The impact of Iran's subsidy reform on households ... - Filebox

<strong>The</strong> <strong>impact</strong> <strong>of</strong> Iran’s <strong>subsidy</strong> <strong>reform</strong> on households: Evidence
from survey data
Djavad Salehi-Isfahani
Virginia Tech, <strong>The</strong> Brookings Institution, and the Economic Research Forum
Bryce Wilson Stucki
Virginia Tech
September 2013
Joshua Deutschmann
Virginia Tech
Abstract
In December 2010 Iran launched an ambitious Targeted Subsidy Reform program
that raised prices <strong>of</strong> bread and energy products by 2 to 22 times. Unlike <strong>reform</strong>s in
other countries, which are <strong>of</strong>ten met with protests and are sometimes abandoned, Iran’s
program appears to have survived its first 18 months without major incidents. <strong>The</strong> key
to the program’s success are cash transfers electronically deposited in individual family
bank accounts on a regular basis. We use survey data for the first three months <strong>of</strong> the
<strong>subsidy</strong> <strong>reform</strong> to study participation in and the <strong>impact</strong> <strong>of</strong> the cash program during
its early phase. We find that, contrary to expectations, rural families that had less
access to banks participated in greater numbers, though the poorest income decile, like
the highest, participated least. Our findings suggest that during its early phase the
program was pro-poor and pro-equity. We estimate that the poverty rate during this
phase declined by about 5 percentage points, mostly in rural areas, and indicators <strong>of</strong>
inequality registered declines.
Keywords: Iran, Subsidy <strong>reform</strong>, Income distribution, Poverty, Cash transfer
∗ We are grateful to the Statistical Center <strong>of</strong> Iran for providing us with the survey data and to participants
in the World Bank seminar, September 26, 2012, Washington, DC, for helpful comments.

1 Introduction
Before Iran implemented its ambitious <strong>subsidy</strong> <strong>reform</strong> program in December 2010, it was
the world’s most wasteful user <strong>of</strong> energy. It topped the list <strong>of</strong> 37 developing countries that
subsidized energy, according to the International Energy Agency and the IMF (International
Energy Agency 2010; IMF 2013). In 2010, Iran spent an estimated $70 billion on energy
subsidies, about twice the size <strong>of</strong> its government budget and one-fifth <strong>of</strong> its GDP. 1 Other
subsidies, such as bread and medicine, added another $5 billion.
<strong>The</strong> distortions resulting from decades <strong>of</strong> subsidizing energy are responsible for making
Iran into one <strong>of</strong> the world’s least energy efficient economies. Whereas in 1980 Iran used
about 137 kg <strong>of</strong> oil equivalent energy per $1000 <strong>of</strong> GDP, two decades later it used twice as
much. During the same period and responding to higher energy prices, the United States
reduced its energy intensity by 45% and the world by 23% (World Bank WDI Data Bank).
In 2009 Iran used two-and-a-half times as much energy to produce a unit <strong>of</strong> GDP as Turkey,
a country with a similar GDP per capita.
Awareness about the need to end the subsidies had been increasing in Iran for many
years, both on account <strong>of</strong> its wastefulness and inequity. <strong>The</strong> top income decile benefited
more than 3 times as much as the bottom decile from energy subsidies. Different Iranian
administrations debated and even made partial attempts to end the subsides, but in the
end it was the populist Ahmadinejad administration, motivated in part by the inequity <strong>of</strong>
the energy subsidies, that took decisive action to end the subsidies. In December 2010, the
government launched an ambitious Targeted Subsidy Reform program (TSR) that raised
prices for fuel and bread by 2 to 11 times. Unlike <strong>subsidy</strong> <strong>reform</strong>s in other countries, which
are <strong>of</strong>ten met with social protests and subsequently abandoned, Iran’s program appears to
have survived its first two years without major incidents 2
Energy subsidies are popular and easy to implement, especially in oil producing countries
where the government does not incur outlays, but removing them is very difficult. Most
country efforts to remove subsidies have been met with protests and riots, and subsequently
abandoned. Recently Nigeria, Bolivia, and Pakistan have made unsuccessful attempts at
energy price increases; in each case, price changes were either quickly rolled back or never
implemented. In Indonesia, where earlier attempts at <strong>subsidy</strong> <strong>reform</strong> had been met with
1 Estimates <strong>of</strong> energy subsidies are based on the international price <strong>of</strong> oil and natural gas because they
measure the opportunity cost <strong>of</strong> selling energy domestically, not expenditures recorded in the government
budget. As a result they can vary from one source to another. This also explains why the size <strong>of</strong> the <strong>subsidy</strong>
is larger than the total government budget.
