Economy, Domestic Economy

Subsidy Reform Plan Under Scrutiny

Subsidy Reform Plan Under ScrutinySubsidy Reform Plan Under Scrutiny

Paying cash subsidies to people under the so-called ‘Subsidy Reform Plan’ could, from a mathematical point of view, reduce economic disparity. Yet, experts believe after its implementation, the plan has entailed catastrophic socioeconomic consequences, affecting poverty rate, among others.

After the plan was put in place by former president Mahmoud Ahmadinejad in 2010, households began to witness a significant increase in prices, accompanied by extensive unemployment and low economic growth.

“People received cash subsidies (a monthly sum of 455,000 rials or $13 per household member) from the government, yet the sinking economy deprived the heads of the households of their jobs,” Davoud Souri, an economist, writes in an article published in Persian economic daily Ta’aadol.

Meanwhile, high inflation rates reduced the value of household incomes and assets by almost a half or even more, he adds.

Although the predicament cannot be solely attributed to the Subsidy Reform Plan, the general perception is that it all happened after the plan was launched, giving rise to poverty and income inequality and in turn diminished welfare in general.

  Statistical Surveys

Two organizations i.e. the Central Bank of Iran (CBI) and the Census Organization conduct annual statistical surveys on Iranian households’ income and expenditures. The studies commonly use the Gini Coefficient or ratio, which represents income distribution of a nation’s residents to measure inequality.

The organizations collect the data via random/accidental sampling, and surveying the socioeconomic characteristics of the sample households.

The Census Organization has been collecting data on the income and expenditure of households for 50 years. It offers independent researchers raw data and documents from its database upon request. However, the CBI refuses to do so and only reveals to the public its conducted analysis in the form of tables and figures. Souri thus argues that the CBI data “are not worth being examined.”

  Validity in Question

The two organizations submitted their reports on poverty and income inequality to the Research Institute for Management and Planning (affiliated to the president’s office) last week.

As a high-level government agency that advises the president on economic policy-making, the statistical data presented to the institute need to be precisely examined before being used in any calculations, argues Souri. Wrong information can mislead economic policy makers and finally lead to formulation of wrong policies in both economic and political fields, warns the expert.

“However, the implications of the Subsidy Reform Plan have apparently cast a shadow of doubt on the reliability of poverty statistics,” he writes.

When the plan was first put forward in 2008, it signaled the households to withhold information on their income (if it was above average) and assets from the government, in an attempt to avoid being classified as ‘the rich’, which would consequently eliminate them from the cash subsidy list.

“It was the first and most natural reaction that could be expected from the public in that setting,” said Souri.

The engagement of the Census Organization in a pilot study to prepare a ‘household wealth and income calendar’ – which was never used – put the organization in an unsought position, which undermined the quality of its once valuable information on household income.

“A fraction of the sample always refuses to provide the surveyors with accurate information, but the rate of such households increased from 7 to over 52 percent after the reform plan,” he said.

The quality and validity of the studies sharply deteriorated upon the implementation of the reform plan, he concluded, adding that researchers need to bear in mind that this significant deviation influences the results of their calculations and thus the macro-level decision-making.  

  Poverty Line Controversy

The former government often failed to answer questions about poverty statistics. Former minister of welfare Abdolreza Mesri once asked a reporter, “What is the use of defining the poverty threshold anyway?!”

Under the former administration, those living on the equivalent of less than $1 per day were deemed to live below the poverty line. International agencies now consider the threshold to be 1.5 or 2 dollars; however they only use the benchmark to compare countries with one another for categorization and ranking purposes.  

Although such a definition has no significant impact on macro decision-makings, officials of the former administration cited the definition to claim that “nobody in Iran lives under the poverty line!” a renowned quote by Ahmadinejad that raised high public criticism.