Iran’s government subsidies are incentives for poor voters

Iranian President Mahmoud Ahmadinejad speaks in the southern port city of Bandar Abbas, May 16, 2013.

In the run-up to the Iranian Guardian Council’s announcement of “vetted” presidential candidates, it is useful to look into a crucial matter on the minds of many voters. The future of cash payments to households as part of the subsidy reforms is set to be a major campaign issue.

Late last month, in a little-noticed announcement, the Central Bank of Iran declared that it would only provide a bottom-rate foreign exchange to importers of wheat, barley, corn and soybeans. Most other importers were referred to its trade room, where currency is sold for twice the price. Predictably, the cost of many goods immediately jumped amid protests from parliament.

In the past, I have argued that the Ahmadinejad administration intends to fund increased spending amid declining oil revenues by devaluing the rial and raising the projected price-per-barrel in its budget. But for now, the valuation of the rial remains opaque. The government’s proposed doubling of the dollar rate in its budget bill was rejected by parliament. Lawmakers included a clause in the law compelling agreement on another exchange rate without finalizing it.

According to Vienna-based consulting firm Atieh International, “It is clear that the rial will be devalued … but not before the election, to avoid negative economic and psychological consequences.” So why did the government push for action that raised consumer prices ahead of the election? There are three main reasons.

First, selling foreign exchange to most importers for twice its previous price is a backdoor way for the Ahmadinejad administration to raise more rials pending an official devaluation. These extra rials are probably going toward helping fund the cash payments.

Second, the burden of supporting domestic industry — which the government has failed to do as outlined in its own subsidy reform program — is being shifted onto consumers. A case in point backing this argument is the state of the rice market in Iran. For years, domestic production of this staple of Iranian cuisine has been challenged by swelling imports of cheap Indian rice bought with subsidized dollars. With the conditions importers are facing, the price of Iranian rice is on par with Indian rice for the first time in years. This cost-free way to avoid directly backing domestic industry fundamentally clashes with the policies promoted by pro-business presidential candidates.

Last but certainly not least, it appears that the exchange restrictions are used by the government to further target its support of certain social strata. Conversely, those left out are set increasingly to carry the burden of economic deterioration caused by both domestic and foreign factors.

In parallel with the monthly cash payments, parliament and the government recently agreed to reintroduce coupons to the poorest social strata. These coupons, which can be used to purchase household essentials, were first introduced during the Iran-Iraq war, and eliminated when the government initiated its subsidy reforms in 2010.

According to Atieh International, it appears that the “political elite is still torn between an approach which focuses on the lower income classes,” referring to the provision of cheap foreign exchange for certain imports and coupons, and on the other hand, “an approach that liberalizes prices and organizes entitlements through cash handouts.” So where does this leave the future of the cash handouts?

In the past, Atieh International Chairman Bijan Khajehpour has argued that the fundamental objective of the subsidy reforms is to monetize the relationship between citizen and state. By unmasking huge subsidies largely unseen by consumers for decades, the reforms are said to have established a direct and overt monetary bond between the Islamic Republic and the Iranian people.

While Khajehpour’s argument is sound, I would go further. During the past three years, the Ahmadinejad administration’s trademark cash payments have been a major source of friction with parliament. Amid parliamentary criticism of how the situation is unsustainable, the government has effectively portrayed parliament as the bad cop that is preventing the expansion of direct cash payments. In other words, the Ahmadinejad camp has sought to secure votes by conveying that the electorate’s monetized relationship with the state will flourish under its rule.

This theme, of political players trying to lure voters by offering to negotiate an improved monetized relationship between citizen and state, is on track to become an increasingly dominant feature of Iranian politics. In this equation, the interests and influence of business interests tied to what Khajehpour refers to as Ahmadinejad’s “monetization approach” should not be underestimated.

In the battle for votes, it is useful to consider the importance of the cash payments for various social strata — and class-related aspects of voter participation. The monthly minimum wage in Iran is in the region of 5 million rials [roughly $407 official rate/$142 market rate]. In comparison, the average four-member household receives 2 million rials [roughly $163 official rate/$57 market rate] in cash from the government every month. According to economist Djavad Salehi-Esfehani, these cash payments “amounted to about 50% of the per capita expenditures of the poorest 10% of the population in 2011.” In comparison, the monthly payments make up “only 5% of the expenditures” of the top decile. While it is clear that the cash payments do matter for the majority of Iranians, another important indicator to consider is the projected voter participation among various social classes.

Earlier this month, the Shahrvand daily published a district-by-district poll on anticipated voter turnout in Tehran. The affluent northern districts ranked lowest regardless of the participation of former President Akbar Hashemi Rafsanjani and Ahmadinejad ally Esfandiar Rahim Mashaei. One striking example of this (class) dynamic is how a mere 13%-16% of voters in Velenjak said they will vote if Rafsanjani and Mashaei do not run, while the corresponding figure in Tehran’s southern Khorasan Square was 52%.

Assuming that the largely class-based disparities in voter participation in Tehran are reflected on a national level, one crucial thing becomes clear: Whoever seeks to become Iran’s next president must be able to portray himself as an effective negotiator of an improved monetized relationship between citizen and state. In this equation, nobody — including business-friendly figures who have loudly opposed cash payments in the past — can afford to ignore the important changes in the citizen-state dynamics during the past three years.

By Al-Monitor

 

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