2 For a detailed account <strong>of</strong> the program see Guillaume et al. 2011; see also Salehi-Isfahani 2011, Atashbar
2012, Hassanzadeh 2012, and Nili 2010 (in Persian).
1

iots and, in one instance, a government collapse (Bacon and Kojima 2006, Beaton and
Lontoh 2010), the government changed course in 2005 and s<strong>of</strong>tened price increases with cash
transfers to the poor, a crucial difference. Iran’s program is noteworthy for two reasons,
the size <strong>of</strong> the price adjustment and its innovative cash transfer program. Price increases
ranged from 2 to 22 times, posing a big shock to consumer budgets and threatening a large
political backlash at a time when the government was mired in the nuclear dispute with the
West, and had lost much <strong>of</strong> political support in the aftermath <strong>of</strong> the controversial re-election
<strong>of</strong> President Ahmadinejad.
<strong>The</strong> key to the program’s success in making the mammoth adjustments in prices without
political backlash was a cash transfer program under which the government electronically
deposited into individual bank accounts 445,000 rials per month (about 45 or 90 USD PPP
in 2010). In 2010 this was about 28% <strong>of</strong> the median per capita expenditures and greater
than the monthly expenditures <strong>of</strong> 2.8 million Iranians. 3 It was about 10% <strong>of</strong> the monthly
wage <strong>of</strong> an unskilled worker, so an unskilled worker with a family <strong>of</strong> 4 would be receiving a
transfer equal to about 40% <strong>of</strong> his or her monthly wage.
Despite its innovative design and apparent initial success, narrowly defined, the TSR
has not yet been studied rigorously. Media reports have been generally critical, reflecting
opinions expressed by upper income Iranians who stood to lose in the bargain, blaming
the program for inflation, unemployment, and rising inequality. Our findings question
these popular perceptions. But, we should hasten to add that this paper is not an overall
evaluation <strong>of</strong> Iran’s <strong>subsidy</strong> <strong>reform</strong> program. <strong>The</strong> survey data available to us covers only the
first three months <strong>of</strong> the implementation <strong>of</strong> TSR, which is not long enough to assess its full
<strong>impact</strong> on inflation, unemployment, economic growth, poverty and inequality. Even with
more data an accurate assessment may not be possible because other events have intervened
since the TSR program went into effect. Intensification <strong>of</strong> international sanctions only one
year after the start <strong>of</strong> <strong>subsidy</strong> <strong>reform</strong>s caused the value <strong>of</strong> the rial to drop, adding to the
inflationary effect <strong>of</strong> the <strong>reform</strong>s and dealing a serious blow to output. Macroeconomic
mismanagement has independently affected Iran’s economy. <strong>The</strong> low-cost housing program
known as Maskan Mehr, worth about $20 billion and a major source <strong>of</strong> government deficit,
has pushed inflation beyond what the TSR would have caused. We may never be able
to disentangle the <strong>impact</strong> <strong>of</strong> the TSR on key macroeconomic variables such as inflation,
unemployment and economic growth.
<strong>The</strong> TSR does appear, however, to have restrained consumption <strong>of</strong> energy products, one
3 Compare this to 22% <strong>of</strong> expenditures <strong>of</strong> poor households in the Indonesian cash transfer program following
energy <strong>subsidy</strong> <strong>reform</strong> (Cameron and Shah 2011).
