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Inflation and the Erosion of the Poverty Reduction Impact of Iran's Universal Cash Transfer

Author

Listed:
  • Ali Enami

    (CEQ Institute)

  • Nora Lustig

    (CEQ Institute)

Abstract

In December 2010, Iran replaced its energy and bread subsidies with an unconditional and universal cash transfer (UCT). In the short-run, this shift away from generalized subsidies had a significant effect on poverty. Studies show that the direct effect of the reform was a reduction in the headcount ratio from 22.5% to 10.6%. However, since the introduction of the reform, inflation has severely eroded the real value of the transfer because adjustments to its nominal value have been minimal in comparison. We estimate that after five years, during which time there was a cumulative 136.5% increase in prices (since 2011/2012 or 1390 in the Iranian calendar), the real value of the transfer was cut nearly in half. As a result of this cut, the poverty reducing effect of the transfer declined by about 40%, which translates into roughly a 5 percentage point increase in the headcount ratio. We find that this deleterious consequence of inflation is much higher in rural areas where the contribution of the transfer to the reduction in the incidence of poverty declines from 21.9 to 11.0 percentage points over the course of these five years. The only way for the UCT to recover the poverty reducing results observed at the beginning, without increasing the budget, is by making it a more targeted program focused on the poorest 40% of the population.

Suggested Citation

  • Ali Enami & Nora Lustig, 2018. "Inflation and the Erosion of the Poverty Reduction Impact of Iran's Universal Cash Transfer," Commitment to Equity (CEQ) Working Paper Series 68, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:68
    as

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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq68.pdf
    File Function: First version, 2018
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    References listed on IDEAS

    as
    1. Ali Enami & Nora Lustig & Alireza Taqdiri, 2016. "Fiscal Policy, Inequality and Poverty in Iran: Assessing the Impact and Effectiveness of Taxes and Transfer," Commitment to Equity (CEQ) Working Paper Series 48, Tulane University, Department of Economics, revised Jun 2017.
    2. Gahvari, Firouz & Karimi, Seyed Mohammad, 2016. "Export constraint and domestic fiscal reform: Lessons from 2011 subsidy reform in Iran," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 40-57.
    3. Jesper Jensen & David Tarr, 2014. "Trade, Exchange Rate, and Energy Pricing Reform in Iran: Potentially Large Efficiency Effects and Gains to the Poor," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 13, pages 307-326 World Scientific Publishing Co. Pte. Ltd..
    4. Dominique M. Guillaume & Roman Zytek & Mohammad Reza Farzin, 2011. "Iran; The Chronicles of the Subsidy Reform," IMF Working Papers 11/167, International Monetary Fund.
    5. repec:mes:emfitr:v:51:y:2015:i:6:p:1144-1162 is not listed on IDEAS
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    More about this item

    Keywords

    Inflation; incidence analysis; universal cash transfer; poverty; Iran;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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