The Wrecking Force of Inflation: How the Universal Cash Transfer in Iran Has Lost its Poverty Reduction Impact - Economic Research Forum (ERF)

The Wrecking Force of Inflation: How the Universal Cash Transfer in Iran Has Lost its Poverty Reduction Impact

Ali Enami and Nora Lustig


Date:
June, 2018

NO.
37

Length:
6 pages

Topic:
P4. Other Economic Systems
I3. Welfare, Well-Being, and Poverty

In a nutshell

  • In December 2010, Iran replaced its energy and bread subsidies with an unconditional and universal cash transfer (UCT). In the short-run, this shift from generalized subsidies had a significant effect on poverty. Studies show that the direct effect of the reform was a reduction in the headcount ratio from 22.5 percent to 10.6 percent.
  • However, since the introduction of the reform, inflation has severely eroded the real value of the transfer because adjustments to its nominal value have been minimal in comparison. We estimate that after five years, during which time there was a cumulative 136.5 percent increase in prices (since 2011/2012 or 1390 in the Iranian calendar), the real value of the transfer was cut nearly in half.
  • As a result of this cut, the poverty-reducing effect of the transfer declined by about 40 percent, which translates into an increase of roughly five percentage points in the headcount ratio. We find that this deleterious consequence of inflation is much higher in rural areas where the contribution of the transfer to the reduction in the incidence of poverty declines from 21.9 to 11.0 percentage points over the course of these five years.
  • The only way for the UCT to recover the poverty-reducing results observed at the beginning, without increasing the budget, is by making it a more targeted program focused on the poorest 40 percent of the population.
Authors

Ali Enami

Tulane University


Authors

Nora Lustig

Tulane University


Project

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