2

<strong>of</strong> its main objectives. According to <strong>of</strong>ficial reports, the year following the <strong>reform</strong> demand
for most energy products dropped – fuel oil by 36.4 percent, petrol by 5.6 percent, diesel by
9.8 percent and kerosene by 2.9 percent (Hassanzadeh 2012). <strong>The</strong>se are significant savings
especially when compared to the consumption growth rate <strong>of</strong> about 10 percent per year
for energy products in the past. Demand for utilities also changed direction. Consumption
<strong>of</strong> electricity and water declined by 1.7 and 6 percent, respectively, as did natural gas
consumption by households, 1.5 percent, but demand for natural gas rose overall by 6.1
percent, perhaps because <strong>of</strong> planned shifts in consumption from oil products to natural gas,
particularly in power generation.
In this paper we focus on the short term <strong>impact</strong> <strong>of</strong> the program on household welfare.
We trace how the cash transfer flowed to poor and rich households, to rural and urban
families, and to those living in developed and disadvantaged provinces in the immediate
months following the program. We also measure how higher energy prices affected direct
household expenditures on energy products. Understanding the short term distributional
<strong>impact</strong> <strong>of</strong> price <strong>reform</strong>s is important because it is <strong>of</strong>ten what <strong>reform</strong>s to the welfare <strong>of</strong> low
income households in the first few weeks or months that determine their survival politically.
Riots and political backlash in the early stages <strong>of</strong> <strong>subsidy</strong> <strong>reform</strong>s is <strong>of</strong>ten what kills them.
In the short term, before <strong>subsidy</strong> <strong>reform</strong> has worked its way through the price system,
governments must be able to answer key questions such as: Who are the winners and losers
from the <strong>reform</strong>? What level <strong>of</strong> compensation enough to outweigh the political and social
cost <strong>of</strong> the price shock? Most governments hesitate to take up <strong>subsidy</strong> <strong>reform</strong> because they
cannot convince the lower income groups that they stand to gain from <strong>subsidy</strong> <strong>reform</strong>. <strong>The</strong>
benefits from reducing budget deficits or redirecting <strong>subsidy</strong> expenditures to health and
education do not materialize quickly enough for the average person to accept the pain <strong>of</strong>
higher prices. From the political economy point <strong>of</strong> view establishing trust during the early
phase regarding the government’s intention to redistribute the savings back to some or all
income groups is the most important determinant <strong>of</strong> program success. This is the lesson
from the cash transfer scheme in the case <strong>of</strong> Iran.
We use data from the 2010 (corresponding to Iranian year 1389) expenditure survey,
which covers the first three months <strong>of</strong> the program (December 19, 2010 to March 20, 2011)
to follow the pace <strong>of</strong> implementation and program participation, as well as the program’s
geographic coverage (rural and urban by province) and its <strong>impact</strong> on poverty and inequality.
We find that the payment mechanism, though it relied on the modern banking system,
generally did not discriminate against people with less access to banks, such as the rural
poor or the inhabitants <strong>of</strong> disadvantaged provinces. During the first three months <strong>of</strong> the
3

program we notice that rural families were more likely to be receiving cash transfers than
urban families. <strong>The</strong> lowest and highest deciles were less likely to participate than middle
income families. Finally, by March 2011 (Esfand 1389) inequality and the incidence <strong>of</strong>
poverty had declined appreciably compared to previous year.
<strong>The</strong> remainder <strong>of</strong> this paper is organized as follows. <strong>The</strong> next section provides a description
<strong>of</strong> the TSR’s implementation. Section 2 discusses the circumstance under which
the <strong>reform</strong> was initiated and implemented. Section 3 describes the cash transfer program
and its implementation. Section 4 describes our data and the procedure we use to identify
transfer recipients. Section 5 discusses the characteristics <strong>of</strong> transfer recipients and
Section 6 evaluates the balance <strong>of</strong> the exchange between the government and households.
We evaluate the program’s <strong>impact</strong> on inequality and poverty in Section 7, and Section 9
concludes.
