Who Reformed, When, How, and Why?
An overview of reforms undertaken during this period shows that of the eight countries considered in this book, six implemented substantial reforms. In chronological order of reforms, these countries are the Islamic Republic of Iran, Yemen, Jordan, Morocco, Egypt, and Tunisia. The other two countries of Djibouti and Libya did not implement any reforms and will not be covered in this section. In what follows, we focus on the key reforms undertaken between 2010 and 2014, summarizing the background, contents, and outcomes of the reforms.
Islamic Republic of Iran: December 18, 2010
On January 5, 2010, the government of the Islamic Republic of Iran introduced the Targeted Subsidy Reform Act, a major subsidy reform designed to eliminate most subsidies and compensate the population with a cash transfer. Due to political and organizational constraints, the implementation of the act was delayed for almost a year and the reform was finally launched on December 18, 2010. The reform was originally planned to be implemented over a period of five years to coincide with the fifth five-year economic, social, and cultural development plan. The act estimated the expected net gain at 200 trillion rials but did not indicate the price increase to be applied to subsidized products. The reform was preceded by an extensive public relations campaign to educate the population on the costs and benefits of the reform (Guillaume et al. 2011). The government also made clear that protests would not be well received. Budget savings deriving from the reforms were expected to be partly redistributed in the form of transfers to the population (50%), partly used by the government for administration (20%), and for improving the efficiency of the energy, transport, and industry sectors (30%).
The actual reforms that unfolded in the weeks following December 18, 2010 included major prices increases for all fuel products, electricity, water, transport, and bread. The price of gasoline increased fourfold from the equivalent of US$0.10 per liter to US$0.40 per liter for quotas2 and from US$0.60 per liter to US$0.70 per liter for nonquotas. The price of diesel increased tenfold from US$0.06 per gallon to US$0.6, and the price of natural gas for domestic consumption increased at least fivefold from 1-1.3 to 7 cents per cubic meter. Prices for electricity and water also increased by around 300% on average, and the reform did not spare public transport or bread, with prices increasing by more than 200%.3
The price reform was accompanied by a compensatory cash transfer of 445,000 rials per person per month, an amount equivalent to 28% of the median household income and 50% of the income of a minimum wage worker with a family of four (see Chap. 10). This transfer was quasi-universal. About 80% of households were made eligible on the eve of the reform, and more households were added later. The cash transfer was administered via bank accounts. The first transfer was deposited in accounts in advance of the price increases in an effort to minimize protest and distrust for reforms.
The reform had a clear impact on prices, which increased during the first half of 2011 across main consumption items, with average increases around 30% and peak increases around 100%. Consumption of fuel products such as gasoline and liquefied gas decreased by about 10%. In January 2012 the government estimated that total savings from the reform amounted to an equivalent of US$15 billion. The simulations provided in Chap. 10 show that the compensatory cash transfers provided were excessive to compensate for the reforms and that a large part of the transfers accrued to the nonpoor. Perhaps because of these large effects, the government partly rolled back reforms in March 2012 when the parliament amended the Targeted Subsidies Reform Act.
The main trigger for reforms was the size of subsidies, which by 2010 were estimated at the equivalent of US$100 billion, an amount larger than the total oil revenues and over 20% of GDP. The scope and size of the reform was unprecedented not only for Iran but also for any other economy that embarked on subsidy reforms. Indeed, the outcomes of this reform have produced large changes in consumption patterns, inflation, and government revenues and expenditure. However, despite the large increases in prices, the reform did not remove price controls and four years later Iran found itself again with very large subsidies, the second largest provider of subsidies in the MENA Region after Libya, as shown in Chap. 2. Therefore, although the reform partly succeeded in readjusting consumption and prices, it failed in its attempt of removing subsidies.
Subsidy reforms in Iran have also been carried out in a complex economic environment characterized by international sanctions and large social programs, such as the Maskan Mehr low-cost housing program, which contributed to a prolonged period of stagnation and inflation. The outcomes of these other factors merged with the outcomes of the subsidy reforms and eventually created public resentments against the reforms (see Chap. 10). The continuation of reforms during the five-year period that was initially envisioned did not happen as expected, and further subsidy reforms remain as problematic as ever.