Does Economic Growth in Iran Increase Income Inequality?

EghtesadOnline: Inclusive growth is what international organizations recommend these days, and it’s hard to argue otherwise.

News ID: ۷۴۴۸۵۰

05 February 2018

Economic growth is better when rich and poor benefit equally. Better still, is pro-poor growth, the type that lifts poor people’s incomes more than the rest.

The economic growth of 2016, which is the main fruit of Iranian President Hassan Rouhani’s international and domestic policies, does not seem to have reached all social classes equally, reads an article recently posted on the website of Iranian professor of economics at Virginia Tech, Djavad Salehi-Isfahani. According to Financial Tribune, excerpts follow:

The economic growth in question is the rapid recovery after the nuclear deal went into effect in January 2016.

According to the Statistical Center of Iran, GDP increased by 10.8% during March 2016-17. The non-oil GDP, which measures more closely the level of economic activity than GDP with oil, grew more slowly but still at a robust rate of 6.2%.

Despite flat oil exports, non-oil GDP has continued to grow at 6% per year for the first half of the current year to Sept. 22, 2017, the latest period for which SCI provides the data.

The question is whether this growth is visible in the expenditures of ordinary Iranians and how it breaks down by income. A neat little graphic tool called growth incidence curves will help us answer these questions. The following GICs plot the growth rate of per capita expenditures by quintiles of pce. They offer a simple visual regarding the inclusivity of economic growth. If the curve is downward sloping, the pce of poor deciles has grown faster than the rich and growth has been pro-poor; the opposite, if upward sloping.

Let us begin by the GIC for the year of economic recovery. Graph 1 shows changes in the living standard during 2016/17-2015/16 by decile of pce. Notice that for the most part, the graph is upward sloping. Richer deciles experienced faster growth than the poor. The red line in the middle is the growth of the median pce, about 1.3%. The real pce of the top two deciles grew twice as fast as the median, while all deciles below the median grew by less than one parent. The second poorest decile actually lost ground while the country as a whole grew.

Clearly, growth was unequal and not inclusive. This is not surprising given the source of this growth and all post-revolution growth spells—higher oil revenues.

Oil-induced growth tends to be unequally distributed because oil revenues do not accrue to individuals, as would the proceeds of some mass produced export that employed a cross-section of workers. They go instead directly to the government coffers and only later find their way, through opaque channels, down the economic ladder. The main channels are government contracts, credit subsidy, government transfers and higher government salaries.

From here, suppliers of goods and services to the government and others who were first in line to receive something from the government, begin to see the benefits of the economic expansion.

During the first three years of Rouhani’s administration, the economy contracted and the contraction was also unequalizing. As Graph 2 shows, during 2013-15, the only group not to lose in terms of real pce was the top decile.

What these graphs suggest is that, left to itself, Iran’s economic system does not treat people at the bottom of the economic ladder as well as those at the top. In particular, the system does not seem to distribute rising windfalls from oil equally.

Under Akbar Hashemi Rafsanjani

Has this always been the case with oil booms? Going back to the first, though very brief, positive oil shock after the Islamic Republic had established itself, we find growth to be unequalizing.

During 1990-91, when the first Persian Gulf war briefly lifted oil prices, we notice an upward sloping GIC (Graph 3, left panel). A 4.3% average growth in pce was distributed unevenly, drawing criticism for President Rafsanjani economic policies.

The pattern for the rest of former president, Akbar Hashemi Rafsanjani’s time in office was a bit different but still unequalizing (Graph 3, right panel). The very bottom decile experienced a slightly higher-than-the-median growth, while the top decile did the best.

Under Reformist Gov’t

What about the oil boom of the early 2000s, during the second presidency of the reformist government? Was it, too, unequalizing?

Significantly, for 2000-05, we get a downward sloping GIC (Graph 4), indicating pro-poor growth. During this period, the median real pce grew by more than 7% per year, with the poorest decile doing even better.

Does this negate the pattern of unequalizing growth observed in other oil booms? The answer is no. If we limit the analysis to the sub-period when oil revenues grew fastest, 2003-05, the GIC is again upward sloping (Graph 4, right panel). An even faster median growth was distributed unequally between the bottom and top deciles of pce.

Under Mahmoud Ahmadinejad

Finally, you may ask if oil-induced growth was more inclusive under the populist ex-president, Mahmoud Ahmadinejad. The answer is yes and no.

The first year of office, the GIC was still upward sloping (Graph 5, left panel), indicating unequal growth.

But later on, once the oil boom had worked its way through the system and Ahmadinejad’s populist programs had kicked in, the GIC became downward slowing (Graph 5, right panel), and growth was once again pro-poor.

As the economy entered into negative growth—the sanctions induced recession—GIC remained downward sloping. The cash transfer program that Ahmadinejad started in 2011 was probably the most effective in protecting the poor during the downturn that covered the remainder of his term, 2011-13.

The recession brought the median pce by 2.4% per year and reduced pce for all deciles, except the very poorest.

Without economic growth, long-term improvement in the lot of the poor, which can only come from more and better jobs, is not possible. Redistribution has its limits; in particular, it can reduce growth.