2 Why <strong>subsidy</strong> <strong>reform</strong>
Subsidies for energy products and critical food items were first implemented during the
Iran-Iraq war <strong>of</strong> the 1980s as a way to manage consumption during wartime. Over time,
cheap energy and bread had become part <strong>of</strong> life and Iranian consumers had built their
lifestyles around them and producers made products with technologies that assumed energy
would remain cheap forever. Attempts at <strong>reform</strong>ing subsidies in small steps during the
administrations <strong>of</strong> presidents Rafsanjani and Khatami (1989-2001) were met with tough
opposition from populist politicians and therefore did not succeed. Raising energy prices
slowly did not work because each round <strong>of</strong> price increases intensified opposition to the
<strong>reform</strong>, and stopped further increases while inflation wiped out the gains.
In the meantime, Iran’s energy consumption was increasing at about 3 times as fast as its
population and the country steadily became the most energy intensive country in the world:
it used about 1.65 times as much energy per dollar <strong>of</strong> GDP as the United States, 2.42 times
as much as Switzerland, and 2.5 times as much as nearby Turkey (Figure 1). Heavy demand
led Iran to become an importer <strong>of</strong> gasoline during the late 2000s, which helped make the
costs <strong>of</strong> subsidies explicit, and so paved the way for their elimination. Smuggling, which
was common and widespread, became an embarrassing issue for the government. 4 Finally,
the international effort to stop Iran’s nuclear enrichment program was gathering strength
and sanctions that would prevent Iran from importing gasoline were looming (Guillaume,
Zytek, and Farzin 2011).
4 http://english.farsnews.com/newstext.php?nn=8810121174.
4

Figure 1: Kilograms <strong>of</strong> oil (or equivalent) over $1000 GDP measured in 2005 PPP dollars,
selected countries 1980-2010
350
Kilos <strong>of</strong> oil equivalent per $1,000 GDP (2005 PPP)
300
250
200
150
100
50
Iran
Turkey
United States
Switzerland
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: World Bank, World Development Indicators.
International sanctions against Iran, then looming in 2010 but not yet in full force,
were another reason why the <strong>reform</strong> gathered more widespread support. In particular, the
threat <strong>of</strong> sanctions cutting Iran’s access to imported gasoline – by then accounting for about
one-third <strong>of</strong> Iran’s consumption – added urgency to curbing the rising demand for gasoline.
Although <strong>reform</strong>ing Iran’s subsidies was urgent and long overdue, what prompted the
populist president Ahmadinejad, not known for his trust in free markets, to push through the
largest pro-market <strong>reform</strong> in the country since Rafsanjani’s <strong>reform</strong>s in the 1990s was most
likely the regressive nature <strong>of</strong> the energy subsidies. Ahmadinejad “rarely missed a chance
to...[say] that 70 percent <strong>of</strong> the nation [received] 30 percent <strong>of</strong> the subsidies” (Harris 2010),
and the regressivity <strong>of</strong> the energy subsidies was a central point in the massive government
advertising campaign to sell the program.
Figure 2 shows the extent to which subsidies accrued to individuals in different deciles
<strong>of</strong> per capita income. Using the 2009 HEIS, we calculate household per capita expenditures
(in 2009) on the main subsidized goods by deciles <strong>of</strong> per capita income. <strong>The</strong>se expenditures
are proportional to the amount <strong>of</strong> (implicit) subsidies received, so the graph can also be
considered to display the distribution <strong>of</strong> the subsidies. <strong>The</strong> bread <strong>subsidy</strong> is the only <strong>subsidy</strong>
that is evenly distributed across income deciles, about PPP USD 5 per person per month.
All others, especially gasoline, are skewed toward the rich. <strong>The</strong> richest decile received about
5

Figure 2: Expenditures per capita on subsidized goods per month and as a percent <strong>of</strong> total
expenditures, by income decile 1388
35
4.0
30
3.5
2010 interna5onal dollars
25
20
15
10
3.0
2.5
2.0
1.5
1.0
Percent <strong>of</strong> total expenditures
Gasoline
Electricity
Home heat
Bread
% <strong>of</strong> expenditures
5
0.5
0
1 2 3 4 5 6 7 8 9 10
Deciles <strong>of</strong> per capita income
0.0
Notes: Home heating is primarily from natural gas and some kerosene.
