Can Iran Show Moderate Jordan How to Keep Unrest at Bay?

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Sept. 11 (Bloomberg) -- Jordan’s King Abdullah is the best Arab friend the U.S. has in a bad neighborhood. A wily ruler who heads one of the two Arab nations to sign a peace treaty with Israel, he has stayed on top by alternately exercising his will and backing off, promising reform and letting it drop.

Yet Jordan’s budget gaps present Abdullah with a problem he can’t dodge forever. Lately, with the Arab Spring, it has gotten worse. Lacking the oil and gas resources of some of its neighbors, Jordan can’t afford to appease protesters by expanding government largesse. Last year, when Abdullah tried to do so, the budget deficit swelled to 15 percent of gross domestic product, excluding foreign grants on which Jordan is heavily dependent. (The U.S., for its part, provides about $767 million in annual aid.) National debt is now an unsustainable 82 percent of GDP. Further draining official coffers is an influx of refugees from the turmoil in bordering Syria.

Energy subsidies are a particularly heavy burden on the government. As a result of Abdullah’s 2011 sweeteners, they went from 1.3 percent of GDP in 2010 to 6 percent in 2011. Energy subsidies are popular but terrible policies that encourage wasteful use, which in turn promotes pollution and traffic congestion. They also benefit the poor less than the wealthy, who can better afford cars and electricity.

In July, the International Monetary Fund approved a loan to Jordan of $2 billion over three years contingent on subsidy rollbacks. Accordingly, the government on Sept. 1 enacted a 10 percent increase in the price of 90-octane gasoline and diesel. But the country had no stomach even for such a small increase. After scattered protests broke out, a majority in Parliament demanded a vote of no confidence in Prime Minister Fayez Tarawneh, and Abdullah ordered the increase rescinded.

No one can expect the king to initiate reforms that might cost him his head. Nor is it realistic to expect citizens to easily accept losing a subsidy, especially when they think that government provides them little else. Yet there is a way for Jordan to end fuel subsidies that doesn’t provoke social unrest. To figure out how, the U.S. ally could do worse than to study the example of one of America’s worst enemies, Iran.

In late 2010, Iran eliminated $50 billion to $60 billion in energy subsidies without kindling significant public opposition. It began by giving the public considerable time to prepare. The changes were preceded by two years of parliamentary debate, which is probably more time than Jordan has. An enormous effort was made to explain the waste and social inequities caused by fuel subsidies, with almost every government minister participating.

Then, the public was partially compensated for the loss of the subsidy. All Iranian households qualified for cash awards, and 80 percent applied; the wealthy were discouraged from asking. Jordan could consider a means test.

The Iranians cleverly released the first of the cash awards to specially created household accounts before fuel prices increased, so the public was primed to accept the change. Officials stipulated that citizens couldn’t access their accounts until after the subsidies were lifted.

The Iranians also used good timing. They waited to let energy prices rise until after harvests were in and the summer vacation season was over. Jordan’s aborted effort came amid the harvest and as summer was winding down.

Iran’s experience offers a negative lesson, as well. By loosening credit to facilitate a massive expansion of housing, Iranian authorities fueled inflation, which devalued the cash grants.

Of course, ending subsidies is always fraught. Yet with his tiny economy and his shrinking ability to borrow, Abdullah will soon be without a choice. A modified version of Iran’s policy blueprint might enable a moderate Jordan to survive. That seems like a chance worth taking.

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