102IRAN AND DUBAI LEAD THE WAYshortcoming— inflation reduced prices in real terms. Inflation also
undermined the value of the replacement cash transfers.^14 By 2013, Iran’s
energy consumption was back to prereform levels.
Since then, Iran has renewed its efforts, gradually hiking fuel prices
and removing 3 million wealthy households from the cash- transfer
program. In 2014, Iran pushed through a 75 percent price increase,
followed by another 20 to 40 percent in 2015. The IMF said the new
increases— aided by the halving of international oil prices— meant that
Iran’s energy subsidy burden had dropped precipitously, from a quarter
of GDP in 2010 to just 4 percent in 2016.^15 Further energy price increases
were written into the Iranian state budget released at the end of 2017, and
President Hassan Rouhani sought a 50 percent increase in gasoline
prices, in part to combat urban air pollution by discouraging driving.
“You cannot leave the prices unchanged and expect to counter the air
pollution,” Rouhani said.^16 However, ensuing violent demonstrations
called those reforms into question, and prices had not changed as of
May 2018.
Among policy makers in the Arab monarchies across the Gulf, there
was little public commentary on the changes underway in their archri-
val Iran. Despite the silence, the Islamic Republic’s actions resonated
deeply. In Saudi Arabia, an adviser told me that Iran’s achievements were
being studied as a serious path toward efficiency.^17
Experts and some policy makers I have interviewed tend to assume
that tinkering with benefits such as electricity subsidies is only possi-
ble if there is a quid pro quo— a replacement benefit, as Iran provided.
One prominent Saudi energy official told me: “The residential electric-
ity tariff is part of the social agreement between the royal family and
the people. If you touch it, you have to repay it somewhere else.”^18 Iran
did this with cash, a technique that provides the highest level of eco-
nomic efficiency. Free cash is still a subsidy and still has a distorting
effect on productivity and consumption. But it is more efficient than
regressive subsidies on energy that flow mainly to the rich. More impor-
tantly, cash handouts also allowed Iran to cut subsidies without trigger-
ing social unrest— until late December 2017. That said, Iran’s subsidy
burden remains among the largest in the world (recall table 4.1).