PPP USD 25 per month compared to less than 10 for the poorest decile. Table 7 provides
figures to the same effect. <strong>The</strong> share <strong>of</strong> the total energy subsidies going to the richest decile
was more than three times that received by the poorest decile, 19.2% compared to 6.0%.
<strong>The</strong> graph also shows that, in terms <strong>of</strong> shares <strong>of</strong> total expenditures, the poor relied more on
subsidies than the rich. Whereas subsidies comprised about 3.5 percent <strong>of</strong> the expenditures
<strong>of</strong> the poorest decile, they were only 0.7 percent for the richest decile (the right axis).
In the 2005 presidential election, candidate Ahmadinejad had campaigned, and many
believe had won, on the promise to “put the nation’s oil wealth on people’s dinner tables.”
For six years this goal had eluded him. <strong>The</strong> economy was growing but in the eyes <strong>of</strong> his
supporters – and in actual fact – the distribution <strong>of</strong> income was not improving, perhaps even
getting worse, as the proliferation <strong>of</strong> luxury cars in Tehran’s streets indicated. His earlier
attempts at forcing an improvement in the distribution <strong>of</strong> income, by redirecting the national
investment funds, had not budged Iran’s high degree <strong>of</strong> inequality (Salehi-Isfahani 2009),
even after he had taken personal command <strong>of</strong> the Management and Plan Organization, the
entity entrusted with allocating Iran’s public investment funds. In his second term, and in
the aftermath <strong>of</strong> his controversial re-election in 2009, the <strong>subsidy</strong> <strong>reform</strong> presented itself as
6

Table 1: Shares <strong>of</strong> total <strong>subsidy</strong> for various items by income decile, 1388
Income Bread Electricity Gasoline Home heat All Total
decile
energy
1 9.09 6.22 3.74 7.20 6.02 6.85
2 9.64 6.90 4.43 7.97 6.75 7.53
3 9.79 8.06 5.18 8.64 7.55 8.16
4 9.93 7.99 6.06 8.99 7.95 8.49
5 10.01 8.74 7.20 9.18 8.53 8.93
6 9.92 9.69 8.83 9.50 9.36 9.51
7 9.97 10.16 10.99 10.21 10.41 10.29
8 10.23 10.97 12.78 10.37 11.17 10.92
9 10.23 12.98 15.00 11.91 13.01 12.26
10 11.20 18.30 25.79 16.03 19.24 17.07
Total 100.00 100.00 100.00 100.00 100.00 100.00
Source: HEIS and authors’ calculations
the last opportunity for him to save his reputation as a man <strong>of</strong> the people. His desire to use
<strong>subsidy</strong> <strong>reform</strong> as a tool <strong>of</strong> redistribution prompted him to initially condition the level <strong>of</strong>
cash transfers on family income and wealth, but as identification <strong>of</strong> personal incomes proved
impractical, his pragmatist side won and he decided to abandon the progressive scheme in
favor <strong>of</strong> uniform cash transfers (Harris 2010).
Redistribution may be the reason why he waited nine months to start the <strong>subsidy</strong> <strong>reform</strong>
program after it became law. <strong>The</strong> TSR Act authorizing the government to remove the
subsidies passed the parliament in January 2010, but the government started the program
in late December, 2010. 5 <strong>The</strong> government blamed the delay on lack <strong>of</strong> preparedness and
administrative issues, but the late start suited president Ahmadinejad who could increase
the size <strong>of</strong> the cash transfer without busting the annual limit set by the Act for redistribution
to households. It is also well known that the President did not like the gradualist approach
preferred by the law makers, which would increase prices <strong>of</strong> energy products and utilities
close to their cost by the end <strong>of</strong> the Fifth Five Year Plan in 2015. He preferred to implement
the full increase at once, and took advantage <strong>of</strong> the fact that the TSR act had only set a
ceiling for the total revenues raised from price increases. By waiting until the last quarter
<strong>of</strong> the Iranian year 1389 (winter 2010-2011), the government was able to push through the
entire price increase without exceeding this limit. <strong>The</strong> delay permitted large price increases
5 For a more detailed description <strong>of</strong> the program and its implementation see (Guillaume, Zytek, and Farzin
2011).
