize -- we were forced to move to a much smaller apartment when our landlord increased the rent by 50 percent last year," Vatandoust explained as he served fruit and tea. "We now live in a very tiny apartment, but the rent is the same as our old house before the increase."

Vatandoust opened a drawer and showed some of the family's utility bills. Their part of the monthly electricity bill was $5, while the government paid the rest, $35. "The same goes for water, gasoline and the telephone. If we have to pay all of those ourselves, our expenses will be seven times higher," he said.

Inflation is also on the mind of Iran's head of parliament, Ali Larijani, a leading opponent of Ahmadinejad. "The parliament will not pass any bill that will increase inflation," he told state television in late November. "And the economic evolution plan is bound to cause more inflation."

Ahmadinejad has urged lawmakers to stay with him. "I will remain and stand by the plan even if it means my government will fall," he said during a separate interview on state TV in October. "This reform will be a great economic victory."

Vatandoust may not wait. "If we get a visa, we will move directly to Germany," he said. "I have heard many promises the last three years, but our lives have only gotten more difficult."