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The Economist: Other countries in the region should envy Iran’s bold economic jihad

The latest edition of the Economist has unexpectedly praised Iran’s economic reform plan and said other governments in the region should envy Iran’s reforms.

Commenting on a press release issued by a mission from the IMF earlier this month that “cheered” the Islamic Republic’s economy and the economic policies of the Iranian government, an article published by The Economist entitled “Iran’s bold economic reform: Economic jihad” stated that “the shock was even sharper given that the IMF, whose biggest shareholder happens to be” the United States, is a “pillar of global capitalism, a system that Iran’s president, Mahmoud Ahmadinejad, gleefully lambasts as evil.”

The weekly magazine wrote: “The reason for the praise is Iran’s exemplary execution of a task dear to the IMF’s heart: structural reform.”

“Whatever its name, the sweeping reform of a ruinous, three-decade-old system of state subsidies that Iran began last December seems to be radically reshaping the country’s economy for the better,” the article added.

“Not only has it relieved the government of a huge financial burden; it has slashed local energy demand, reducing chronic pollution and leaving more oil for export. It has dramatically raised disposable incomes for the poorest without placing extra burdens on the rich, spreading social equity while boosting consumption and bolstering the banking system. In future, Iran’s subsidy reform may even be seen as a model for top-down social change, not unlike successful schemes pioneered by Mexico and Brazil,” The Economist said.

“Until December, economists estimated the annual cost of subsidies on food, fuel and electricity at $60 billion-100 billion, a quarter of Iran’s GDP and equal to or greater than the value of annual energy exports. Most of this burden was carried as an implicit subsidy to domestic energy consumers, with the price of diesel fuel, for example, set at the equivalent of two American cents a liter, and petrol selling for less than bottled water. The predictable results were soaring energy consumption, waste, smuggling, pollution, market distortion and inexorably rising bills for the state,” the article stated.

“Accepting the need to compensate consumers for raising prices closer to world levels, Mr. Ahmadinejad at first proposed a monthly cash transfer aimed at poor families… (but) this was dropped in favor of blanket transfers to any family that applied for them. Some 19 million families, 90% of Iran’s population, have done so, setting up bank accounts to receive monthly payments based on numbers of family members. The government then set up a fund to administer receipts from the higher-priced goods, demarcating 50% to go towards families, 30% to help businesses affected by price rises and 20% to meet the state’s own added costs.

“The government cleverly doled out two months’ worth of family cash transfers, amounting to some $90 per person, before unleashing its shock. When the first tranche of price rises hit, quadrupling the cost of some kinds of bread and shooting diesel prices up by 2,000%, among other things, there was barely a peep from the public. Iranians have rapidly got used both to paying a lot more for some things and to having more money to spend as they wish. A family of five now pockets monthly sums close to Iran’s minimum wage, enough to pull a big proportion of the 10% of Iranians who live on less than $2 a day above that bar,” the article noted.

In conclusion, The Economist said: “Yet tight controls on the money supply have kept inflationary pressure lower than feared. By some counts it has already fallen from an annualized 20% in March to 14% in May. With government finances now in better shape, that may drop still further, and quickly.”

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