7

and cash transfers without breaking the letter <strong>of</strong> the law.
With hindsight, maximizing the size <strong>of</strong> the monthly cash transfer was not shortsighted,
it minimized the chances <strong>of</strong> political backlash while increasing the threat to the program
from inflation later on. Larger cash transfers thus bought political support in the early
phase at the expense <strong>of</strong> support in the longer run. It has been widely reported, though
the government has not <strong>of</strong>ficially acknowledged, that the <strong>subsidy</strong> program has so far been
in the red, meaning that the government paid out more to households than it collected in
higher prices, by as much as 50%. <strong>The</strong> deficit in the TSR program forced the government
to borrow from the Central Bank, fueling inflation.
3 Implementation <strong>of</strong> the cash transfer scheme
What distinguishes Iran’s <strong>reform</strong> program from those <strong>of</strong> other countries, such as Nigeria,
Bolivia, Pakistan, and Indonesia prior to 2005, besides the size <strong>of</strong> the price hikes, is the
cash transfer scheme. Energy <strong>subsidy</strong> <strong>reform</strong> throughout the developing world is typically
unpopular and <strong>of</strong>ten leads to violence. Experience shows that the most effective way to
convince a majority <strong>of</strong> the population, especially the poor, that energy price <strong>reform</strong>s carry
net benefits is to <strong>of</strong>fer cash in return for higher prices. In Iran, this was done in two steps.
<strong>The</strong> first step was to deposit the transfers in individual bank accounts, and letting the
people know the money was there but not allowing them to withdraw it. By seeing the
actual money in their bank accounts, participants gained confidence that the government
would come keep its promise, unlike payments promised under the 2005 Justice Shares
program that were rarely delivered (Harris 2012). <strong>The</strong> second step was to release the funds
simultaneously with price increases. <strong>The</strong> first step helped build trust so that months later
when, on December 19, 2010, the president announced on national television that the <strong>reform</strong>
program would start at midnight, there was no rush to withdraw the funds the next day
(Salehi-Isfahani 2011). Trust building may also explain why Iran’s <strong>subsidy</strong> <strong>reform</strong> did not
lead to street protests.
<strong>The</strong> TSR transfer <strong>of</strong> about $45 per month per person (for up to six members <strong>of</strong> the
household) was made available to any household head who completed a form and identified
a bank account for into which the cash would be deposited. <strong>The</strong> universal and uniform
electronic deposits into individual bank accounts went a long way in reducing the type <strong>of</strong>
controversies that had plagued the Indonesian cash transfer program where village leaders
identified and registered the poor and sometimes collected the money for them (Cameron
and Shah 2011). A side benefit <strong>of</strong> using electronic bank transfers, in addition to keeping
8

corruption low, was that poor and rural people who had never used a bank before were
motivated to learn to use the modern banking system. ATMs were set up in villages to enable
rural families to withdraw their cash. <strong>The</strong> application could be completed electronically
(though only 8.2% <strong>of</strong> households had internet access in 2010) or by hand. Although the
government claims registration did not require supporting documents (Guillaume, Zytek,
and Farzin 2011) anecdotal evidence suggests not only that it did, but also that not all
registrants received funds. To attract applicants the government used a publicity campaign
in print, radio, and television to give instructions on how to register for the program,
information on how the transfers were to be distributed, and the benefits <strong>of</strong> <strong>reform</strong> (Atashbar
2012). <strong>The</strong>re was also no penalty for late registration: a family registering two months late
would be eligible for the same amount <strong>of</strong> total transfer as if it had registered at the beginning
<strong>of</strong> the program. However, the government did request that wealthy families not register,
and later on tried to drop these families from the transfer roll. But even with steps to
ease access, especially for the poor, many wondered whether illiterate heads <strong>of</strong> household,
families living in poor rural areas, and people who lacked access to the internet and media
generally would register for the program.
