The Administration Strives to Act as the Mother of Expenditures

Abbas Abdi’s interview with Fararoo website on the bill to enact targeted subsidies has raised new issues on the subject of subsidies. The questions that I raise in my interview with Abdi come from the Free World while the issues he raises come from a land where even the views of experts, or the writer, are interpreted as a criminal. In this interview Abdi says, “The government intends to include all revenues into the government’s treasury and thus put itself at the head of all expenditures.” This money will in fact make people more dependent on the current government, and strengthen the administration’s position in future.” He further says, “The administration is aware that it will be confronted on this by the Majlis. The re-channeling of this money in provinces that have just one Majlis representative will have a huge impact a major impact on the position of the representatives themselves, as the administration tries to take control of the legislative branch. So this is the time to make things clear to the opposition lawmakers.”

Here are the excerpts of the interview that was conducted through email.

Nooshabeh Amiri (Amiri): Let’s begin with the question that in an economy that sells its only product and spends the money without any planning for the future, what is the urgency in these “targeted” subsidies?

Abdi: The term “targeted subsidies” is not an appropriate term, even though it is used. The reason is that there is no subsidy for fuel (except on the volume that is imported). The exact amount of subsidy is identified in the budget, which is the difference between the cost and selling price of a product or service. Subsidies are paid on wheat or bread, even medicine, sugar and some other agricultural products, to cite some examples. But this is not true for (natural) gas, whose price is lower than its world price. This is not confined to fuel or energy, but is also true for wages. At the same time there are products where the situation is the reverse and their relative price is much higher. So there is really no subsidy in the budget that needs to be targeted. The real purpose of this bill is to raise the price of fuel to international levels. So the first question that comes to mind is why must the price of fuel be free and floating? Second, who should get the difference in the price? On the first question one can defend the situation by the supply of some products or services at a lower price is justifiable. This is true for education, health, information and even some food products because their greater consumption is usually beneficial. Or at the least their consumption must be at levels that do not bring in any harm to the community or the individual. For example people should be provided literacy for free, or even compulsorily done so, as this benefits the individual and society at general. But acquiring another stylish suit or pair of shoes is a priority only for the individual and so there is no reason why society at large should have to pay for the benefit of an individual. Fuel belongs to this category where is no need to provide it with any subsidy. Some countries impose taxes even on their consumption. This is good for the economy and the public. It is good because it will result in lower and better consumption, particularly in Iran and Venezuela where consumption per production unit is very high. So from this perspective, one should let the market determine the price of fuel, or even tax its levels of consumption. However, note that this should be done as part of a policy of deregulation of prices and should not remain confined to the energy sector, but encompass the whole economy. And the first step in that direction is to end all monopolies. Existing monopolies in production, ownership, tenders and contractors are at conflict with this policy.

The second question is no less important than the first. The revenue that is generated through a higher energy price should go to the owners of the energy, i.e. the public and will be detrimental if it is channeled to the government (even if it desires to distribute it directly among the population). The results of such a policy are the enlargement of the government, an increase in the dependency of the public on the government, an increase in corruption, inflation etc. In addition to these, you will also have other issues to deal with such as unequal and unfair use of energy subsidies.

With this said, one must conclude that the administration is not following any of these arguments. On one hand it does not accept to free the economy and the policy – and in fact is opposed to it – while on the other hand it wants to channel more revenues into the government treasury and become the mother of all expenditures. Its principal purpose in this is to finance the budget shortcoming and also to dominate the sources of revenue in society and the public.

Amiri: But a government that depends on the oil budget is in fact itself the largest receiver of subsidies. So should the payment of subsidies to such a government too not be “targeted?”

Abdi: No! The government should not be given a subsidy, regardless of whether it is “targeted” or not. The government must receive its dues from the public for properly implementing its responsibilities and this falls on the shoulders of those who are active. Unfortunately our society has not been attentive to this. We always want or expect our subsidy receiving government to change, whereas such systems have only one nature: If we cut off the support/subsidies that are provided to the worst government, then its bad policies and practices will fall. On the other hand if we install the best people in a government that receives such support and subsidies, then it will soon become corrupt as well.

