Tyranny of numbers

The poor and the gasoline price hike

Posted in Poverty, Subsidy reform by Djavad on November 23, 2019

Since the announcement of the gasoline price hike on Friday November 15, events in Iran have taken a tragic turn with loss of life and destruction of property. They also took a perplexing turn.  Three days after the price increase and the vague promise of cash compensation for the price hike, on Monday the government announced it was putting the promised money into people’s bank accounts.  If the compensation scheme was ready, why not announce it with the price increase? I am not sure if it would have prevented the unrest altogether, but at least there would have been one fewer grievance.

The accounts in question are the same accounts that Rouhani’s government had ignored for years, treating them as an embarrassing legacy of a past government misdeed.  He let their value shrink as inflation raged and as he raised energy prices.

Better late than never.  The new deposits will double the amount of cash transfers households have been receiving as part of the Ahmadinejad subsidy reform scheme of 2010, from 455,000 rials per person to about 1000,000 rials for a single-person household, with smaller increments per person for larger households. Despite the increase, the real value of what people will receive will be about half the level in 2011 because prices have nearly quadrupled since then.  However, given the looming  government budget deficit, this should be seen as rather generous.  The Rouhani government is not repeating the mistake of the Ahmadinejad government that paid out more than it received from the price increase.  The math has improved, if political acumen has not.

The question that this scheme — cash transfers as compensation for higher energy prices —  raises is whether the poor win or lose in the bargain. Many have speculated that the recent protests were fueled by loss of income.  But no one really knows the class composition of protesters, and there is no shortage of grievances, especially for the youth, who suffer disproportionately from high unemployment and strictly enforced social restrictions.  If the poor gain in the balance of more expensive gasoline and higher cash transfer, the revamping of cash transfers, rising poverty would not be among the grievances.

Some simple calculations show that this is the case.

There are few topics that are amenable to quantitative and fact-based discussion than subsidies and the poor.  Both are nevertheless terribly misunderstood in Iran.  Iran produces a ton of publicly available survey data that anyone with a basic understanding of statistical software can use, but, unfortunately, the public debate on the amount and incidence of the gasoline subsidy is mostly based on opinions or misuse of the data.

The amount and the incidence of gasoline subsidy in Iran are well known.  The government sells about 90 million liters each day, roughly 3.3 billion liters per year to its people.  Until a week ago, gasoline was sold at 10,000 rials (10 cents) per liter, about $0.90 below the world average price of $1 per liter.  If we take the $0.90 difference as the subsidy per liter, we get a nice round number for the amount of the gasoline subsidy of $30 billion per year — about 7% of the GDP.

Incidence of this hefty subsidy — defined as the share of different income groups in this sum — is highly skewed toward the rich, which is why a uniform transfer can make a big difference for the poorest households.  The amount of gasoline subsidy each person receives is proportional to their gasoline expenditures, which we can calculate from the 2018 expenditure survey.  The table below is what I have calculated.

Of 100 liters distributed, 23.2 liters went to individuals in the top decile and only one-tenth, 2.3 liters, to those in the bottom decile.  An egalitarian distribution of the national wealth would give each person irrespective of income 10 liters and let them decide what to do with it — burn or sell.  The allocation could be entered into an account that can register both the amount of the gasoline credit in a person’s account and its worth given the current price as revealed by a properly designed online market.  It will take some work, including some experimentation, but it is the way of the future. A distant second in terms of fairness (though not administrative ease) is to give everyone the same amount of cash.

There has been a lot of opposition to uniform transfers.  Giving cash to the rich does not make much sense, unless it is difficult to say who is rich and who is not.  Everyone knows a rich person when we see one, but it is not easy to know people’s income and wealth accurately in Iran.  The existing system of identification, which has dropped one million people from the roll using data from income and asset ownership, will become increasingly controversial as the government moves down the income distribution.

Equal payments have the advantage of simplicity and transparency– no government discretion to kick you out of the roll — and frees up administrative energy for fixing the broken income tax system.  If the government can find out who the people in the top three deciles are, then it should tax their income at a higher rate and not burden the reform of energy subsidies with double duty.

Without compensation, gasoline price increases hurt the poor, not because the poor are big consumers of gasoline but because there is no room in their budgets for further cuts.  In 2018, households in the poorest decile spent 1.7 of their budget on gasoline, lower than the middle income households (2.0-2.2 percent) but higher than those in the top decile (1.4 percent).  The poor have made painful cuts in recent years to cope with the eroding value of the cash transfers and the sanctions-induced recession.  Since 2012, their real per capita expenditures have shrunk by 8.9 percent. Last year, Iran had the sharpest increase in poverty rates in years, especially in Tehran (see the figure below).  The poverty rate in rural areas increased from 13.5 to 15.2 percent, in urban areas from 8.6 to 10.0 percent, and for Tehran from 6.9 to 11.5 percent; for the country as a whole it increased from 9.6 percent to 11.5 percent.*  A two-percent increase in the poverty rate means 1.6 million falling into poverty in one year.

As the graph shows, cash transfers in 2011 helped reduce poverty, especially in rural areas, as Obama sanctions were tightening and Iran’s economy fell into recession.  The gains in rural areas were soon lost, by 2014, and urban areas and Tehran followed in order.

Whether the renewed cash transfers can reverse the adverse trend of recent year is hard to tell and depend on many factors, like how the economy performs in coming months. We will not know for sure before survey results for 2019 are released, but, based on what we know about how regressive gasoline subsidies are, we can tell that the top up of cash transfers is a net gain for them.
* The poverty rate is the percent of population with per capita expenditures below $5.5 PPP, adjusted for the regional variation in the cost of living.  I use the World Bank private consumption PPP rates, except for 2018, which is not yet available and I estimate to be 18570 rials per USD. Obviously different poverty lines would produce different poverty rates at each point in time but the pattern of deterioration since 2013 would not be substantially changed.

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  1. […] economists in Iran have long argued against fuel subsidies, which disproportionately benefit the better-off, in favor of targeted payments to the less well-off. Facing a large budget deficit, the […]

  2. […] the emergence of a precariat class in Iran. Just last year, 1.6 million Iranians fell into poverty due to high inflation. The study details how the counties in Iran which saw protests were often […]

  3. […] rate due to the US-sanction-induced recession. Last year, Iran had the sharpest increase in poverty rates in years, from 9.6% to 11.5%.  In rural areas the rate increased from 13.5% to 15.2%, in urban […]

  4. […] In the table below, “PCE” is the value of the PCE in 2018 inflated by the consumer price index (CPI). So, for the bottom 20 percent of the population PCE averaged to IRR 114,000 per day (about $5 PPP), net change in income was IRR 125,410 and “PCE after” are the same averages after adding the amount of transfer and subtracting the increase in gasoline expenditures.  For the bottom quintile, this is nearly 10 percent larger.  The averages for the amount of transfer and the net change show that the bottom 60 percent of the population, the intended target of cash transfers, do benefit from the program while the top 40 percent lose.  Per capita expenditures of the bottom 20 percent, most of whom are classified as poor according to the World Bank $5.5 PPP daily poverty line, will increase by 9.9 percent. This is a sizable gain that can reverse the rising trend in poverty that I documented in my last analysis. […]

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