Tyranny of numbers

Stagnant rural incomes

Posted in Inequality, Macroeconomy, Poverty by Djavad on May 22, 2009

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!

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  1. How The Light Gets In « Max Dunbar said, on June 25, 2009 at 9:56 am

    [...] that rural income has stagnated under Ahmadinejad. The Iranian working class has been hammered by unemployment, privatisation and [...]

  2. [...] that rural income has stagnated under Ahmadinejad. The Iranian working class has been hammered by unemployment, privatisation and [...]

  3. Hossein said, on May 31, 2009 at 11:22 pm

    It might be useful to have the same graph for expenditures without housing. Housing boom not only might have wealth effect, as Keyvan pointed correctly, it might also have just a “numeric effect”. When there is an increase in the price of houses, and when it is higher in urban than rural areas, even if people in urban areas dont spend more on other commodities (i.e. no wealth effect), their expenditure shows more increase in data. Any increase in housing prices changes one’s expenditure (data contains the rent-equivalent cost of houses), even if the household does not change any item.

    • Djavad said, on June 1, 2009 at 2:55 am

      good suggestion. will do it asap.

  4. dsalehi said, on May 25, 2009 at 10:12 pm

    I think I understood what you were saying–if the richer rural folk leave then the average income for those show stay behind cannot rise– a very valid point, though I doubt it is the entire story for 2004-07. I made a note of this point in my most recent post.

    Very interesting observations on the contrast between China and South Africa. In Iran both urban and rural consumers are being subsidized by the oil wealth, which is why in Iran wages are higher than productivity. I think most of the time the subsidy going to urban consumers is greater.

  5. a said, on May 24, 2009 at 6:14 am

    The money paid to farmers is very small when compared to the price fruits. Example, 1Kg of apple is sold by farmers for around 500 Rials. The same 1 Kg of apple is sold in Tehran for 20,000 Rials.

    About Ahmadinejad’s support in rural areas. The problem is not rural areas. IMHO, which is based on very restricted observations and therefore is not strong, there are two social factors effecting people’s votes other than economy. One is a backlash toward social policies of reformists in some conservative areas. Second, a backlash toward the elite and higher middle class who have earned their fortune during Rafsanjani’s governments and probably Khatimi’s. (Again, IMHO, the difference between luxury life people in north of Tehran enjoy and bad conditions people in south of Tehran have and comparison of these by later group is creating this problem.)

    Here are some links about distribution of votes, though I have not found a good one. Is anyone aware of where one can find a good statics about distribution of votes depending on various factors for last election(s)?


  6. Keyvan said, on May 23, 2009 at 1:19 pm

    Here’s a few more guesses:
    1. Household expenditure surveys do not take into account migration linkages where members of a family live in urban areas, and work and consume there instead of rural areas, yet retain ties to rural areas for various social and economic reasons. The patterns of rural to urban migration – stratified by age, sex – may help explain some of the increasing income gap. Unless the household surveys take that into account, but most do not.
    2. The wealth effect due to the housing boom, which I assume took place more so in urban areas than rural areas. As housing prices went up, those who owned property felt they were richer, and spent more. The stagnation/decline in the housing market as of this year may reverse this trend.

    That’s all I got off the top of my head. By the way, Val Moghadam mentions your work on women in the labor market in the MEI report on the Revolution at 30 years, and it is reprinted here. She says the SCI and you overestimate the female share of the labor force, and uses census data instead. Which is better and do you have any response?

    • dsalehi said, on May 23, 2009 at 6:15 pm

      Good points, but I like the second point better–the wealth effect. It is certainly worth a closer look. If this guess is correct, the gap between incomes and expenditures in the data should have increased. Usually we observe a gap of about 10-20 percent between income and expenditures, with the latter being higher. The gap should have increased more for urban than rural areas in the last few years.

      I am not sure if migrants consuming in urban areas should be counted as rural anything. If they remit, then it should be reflected in expenditures in rural areas; if not, it does not add to rural welfare.

      Thanks for the link to Val’s article. Bahramitash and Esfahani (in Ali Gheissari’s new edited OUP volume) also have a recent paper that carefully examines the census data and makes a similar point. I hope to get a chance to address that topic soon.

      • Keyvan said, on May 25, 2009 at 9:35 pm

        I will take a look at that book! On the migrant issue, I was too convoluted. I was trying to say something like: perhaps there has been a gradual change in the rural-urban linkages in Iran over the past 20 years.

        We know that rural and urban sectors influence each other, especially when the economic production and social reproduction of one sector subsidizes the economic production and social reproduction of the other. Compare, say, the rural areas of China vs. South Africa. In the former, land reform and rural reinvestment arguably aided the industrial take-off of the Southeast urban coastal areas, by allowing migrants to return to the rural areas and subsidizing the cheap wages of Chinese urban manufacturing. In South Africa, with no real peasantry to speak of, nor land reform (due to legacies of Apartheid policy), the urban sector and state entitlements effectively subsidize rural livelihoods. I wonder if either phenomenon was or is occurring in Iran, and if any changes occurred due to the shifts in state economic policy and its effects on rural-urban linkages.

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