Amiri: Some argue that this policy should have been implemented much earlier and so Ahmadinejad’s administration is doing what others refrained from undertaking. What does this mean? Is it true? If so, why did the earlier administrations not do it?

Abdi: Yes, this program should have been implemented much earlier (but not in its current form) but the current administration and its allies had prevented that from happening. In its place they put forward a different plan to stabilize prices that is 180 degrees in the other direction. They passed their version of the law, but since they are now facing a dead-end on it, they want to start implementing the original one. On the reasons why earlier administrations did not implement it, one must note that to do so would require the support of the whole administration, something that was missing in earlier governments because they were divided in their goals etc.

Amiri: Some say that the reason why there is an interest to implement this plan today is because of the desire to follow the outlook of the World Bank and thus make an official declaration of joining the capitalist system. Is this true? If so, can one implement some parts of it and still join the World Trade Organization?

Abdi: This is not a serious discussion. It is rhetoric used by quarrelling factions inside the ruling circles. If the current administration had such definitive plans, then one had reason to be content. What can one expect from a government whose head says that he has calculated that at least 5 million people must leave Tehran? The two reasons that I cited in the beginning of the interview are the real arguments on this.

Amiri: You said that the administration and the Majlis have come to a dead end on the plan to initiate targeted subsidies. Why? Where do people who reach a dead end go?

Abdi: The management of an economy or politics without modern rationalism and reason comes to a dead end. Some of these dead ends are very obvious, while others are not. It has been very clear for some years now that Iran’s energy consumption policies would lead to a dead end. A country that aimed to be independent is today dependant on imported foreign fuel whose source it itself possesses, and which it consumes irrationally!! I have written much on this and do not wish to repeat those ideas here, but the fact is that the policies that have been developed in recent years lack the necessary rationality and will eventually bring us to a dead end, as they already have. The current administration deals with this dead end primarily in an instinctive or emotional manner. If one studies the recent remarks by the head of the government about Tehran and his calculations regarding the necessity of moving at least 5 million people out of the capital, and his understanding of expanding employment in the provinces, then one will realize that his current policies on energy pricing are in all in line and consistent with his earlier remarks.

Amiri: You have said that if they implement this program, they will stop it half way and would never allow fuel prices to rise to internal levels. Where is that half way?

Abdi: That depends on how define the start and end of the plan. This issue is present even now as they are only passing the law. These problems have existed at all levels and phases of the plan.

Amiri: Do you think this plan will result in the reduction or elimination of the budget deficit? Does Ahmadinejad’s administration have any other ways to eliminate the deficit?

Abdi: There are a number of ways to pay up the deficit. One is to reduce the government’s expenditures which is normally done in one of two ways. The government’s responsibilities and involvement may fall or expenditures could be reduced, but both of these methods are in conflict with the policies of the current administration and therefore not only will the deficit not be reduced, it will in fact increase. The other way is to increase revenue through greater taxes or higher profits of government companies, both of which also are not doable. Higher taxes will lead to stagnation and tax collection in Iran is weak and ineffective. A government such as ours is essentially not interested in doing things through taxes. On the subject of company profits, because government firms have weak management and the interference of political criteria will not result in greater production and therefore profits. Profits will in fact fall, particularly those companies whose stocks have been grouped into the fair stock basket. The other way is to borrow money from the Central Bank which will lead to a rapid rise in inflation. This policy has long been recognized to be bad. Yet another way is to resort to foreign exchange revenues and liquidating them in the market through higher imports. This approach will result in what is known as the Dutch Disease (the policy of increasing revenues through the sale of natural resources) and lead to economic depression while at the same time reducing the level of foreign exchange reserves. This is precisely how things have been done until now, but the policy is not working any more. The most effective way is to increase the price of energy sources which will partly reduce the problem of fuel while at the same time increasing the flow of cash into the government’s treasury.

