Economic Research Forum (ERF)

Poverty reduction efforts in Iran: the wrecking force of inflation

1016
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]

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.




LinkedIn