Iran’s Gini Index Surges

EghtesadOnline: Iran’s Gini Index stood at 0.4006 in the last fiscal year (March 2020-21) compared with the previous year’s 0.3992, the Persian-language daily Shargh reported, citing the Statistical Center of Iran.

News ID: ۷۸۶۸۳۰

09 August 2021

The Gini index, or Gini coefficient, was devised by an Italian statistician named Corrado Gini in 1912. By far, it has been the most popular measure of socioeconomic inequality, especially in terms of income and wealth distribution.

The Gini index ranks income inequality on a scale of zero — no inequality — to one, the maximum level of inequality. In other words, the closer the number is to one, the more wealth is concentrated in the hands of fewer people and the bigger the income disparity. Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.

Inequality has been higher in urban areas than in rural parts over the past two years. SCI says the Gini index for urban areas stood at 0.382 and 0.383 in the years ending March 2020 and March 2021, respectively, while for rural parts, it was 0.353 and 0.359 in these two years, the Persian-language daily Etemad reported.

South Africa, Chile, Argentina and Brazil are among countries with Gini coefficient above the global average and consequently bigger income disparity while the Czech Republic, Norway and Sweden experience very low Gini ratio.

The outbreak of Covid-19, coupled with sanctions, has dashed any hope of economic improvement, placing inflation expectations at rates higher than 40% for the current year and it seems the Gini index will move further from zero this year.

Post-Revolution Review

Iran’s Gini index registered its highest level in the years ending March 1975 and 1976.

According to analysts, the increase in wealth inequality was one of the main reasons behind the Islamic Revolution of 1978.

The Iran–Iraq War (1980-88), direct payments to individuals in the form of cash payments and sanctions have affected the dynamics of wealth inequality in Iran after the revolution.

Using the Statistical Center of Iran data on the Gini index, the Persian-language daily Iran has classified the Iranian years between March 1985 and March 2020 into five periods and surveyed the impacts of political and economic conditions on the Gini index.

From the Iranian year ending March 1985 to March 1988, the country was involved in the Iraq-imposed war. The then government instituted a coupon system to ensure that everyone had equal access to essential food items. The Gini index did not register a significant change during the period and generally remained on a downtrend: it decreased from 0.4291 in the year ending March 1985 to 0.4200 in the year ending March 1989. In addition, the spending gap between individuals in the top 10% of income earners to those in the bottom 10% income earners decreased from 16.59% to 15.26% during the period.

With the end of war came the growing income inequality. Those who had lost their source of income during the war years reclaimed their livelihoods and the country’s revenues were allocated to the reconstruction of infrastructures. The Gini coefficient increased from 0.4249 in the Iranian year ending March 1990 to 0.4294 in the year leading to March 1997. The spending gap between individuals in the top 10% of income earners to those in the bottom 10% income earners increased from 16.24% in the year ending March 1990 to 17.20% in the year ending March 1997.

Years between March 1998 and March 2005 saw the return of relatively stable inequality indexes. Iran’s economy posted a significant growth during the period. Per capita gross domestic product also registered high rates. The Gini index settled at 0.4240 in the year ending March 2005 from 0.4230 in the year ending March 1998. The spending gap between individuals in the top 10% of income earners to those in the bottom 10% income earners decreased from 16.80% to 16.21% during the period, which is indicative of a narrowing wealth inequality.

The Gini index fell below 0.40 between March 2006 and March 2013, chiefly because of the implementation of targeted subsidies policy that increased the income of all deciles equally. The Targeted Subsidies Law of 2010 authorized the reduction of food and energy subsidies and instead allowed the payment of 455,000 rials to each and every Iranian on a monthly basis.

The plan has been retained so far and more than 95% of Iranians currently receive the monthly cash subsidy. The Gini index slid from 0.4248 in the year ending March 2006 to 0.3659 in the year ending March 2013. The spending gap between individuals in the top 10% of income earners to those in the bottom 10% income earners decreased from 16.46% to 10.79% during the period.

Between March 2014 and March 2020, income redistribution indexes fluctuated. The Gini index hit its 36-year low in the year ending March 2014 and settled at 0.3650 in that year. However, it began a rising trend from March 2014 to March 2019 but returned to a declining trend in the year ending March 2020. The index stood at 0.3788 in the year ending March 2015, 0.4093 in the year ending March 2019 and 0.3992 in the year ending March 2020.

On the other hand, the spending gap between individuals in the top 10% of income earners to those in the bottom 10% income earners increased from 10.68% in the year ending March 2014 to 14.45% in the year ending March 2019, but fell to 13.69% in the year ending March 2020.

Government’s cash and non-cash subsidies to low-income deciles have been the main reason behind the improvement in wealth redistribution during the last year. Reports show the government’s annual subsidies to the top low-income deciles in the year ending March 2020 increased 2.8-fold in urban areas and 3.5-fold in rural areas compared with the year ending March 2017, which resulted in the country’s Gini index to drop below 0.40.

Share of Sanctions in Inequality

According to a report by the Macroeconomics Department of the Plan and Budget Organization, the imposition of international sanctions in the early 2010s resulted in a 10-20% decline in the welfare of all income deciles in Iran, despite the continuation of government’s direct subsidy programs.

The preliminary nuclear agreement in the Iranian year ending March 2014 and the start of negotiations with world powers and ease of some international transactions benefited households in different income deciles but the real improvement in their spending and welfare was realized in 2016, as sanctions were officially lifted.

The welfare of families living in urban areas improved by 5-10% during the two-year period after the implementation of the Joint Comprehensive Plan of Action. The sharpest decline has been recorded for food in the households’ consumer basket over the past decade.

Since the year ending March 2017 and the implementation of Health Reform Plan, spending on health began to rise exponentially, particularly in rural areas.

The Health Reform Plan was introduced in 2014 to fulfill the outgoing president, Hassan Rouhani’s election campaign promise of healthcare for all Iranians by 2018 under a nationwide health insurance program.

Government payments, including the payment of cash subsidies and health insurance premiums, have decreased steadily from the year ending March 2012. As a result, payments at constant prices in the year ending March 2019 reached one-third of what it was in the year ending March 2012.

When constant prices are used, per capita income dropped by 11% over the period. A 15% decline was recorded in per capita income during a single year: March 2018-19.

Government payments, including cash subsidies, account for 26% of total income of households in the first income decile (those with the lowest income), while it constitutes less than 4% of total revenues of families in the 10th decile (those with the highest income).

Miscellaneous salaries and revenues, which are usually exempt from tax, account for 35% and 41% of the income of high-income families, respectively.

The removal of sanctions, together with economic growth, during March 2016-18 resulted in a considerable improvement in households’ welfare. Job creation and economic growth were apparently the main causes of decline in wealth inequality and poverty then, the report read.