100IRAN AND DUBAI LEAD THE WAYcheap, while targeting the wealthy with drastic increases for wasteful
consumption. “Some of them are using cheap energy to keep the water
warm in their swimming pools, and meanwhile a young student told me
that his school’s roof was falling in,” the president confided. “Those
whose consumption levels are low, the price will be cheap. As con-
sumption levels go up, the price will go up. The energy and the wealth of
the country belong to the people.”^7
Ahmadinejad sold his reforms using populist rhetoric that appealed
to his political base. But the design of the new pricing scheme was an
economic masterstroke that might have been devised by free- marketeers
at the University of Chicago. Instead of simply wiping away the subsidies
by raising prices, Iran acted strategically to placate the public. It replaced
benefits with cash. Preparations included the creation of bank accounts
for each household. The state deposited two monthly payments, each
worth about $40, into every account before raising prices. Recipients
could only access those payments after the reform was launched. This
increased support among the poor for the forthcoming price hikes.^8
Economists have long encouraged cash transfers over in- kind subsi-
dies, arguing that cash handouts— while still carrying some negative side
effects— are far more efficient.^9 For a short time, Ahmadinejad, the ultra-
conservative antagonist of the West, became the darling of monetary
economists. The 2010 reform managed the rare achievement of positive
welcomes from both the IMF and the Iranian public. It made Iran the
first major energy- exporting country to cut energy subsidies at such a
drastic level as well as the first country in the world to replace handouts
of energy products with handouts of cash.^10
The scale of the price increases, in many cases, was huge (see figure 7.1).
The cost of diesel fuel leaped from 6 cents to $1.40 per gallon, an increase
of more than 2,000 percent, although this was still not enough to reach
world wholesale prices, which were near $2.50 at the time. Electricity
rates also jumped, particularly for large residential consumers. While
the base price of electricity rose only slightly, from 1.6 to 2.7 cents
per kilowatt- hour, for consumption in excess of 600 kWh per month
(about two- thirds of what the average US household uses), the price rock-
eted to 19 cents per kWh (a rate nearly double the average US price in