Stagnant rural incomes
The gap between rural and urban incomes has been widening because the rural areas appear to have missed the recent boom or President Ahmadinejad’s redistribution. According to survey data, in 2007, the gap between rural and urban per capita household expenditures reached its highest level, nearly 50 percent, up from 45 percent in 2004. During these three years, when urban families enjoyed (a modest) 3.5 percent annual growth, rural expenditures grew by zero percent! Why the rural economy has fallen behind or out of national favor is anybody’s guess, but here are a few leading explanations.
First, a closer looks at the facts as I have extracted them from the Household Expenditures and Income Surveys collected by Iran’s Statistical Center. The figure below shows average per capita expenditures in 2007 prices (deflated by the Central Bank of Iran’s CPI) for rural and urban areas since 1985. It also shows, on the right axis, the expenditures gap (urban minus rural) as percentage of urban expenditures.
Rural incomes have been historically lower than urban incomes, which is no surprise, but the variation in the size of the gap is not easy to understand. In the last two and half decades, the gap has changed from a low of 27.6 percent in 1990 (1369) and a high of 51.5 percent in 1985. Some of the gap is spurious because of the lower cost of living in rural areas (mainly housing), but the change is probably not.
The rural-urban gap has been one of the main drivers of changes in inequality, especially in the last four years (more on this in a future post). The gap narrowed under Mr. Moussavi’s watch, and widened during the Rafsanjani and Khatami’s administrations. In the last three years of President Khatami’s government rural expenditures were rising faster than urban expenditures and the gap closed somewhat.
So, why did rural incomes stopped rising under Mr. Ahmadinejad? Before I put down a few guesses, I should note that they are just that, guesses. I have not seen any research which dealt with the issue. Something may be out there, but perhaps not in English. If so, I hope to hear about it. Three good answers comes to my mind. First, is the drought. We know most of Iran suffered a severed drought in the last few years, which could have hurt agricultural output. However, this is not a full explanation because often droughts also raise agricultural prices which help farmers recover part if not all of their loss. This does not happen in Iran, because when droughts cause prices to rise the government opens the food import spigot, which stabilizes food prices but also turns dark the silver lining in the misfortune. It is a curious situation in which the government offers drought insurance to the richer urban consumers who but not rural consumers. I know, not that curious because we all know that urban consumers are more politically savvy than the rural folk. (You want to know how savvy, try to guess who has been complaining more about a bad economy by looking at the figure above!)
I have already mentioned my second guess, rising oil income, which led to more imports that depressed not only agricultural prices but all tradable goods prices. This is the famous Dutch Disease which may well have hit Iran’s agriculture and rural incomes in recent years.
The third explanation is lack of increase in productivity in agriculture. For rural incomes to go up they have to be more productive, which is difficult to do since nature plays a large role in the outcome. There have been significant improvements in the rural economy of Iran, from electricity and health to application of science and technology, but none that show up in the last four years in rural expenditures at least.
Sorry for not having anything juicy or definitive to say here. This post is intended mainly for my own education. I look forward to hearing about other ideas, and perhaps research that could throw light on this important issue for me. I would also like to hear about a related issue: I hear a lot about the strong support for Mr. Ahmadinejad in rural areas. Either my numbers are not telling the whole story or what I hear about his strong rural base is just political gossip. Or perhaps there is no contradiction between a widening rural-urban gap and Mr. Ahmadinejad’s political support in rural areas. Could rural voters be looking deeper than inside their pocketbook? Does politics of identity trump simple economic calculations? We could find out in a few weeks!