Think Tank Explores Poverty Trap in Iran

EghtesadOnline: In its latest report, Majlis Research Center, the influential research arm of the Iranian Parliament, has singled out a set of potential deterrents to poverty reduction in Iran’s economy.

News ID: ۷۴۸۲۷۹

27 August 2019

Poverty not only raises economic concerns, but also political and social costs. The rise in poverty rate, which is the ratio of people whose income falls below the poverty line, would lead to social ills and discontent.

The most debilitating social ills include unemployment, crimes, delinquency, drug addiction, homelessness and family disintegration.

According to an estimate by Majlis Research Center, Iran’s poverty rate stood at 16% in the fiscal 2017-18, which is acceptable in view of the extreme poverty rates of 30-40% in some developing or less developed countries, Financial Tribune reported.

Failure in reducing poverty rate would result in chronic poverty, suggesting that a fraction of the society gets trapped in the cycle of poverty for long periods of time.

The research center has identified several reasons why poverty continues to blight Iran’s economy.

Failing to maintain inclusive economic growth is one of the main reasons behind the ongoing experience of poverty in Iran.

Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society.

The poor in Iran do not benefit from economic growth. This means that the type of growth experienced in the country is not one that leads to an increase in productive investment and labor force, nor does it narrow disparities or create job opportunities.

Iran’s economy emerged from recession in the fiscal 2014-15 with a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, according to the Central Bank of Iran.

Growth in 2015-16 has been put at -1.6% by CBI and 0.9% by the Statistical Center of Iran.

CBI has put 2016-17 growth at 12.5% while SCI considers it to be much lower at 8.3%. The former has ceased to release reports on Iran's growth rates.

Latest reports show Iran's gross domestic product shrank by 4.9% in the fiscal 2018-19 compared to the year before.

Low Economic Mobility

Low economic mobility of people of modest means decreases the chances of their breaking free from the shackles of poverty.

Economic mobility is the ability of an individual, family or some other group to improve their economic status—usually measured in income.

Given the characteristics of low-income deciles in Iran, outside intervention, including skills training for poor individuals to achieve empowerment, providing them with cash and non-cash subsidies and clearing legal obstacles to getting credit and loans, is vital for individuals in these strata.

The average annual inflation gap measured by SCI among income deciles stood at 2.9% in the Iranian month ending Aug. 22, indicating a 3% decline compared with the previous month.

The average goods and services Consumer Price Index in the 12-month period ending Aug. 22 increased by 41.9% for the first decile (those with the lowest income) whereas it grew by 44.8% for the 10th decile (those with the highest income).

The second and seventh deciles saw their 12-month average inflation rates grow by 43.1%, compared with last year’s corresponding period.

The annual inflation rate for the third decile increased by 43% in the same month, the fourth decile 42.9%, the fifth decile 42.8%, the sixth decile 42.5%, the eighth 43.2% and the ninth decile 43.6%.

The highest overall CPI (using the Iranian year to March 2017 as the base year) stood at 184.3 for the 10th decile and the lowest index was 179.5 for the first decile.

The year-on-year inflation rates increased by 40.7% for the first decile during the month under review, 41.7% for second, third and fourth deciles, 41.8% for fifth, 41.5% for sixth, 42% for seventh and eighth, 42.3% for ninth and 42.9% for the 10th decile

Income deciles are groupings that result from ranking either all households or all persons in the ascending order based on income, and then dividing the population into 10 groups, each comprising approximately 10% of the estimated population.

Low Paying Jobs

Another reason cited by the research center is the low income of job holders in Iran.

According to the report, more than half of the breadwinners of Iranian households who fall within the first three low income deciles are job holders.

Employment alone has not solved poverty in Iran. Studies show there is high concentration in some jobs held by people of low-income deciles. For example, 65% of individuals in the first decile (those with the lowest income) work in seven job categories, suggesting that there is low diversity in the skills possessed by these people.

Another implication is that the high concentration of job holders in the job categories discussed means they benefit from lower pays (supply and demand).

Furthermore, people of modest means tend to engage in unofficial jobs without the benefits of Labor Law and insurance, which in turn hinders the flight out of poverty.

Iran’s unemployment rate, the proportion of jobless population of ages 10 years and above, stood at 12% in the last Iranian year (March 2018-19), indicating a 0.1% rise compared with the year before (March 2017-18).

A total of 3,260,796 Iranians were unemployed last year, according to SCI's latest report.

The unemployment rate for men stood at 10.4% while women joblessness hovered around 18.9%.

Over 2.25 million men and 1.01 million women of ages 10 and above were jobless last year.

The unemployment rate was 13.5% for urban areas (2.7 million people) and 7.9% for rural areas (553,883 people).

Other Reasons

The imbalance between skills needed by the labor market and those of unemployed university graduates, lack of central, long-term government planning for tackling poverty and the stark disparity in giving access to financial facilities among income deciles due to excessive bureaucracy and burdensome banking regulations are other metrics for the chronic general poverty in Iran.

Add to these, the immigration of skilled, educated workforce from the country and the entry of unskilled, cheap workforce into Iran, sudden rises in the value of foreign currency against the national currency and the ensuing inflationary expectations as well as lack of a vision for deflecting the economic consequences of foreign shocks help further entrench poverty in the country, the research center concluded.