Iran Overhauls Subsidies in the Face of Sanctions


Jan 13, 2011

This commentary originally appeared on and on January 13, 2011.

The Iranian regime plans to replace nearly $100 billion of government subsidies on fuel, electricity, and food with more targeted assistance to needy Iranians. If successful, the overhaul would be a major and historic change, one designed to save the government money in the wake of international sanctions. The overhaul delivers a clear signal: though sanctions have seriously damaged Iran's economy, the country intends to continue its nuclear program despite external or internal opposition.

The change is but one component of a comprehensive effort by the regime's ruling triumvirate—Supreme Leader Ayatollah Ali Khamenei, President Mahmoud Ahmadinejad, and elements of the Revolutionary Guards—to consolidate their power and crush internal opposition, which became highly visible after the contested 2009 presidential election.

Subsidy reform is a risky strategy. It could lead to even higher inflation and political turmoil. In the past, these risks foiled reform attempts by two previous presidents, Ayatollah Hashemi Rafsanjani and Hojatoleslam Mohammad Khatami. Neither could budge Iran's massive and politically sensitive subsidy system.

The current Iranian regime enjoys a better position from which to enact such reform. The consolidation of power by the triumvirate creates a more streamlined political system in which decisions can be enacted authoritatively. Compliance can be managed through the use of force. An overhaul of the subsidies system would enable Iran's increasingly militarized government to better resist U.S. and international pressures.

The subsidy program, created after Iraq's invasion of Iran in 1980, sought to mollify a restive population and achieve "social justice." However, since then subsidies have become a major burden, consuming as much as 25% of Iran's gross domestic product (GDP).

The Revolutionary Guards are Iran's most powerful security and military actor. They also control much of Iran's economy through leadership or outright ownership of many industries. The Guards' ability to profit from their economic role has been undermined by U.S. and international sanctions, which were designed in part to pressure the Guards on the nuclear program. Subsidies reform could return the Guards to a more favorable economic position and help secure their nuclear prerogatives.

Since the 2009 election and its violent aftermath, Khamenei and Ahmadinejad, backed by the Guards, have enjoyed a freer hand to pursue domestic and foreign policies more to their liking. Former Presidents Rafsanjani and Khatami, who had been critical of Ahmadinejad and his economic policies, have been marginalized. Just recently Ahmadinejad dismissed his foreign minister, Manouchehr Mottaki, most likely because he disagreed with the president's strident foreign and nuclear policies. Ahmadinejad and Guards loyalists also have tried to limit the powers of Parliament and bring Iran's largest private university system, closely linked to Rafsanjani, under government control. Khamenei has supported these efforts.

There is no guarantee that the regime's strategy will be successful. Ahmadinejad's efforts to control parliament and the educational system have been vigorously challenged. And Iran's political system and its elite, including the Guards, may be too fractured to undertake major economic reforms peacefully. However, Iran's increasing international isolation appears to have resulted in bold decisions, some unprecedented in scope. Whether these decisions will weaken the regime or empower it remains to be seen.

Alireza Nader is an international policy analyst at the RAND Corporation, a nonprofit institution that helps improve policy and decision-making through research and analysis.

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