Economic Research Forum (ERF)

Poverty reduction efforts in Iran: the wrecking force of inflation

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Iran’s universal cash transfer (UCT) programme plays an important role in fighting poverty. But as this column shows, its real value and impact on the country’s poorest people has diminished significantly as a result of rising prices. Over the five-year period since the UCT was first operating in 2011, inflation halved its original value.

In a nutshell

Policy reform is needed to keep Iran’s universal cash transfers relevant in reducing poverty.

Benefits should be eliminated for the top 40% of the distribution, with the resulting freed-up resources reallocated to the bottom 40% to compensate for the effect of inflation over the past five years.

Targeting resources will significantly increase the effectiveness of UCTs and ensure that financial resources are properly spent on fighting poverty and reducing inequality.

In December 2010, Iran replaced its energy and bread subsidies with an unconditional and universal cash transfer (UCT). The transfer was set at about US$40 per person per month for all Iranians. Our analysis shows that about 95% of Iranian households signed up to receive the UCT and the proportion of individuals living in poverty was more than halved – from 22.5% to 10.6% – as a result.

But the real value of the UCT did not keep up with inflation. Removing the energy subsidies had an instantaneous effect on prices. Over the course of the five years following the reform, overall prices more than doubled while the nominal value of the UCT remained mainly unchanged.

What is the impact of inflation on the poverty-reducing effect of UCT? How could the effect be restored, if not in full, by a significant order of magnitude?

We find that the poverty headcount ratio remained relatively the same for 2011/12 and 2012/13, but it increased by about five percentage points to reach 14.3% by 2015/16. The increase in poverty was much more severe in rural areas compared with urban areas: from 20.6% to 31.1% and from 4.8% to 7.5%, respectively.

Using the framework proposed in Enami et al (2016), we compare poverty rates with the UCT in place with poverty rates in its absence. We find that its power to reduce poverty decreases significantly as it loses its real value due to inflation. Between 2011/12 and 2015/16, the contribution of UCTs to the reduction of poverty diminishes by about 40% – from 11.3 to 6.4 percentage points.

While the UCT still plays an important role in fighting poverty in Iran, our findings highlight the detrimental impact of inflation and the need for policy reform in order to keep the UCT relevant in reducing poverty. Over the past few years, Iran’s government has focused on eliminating UCT benefits to the top 20% of income distribution (that is, making the cash transfer ‘conditional’) to reduce the fiscal burden of the programme.

Our recommendation is to eliminate the benefits not just for the top 20% but the top 40% of the distribution, and to reallocate the resulting freed-up resources to the bottom four deciles to compensate for the effect of inflation over the past five years.

Our analysis shows that the value of the UCT in 2015/16 is almost half of its original value in 2011/12. This means that if the freed-up resources were evenly divided among individuals in the bottom 40%, the latter would be as well off as they were in 2011/12 (ignoring the impact of inflation on other components of the fiscal system in Iran).

A better approach, although costlier from an administrative perspective, is to make the UCT more targeted toward the poor population, especially in the rural areas. Our analysis (Enami et al, 2016) shows that targeting resources will significantly increase the effectiveness of UCTs in reducing poverty and ensure that financial resources are properly spent on fighting poverty and reducing inequality.

Further reading

Enami, Ali, Nora Lustig and Alireza Taqdiri (2016) ‘Fiscal Policy, Inequality and Poverty in Iran: Assessing the Impact and Effectiveness of Taxes and Transfers’, Tulane University Economics Working Paper No. 1605.

Enami, Ali, and Nora Lustig (2018) ‘The Wrecking Force of Inflation: How the Universal Cash Transfer in Iran has Lost Its Poverty Reduction Impact’, ERF Policy Brief No. ?? [add link]

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