Economist Blames Failing Subsidy System for Rising Inequality

EghtesadOnline: Because of the failing subsidy system in Iran, some high-income individuals have raced ahead while those who fall into low-income deciles have been left behind and become poorer, Vahid Shaqaqi-Shahri, an economist and university professor, says.

News ID: ۷۸۷۰۷۱

28 September 2021

What follows is the full translation of his write-up in the Persian daily Jahan-e Sanat on the most important requirement for designing a subsidy reform plan:

Iran’s economic system has three key components: the banking system, the taxation system and the subsidy system. A healthy heart’s task is to pump blood to all organs of the body, but if it fails to pump blood properly, some organs would fail. The same is true about a subsidy system, if it fails to divvy up subsidies equitably among income deciles, some groups might benefit more than others, and some might be left behind and become poorer.

More than 10,000 trillion rials (over $36 billion at current exchange rates) in subsidies are being paid annually in Iran. In addition, exemptions such as tax exemptions are being offered to some sectors, which should also be categorized as subsidies.

The concept of subsidy system is to provide financial support for low-income deciles or fledgling producers, although statistics show that Iran’s subsidy system has not been able to fulfill its mission successfully and mainly favors high-income deciles.

Most consumers of heavily-subsidized energy carriers, for example, are high-income deciles who either have a manufacturing company and their assets go beyond a few buildings and vehicles. Therefore, it can be said the flawed subsidy system has contributed to rising inequality in the Iranian economy.

The new government’s Cooperatives, Labor and Social Welfare Minister [Hojjat Abdolmaleki] has expressed his interest in overhauling the subsidy system; he speaks of fundamental changes that should be introduced to the system. But whether the young minister would be able to take any step in this direction and achieve results remains to be seen.

The first and most important requirement for reforming the subsidy system is having access to a transparent database with little deviation. The main task of the Cooperatives Ministry, therefore, is to put together an accurate database, without which any decision-making scenarios will play out in a disappointing way.

We have twice failed to reform the cash subsidy system; once during the administration of Mahmoud Ahmadinejad and the other under the government of Hassan Rouhani.

Before the implementation of the cash subsidy plan in the fiscal 2008-9, a clustering policy was introduced. People were divided into three clusters and the plan was to allocate different sums of subsidies to each cluster: the first cluster was supposed to receive [a monthly sum of] 1 million rials [$3.6], the second 500,000 rials [$1.8] and the third 300,000 rials [$1]. The clustering policy did not take effect and a fixed sum of 455,000 rials [$1.65] was paid to each member of society in the fiscal 2010-11.

The overhaul of the country’s subsidy system again failed to produce the intended result under Rouhani: In the early months of his term, Rouhani tried to encourage high-income individuals to forgo the cash payments. The then government tried for five months to achieve this goal via TV and radio advertising campaigns. In the meantime, it tried to prepare the database needed for completing cash subsidy reform. But these attempts remained fruitless, even the few people who had agreed to give up their subsidies requested their reinstatement after a few months.

Now, after two unsuccessful attempts, a third one is [purportedly] being shaped by the new government. For this effort to succeed, we need to prepare an accurate and comprehensive database, but fulfilling this task in just six months seems tough. The government needs to compile data from various organizations of the country, including the banking system, tax office, civil registration organization, real-estate registration organization and municipalities.

The government can then determine the income decile in which individuals fall to carry out the so-called ‘Subsidy System Surgery’. Statistics show that many people who earn astronomical income still receive the 450,000-rial cash subsidy, so the Ministry of Cooperatives, Labor and Social Welfare should probe into the wealth of these people to be able to place people in the right deciles.

Identifying these people also requires verification, which in turn needs a connection among different databases in the country. When it comes to reforming the subsidy system, the main point is not only about increasing or decreasing the value of subsidies, but also about the disruption of this payment system; a system that pays 10,000 trillion rials in subsidies is practically acting in favor of the rich rather than the poor.

So we do pay enough subsidies, but the question is whether these subsidies are being distributed equitably? It is obvious that the fundamental step in reforming the subsidy system is to have accurate information about the financial state of households; otherwise any reform will lead to the waste of even more resources, the rich becoming richer and the poor becoming poorer.