Iran has done what every politician on earth secretly dreams they could do: enforced the end of dirty energy subsidies. And the country is still standing. Mr. Dominique Guillaume and his posse from the International Monetary Fund (IMF) recently paid a visit to Iran in order to assess damages after the country increased energy, public transportation and bread and wheat prices in December, 2010. The “mission” found that there is life after oil.
Iran raised certain food and energy prices by up to twenty times, escalating fears that inflation would soar and the country would come to a grinding halt. Inflation did rise, but only by 4.1% between December, 2010 and May, 2011.
Overall annual inflation, as a result of strict financial controls, actually dropped from 25.4 percent in 2008/09 to 12.4 percent in 2010/11.
By hiking up prices on historically cheap energy products, transport, and certain food staples, Iran has successfully removed approximately $60 billion in annual subsidies. This amounts to nearly 15% of the country’s GDP.
Don’t believe the corporations
In so doing, rather than bring Iran to its knees, as large oil corporations would have us believe would be the case, ending subsidies strengthens the overall economy and raises the quality of life for a greater number of its citizens.
According to Gulf in the Media, “redistribution of the revenues arising from the price increases to households as cash transfers has been effective in reducing inequalities, improving living standards, and supporting domestic demand in the economy.”
No more energy waste
Despite the financial risk, the environmental benefits can already be seen. Very quickly after the authorities raised prices, businesses and residents responded by cutting back unnecessary energy consumption and waste.
Ending food and energy subsidies is considered political suicide in the Middle East since leaders worry that any new discomforts might stimulate more riots. Iran avoided this problem since it initiated its move away from subsidies before the “Arab Spring” flared up.
Learning from Iran
Even though drastic measures are unlikely to take place elsewhere, at the very least, other oil-dependent nations such as the United Arab Emirates and Saudi Arabia can point to Iran’s success when introducing the possibility of similar schemes to their own residents.
Maintaing Iran’s post-subsidy momentum, however, will require due diligence. According to the IMF, the country needs to adopt more energy-efficient technologies, reorient the economy towards less energy-intensive products and services, and improve the business environment in order to foster job creation and new enterprises.
Ending subsidies is the first step to a cleaner future. Creating an environment that is receptive to the next generation of energy production methods comes next. Who would have thought Iran would lead the way?
More on energy subsidies in the Middle East:
image via Ali Reza Parsi