Tyranny of numbers

Rising poverty and falling living standards in Iran in 2020

Posted in General, Inequality, Living standards, Poverty by Djavad on August 28, 2021

The Statistical Center of Iran (SCI) has released the micro data from its most recent annual Household Expenditure and Income Survey (HEIS) for the Iranian year 1399 (21 March 2020 to 20 March 2021). The results do not surprise — the downward slide in living standards and the rise in poverty that started a decade ago continues. Along with the more positive news on the GDP and employment front that have become available in the last few weeks, the survey offers a relatively accurate if mixed picture of a country and a people struggling under the Trump-Biden maximum pressure campaign. Relative to household welfare, the economy is doing better. GDP grew by 3.6% last year and last quarter (spring 2021) 200,000 more people were working compared to a year ago. This makes perfect sense since falling real wages that are hurting welfare are good for employment and production.

Living standards. Since 2007, when per capita household expenditures (pce) peaked at $19 PPP per day, they have been falling more or less steadily to $14 in 2020, a drop of 25%. (The original data in current rials are converted to 2020 prices using the CPI for rural and urban areas and the PPP conversion factor for the GDP of 30008 rials per USD is from the World Bank World Development Indictors. In addition, I adjust expenditures for differences in the cost of living between the regions, as reflected in differences in the poverty lines in 2005.)

Figure 1 plots the average pce since 2007 for three regions — rural, urban and urban areas of the Tehran province (mostly the Tehran metropolis). All three regions experienced a short recovery after the nuclear deal (JCPOA) went into effect in 2016, a positive blip in the otherwise depressing picture of living standards that is hard to square with some claims in Iran that all of Iran’s economic problems are due to the JCPOA.

The graphs shows that the decade-long decline has not been equally shared by all regions. The 2007-2020 drop was much higher in rural areas (39%) compared to 26% in urban areas and 11% in Tehran. The slower rate of decline in Tehran may be due to higher inflation (I do not use a separate CPI for Tehran), or bias in government expenditures, as exemplified by the 60% increase in public sector wages and salaries for the current year most of which disproportionately benefits salaried employers in Tehran.

Figure 1. Living standards by region

Poverty. The declining trend in average expenditures is reflected in rising poverty, reaching 13% from below 10 percent a decade ago and 12.1% in 2019 1398). (The poverty rate is the percentage of the population below the poverty line of about $5.6 PPP per person per day.) There is also much regional variation. Rural poverty, at 25%, is much higher than the urban rate (less than 10%) and has risen faster (up from 22% in 2019).

Figure 2 depicts the history of poverty since 1984, the first year for which micro data is available. The poverty line I have used is close to the international poverty line of $5.5 in 2011 PPP, which I estimate by using separate lines for the rural and urban areas of Iran’s 31 provinces. In 2020, these lines are 144,021 rials per person per day in rural areas, 164,599 in urban, and 227,805 in Tehran. The average line for the country as a whole is 168,491 rials, which using the World Bank’s PPP conversion factor for 2020 of 30008 rials, gives you the $5.60 PPP.

Figure 2. Poverty rates by region.

This history is informative because it shows that the recent trend in poverty, especially in rural areas, is wiping off twenty years of poverty reduction. Two factors are to blame for the rise in poverty since 2011. The most obvious is imposition of US sanctions, but a deeper reason is the lack of a policy response to protect the poor in the face of the sanctions. The success in poverty reduction after the war with Iraq, displayed in Figure 2, is the result of social policies and heavy investment in disadvantaged areas, building basic infrastructure like road, electricity, and clean water in rural areas. These policies, along with rural family planning, were instrumental in reducing infant mortality and fertility for what was then poorer half of Iran’s population. How infrastructure promotes better health and education and thereby lifts people out of poverty is a familiar story.

Whereas these policies followed naturally from the revolutionary spirit that infuses all popular revolutions, policies to help losers in a market economy, especially one under extreme sanctions, need sophisticated approaches more fitting of a complex economy. The Islamic Republic has relied too much on charity in place of policies that address inequities in access to education and good jobs.

One innovative anti-poverty program that relies on cash transfers but is not charity is Ahmadinejad’s targeted subsidy program that replaced vast energy subsidies with direct cash transfers. That program, which is still popular despite having lost its financial worth, can be revived and implemented better, but it is not a substitute for more serious reform that equalizes access to, for example, to good schools and higher education.

Inequality. Unlike poverty and living standards, inequality has not changed much. In fact, for the past three decades the Gini index has been less than 3 Gini points away from the 40 percent that it was in 2019 and 2020. The common wisdom in Iran that inflation breeds inequality is simply not based on any evidence that I have seen. Inflation increased from an average of about 10% in 2015-2017 to more than 30% in 2019-2020 without much change in income inequality.

A more detailed view of income inequality is available from the comparison of real pce for different income groups in Table 1 (in PPP USD per person per day). Individuals in all quintiles of income appear to have lost purchasing power, but those in higher quintiles have lost more. The average decline in real pce between 2007 and 2020 is 23%; it rises steadily from 18% for the bottom 20% to 26% for the top 20%. The reverse is the case for change in 2019-2020, which is highest for the bottom quintile (5.6% compared to the average decline of 3.2%).

Note: Expenditures in 2020 prices are converted to PPP USD using the World Bank estimate of 30008 rials for 2020.

I will end with a note on the comparison of my estimates of the much higher rates you may have seen in media reports inside and outside Iran. A good example is a report from the Ministry of Cooperation, Labor, and Social Welfare (MCLS) published this summer that the venerable economics daily, Donyaye Eghtesad, referred to as the first “official” report on poverty. It is “official” in the sense that it is research done by officials of the Ministry and not much more. Iran still does not have an official poverty line.

The poverty line adopted by the report is simply too high for a middle income country, not to mention one under sanctions, to commit to. On p. 30 of the report the poverty line per person for 1399 is estimated at 12,540,000 rials per month, which is about $14 PPP per person per day, more than twice the international standard for poverty for upper middle income countries (to which Iran belongs according to the World Bank). The $14 poverty line is based on an earlier study by the Majles Research Center’s (MRC) for 1395, which also showed a high incidence of poverty. That grim account of poverty under Rouhani was widely reported and may have affected the dim evaluation of Rouhani’s performance.

The MCLS report estimates that 32% of Iranians were below the poverty line in 2019, 2.8 times my estimate of 12% for that year. Since we both use the same data for 2019, the difference arises from different poverty lines.

Adopting a high poverty line and estimating high poverty rates seems accepted practice by officials and academics in Iran. From a philosophical perspective, there is nothing wrong with adopting a lofty standard that others use to define the middle class. But from a policy perspective it makes little sense. First, the country cannot afford to fight that level of poverty with redistribution, and, secondly, if dire accounts of poverty were to persuade the government to help the poor, they have obviously failed to do so. A cash-strapped government is more likely to implement policies to help 15% of the population than twice as many. Even if the government wanted to redistribute, it would not be able to persuade the rest of the country to subsidize families with middle class possessions. Among those the report designates as poor, 48% own homes, 30% own a car, and 37% have washing machines.

One Response

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  1. Maye Ehab said, on September 16, 2021 at 3:38 pm

    Thanks for an interesting and enlightening read.

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