Amiri: Where is this 40 billion supposed to come from and where is it going to go?

Abdi: It is supposed to come from the pockets of consumers and go completely into the government coffers. The government’s hand is more or less unhindered in giving this money to those groups which it favors, in society and among the producers. So this money is expected to increase the dependency of people on the government, while ensuring its future.

Amiri: The administration changed its policy on subsidy distribution and thus added ten million more people who live on subsidies. But will this promise work? How many people will really be covered by this?

Abdi:  I don’t think one should take this policy very seriously. The administration will distribute this anyway it wants which is to its benefit and will not loose the support of its superiors.

Amiri: You have said that for the government this is primarily a political issue. Can this view tie the fate of this government or even the regime to itself? How?

Abdi: The government is aware of its fate, but the problem will persist for the regime. The mixture of three pressures, foreign, inflation and economics, and the domestic political discontent, is a serious threat that threatens the regime.

Amiri: You have said that the majority of Majlis deputies look at this problem from the economic perspective, and its impact on production and inflation, while the administration looks at it from a political standpoint. You have also said that these two views are not complimentary. But since the managers of the legislative branch and those in the executive one belong to one ideological faction and will join hands if the boat starts to rock, don’t you think that the groundwork for them joining hands is already here?

Abdi: They will remain part of the same faction so long as they feel threatened from other groups. Otherwise, they have deep ideological and interest differences and have till now been able to partly cover this up.

Amiri: What will be the impact if the subsidies are removed? Who will it impact?

Abdi: What I had said was that if the administration does not proceed with this policy, then it will have problems. And if it proceeds, it will have another set of problems. Its impact will depend on how the government implements the program, and other political and economic events which will poke this issue. But at the end of the day, I think that if the plan is implemented it will be a step forward for the public and society. The manner that critics respond to this will also bear an impact.

Amiri: In the past Ahmadinejad had suggested holding a referendum on targeting subsidies, but you believe that the chances for this to happen are nil. This is because you think it will create a precedent. But what will be the impact if this becomes a practice?

Abdi: The official policy is not to accept the resolution of differences and views through such modern institutions as a referendum. The acceptance of this method requires the institutionalization of a democratic culture.

Amiri: My understanding from your interview with Fararoo is that this policy will fail because the ground work is not there yet. Is this right? What will be the impact if this fails? Who will benefit and who will loose from this?

Abdi: One cannot use the term benefit or loose that easily, because these things are relative. It appears that the government will not be able to pull this through the way it thinks it can, because its implementation basis is missing. Who will win and who will lose depends on how people and interest groups behave. So one cannot make a definitive prediction. But if reformists and critics pursue the proper policy and have some patience, this plan will bring much benefit to the public and society.

Amiri: You believe that for this plan to succeed, the administration has to tighten its belts so it does not eat up the budget. So where or who will the money go to?

Abdi: This is a complex issue. When economic indicators are at their lowest in the last two decades even though oil revenues are at their highest, and while there is growing corruption around the country, one can anticipate where this will lead to.

Amiri: Mr. Tavakoli’s website writes this about Kyrgyzstan: “Among other current concerns in Kyrgyzstan one can name government companies, the growing influence of the West, relations among ethnic groups and terrorism. This country is also among the 20 leading country with the worst corruption level in the sphere of finance and bureaucracy. Kyrgyzstan became independent in 1991. But despite Western support for it, and that of the IMF, World Bank and the Asian Development Bank the country has developed deep economic programs since its independence. So its government was forced to reduce its spending and cut off most of its subsidies.” Is this not the same situation as Mr. Ahmadinejad’s?

Abdi: I don’t know. One should ask the managers of Alef website. But if the reference is to this administration then it must undertake a serious review of its performance in recent years and the general structure of the regime, addressing the question: why did things come to this point.