The Straw that Could Break the Camel's Back: An Economic Analysis of Subsidies in the Iranian Economy

Subsidies and welfare payments play a large role in the Iranian economy. The numbers that appear in the government budget under welfare or subsidy payments are only the tip of the iceberg. A considerable part of subsidies paid by the Iranian government are hidden and do not appear in the budget. The government provides to the populace a number of goods and services at prices below their cost or far below prices prevailing in international markets. All said, the Iranian economy is crisscrossed with a network of hidden and visible subsidies that threaten the long-term health of the economy that the President himself has referred to as sick. To be sure, extending a social safety net to individuals and families who are economically vulnerable is a laudable act, and ranks high among the tasks of a modern government. Nevertheless, such undertakings have many economic implications. For a policy to be viable in the long run, all costs, apparent or hidden, and all tradeoffs should be considered. The objective of this paper is to evaluate the economic ramifications of Iran’s system of subsidies and President Khatami’s welfare proposal.