A few final steps helped ensure the program’s acceptance. A rationing program for
gasoline had been in place for many years in which participants were issued smart cards
that allowed them to purchase gasoline at a progressive rate based on consumption, and
consumers received a new allocation <strong>of</strong> discounts just days before gasoline prices increased
(Guillaume et al. 2011). Progressive pricing schemes also remained in place for homeheating
fuels and electricity, easing the transition to higher prices. Finally, to control
inflationary expectations, the government instituted price controls, which were unevenly.
From its inception, the program was widely and harshly criticized. By the beginning <strong>of</strong>
2011 the government reported that 80% <strong>of</strong> the population had registered for the transfer
program, but critics contended that this was a large overestimate. 6 <strong>The</strong>re were also concerns
that the underfunded program would be paid for by printing money, adding monetary
inflation to the inevitable cost-push inflation the program would cause. Despite these criticisms,
in June 2012 the parliament extended the TSR to its second phase, for a second
round <strong>of</strong> prices increases, but so far (December 2012) the government has not implemented
the second phase.
In 2010 the government claimed that approximately 16 million bank accounts were
opened to allow families to receive the transfer, that the banking sector improved their
6 <strong>The</strong> government reported that by May, 2011 over 90% <strong>of</strong> the population had registered for the TSR
(Guillaume, Zytek, and Farzin 2011).
9

ATM networks to handle the anticipated activity when the transfers became available, and
that ATMs were expanded into rural areas to improve access. Concerns remained, however,
with an IMF report noting that “even the government’s more ardent opponents neither
questioned the need for the <strong>reform</strong> nor its main elements, but argued that the government
lacked the skills necessary to implement the <strong>reform</strong>” (Guillaume, Zytek, and Farzin 2011).
4 Data and the identification <strong>of</strong> recipients
Our data come from the 1389 (2010/2011) round <strong>of</strong> the Household Expenditure and Income
Survey (HEIS) collected by the Statistical Center <strong>of</strong> Iran (SCI). <strong>The</strong> HEIS is the principal
annual household survey collected in Iran.
It relies on a two-stage stratified sampling
method and has been collected without pause for the past fifty years. <strong>The</strong> total number <strong>of</strong>
observations is divided into roughly 12 equal sub-samples, each for one month <strong>of</strong> the year
(Table 2). <strong>The</strong> HEIS contains detailed information on household expenditures, ownership
<strong>of</strong> amenities, and individual characteristics and incomes, but there is no explicit item for
the cash transfer because the HEIS questionnaires had been printed and distributed before
the TSR began. 7
Fortunately, when the program did start, interviewers were instructed
to record the transfer in the section “Miscellaneous Income,” under one <strong>of</strong> the six types
<strong>of</strong> income (tuition assistance, welfare payments, etc.). 8
<strong>The</strong> cash transfers were deposited
every two months, so we looked for items that equalled individual transfers (890,000=
2x445,000 rials) times family size. Since this number rarely occurs by chance, it provided
us with a method to identify transfer recipients. Approximately 98% <strong>of</strong> those reporting these
numbers are household heads, consistent with the TSR’s procedure <strong>of</strong> delivering transfers
to family heads.
While our identification procedure is not ideal it does a good job <strong>of</strong>
counting the recipients in most provinces, as seen in Table 2. <strong>The</strong> proportion <strong>of</strong> households
reporting numbers equal to household size x 890,000 is very small before the TSR went
into effect (less than 1%). Interestingly, one-third <strong>of</strong> households report receiving transfer
before the program started but when transfers had been deposited into some participants’
bank accounts. <strong>The</strong>se individuals likely confused having the money in their bank accounts
with having it to spend, indicating perhaps trust that the government was going to keep its
word and release the money. By Esfand (February 21-March 20), we find that 68.3% <strong>of</strong> the
7 <strong>The</strong> SCI was also the agency that conducted the ill-conceived wealth survey in 2009, so its <strong>of</strong>ficials knew
the program was in the works, but presumably did not know when it would actually start.
8 Within provinces the vast majority <strong>of</strong> identifications were typically in only one miscellaneous income
sub-category: In Markazi, 100% <strong>of</strong> identifications were in the scholarships category while in Ardebil 100%
<strong>of</strong> the identifications were in the home production category.
10

Table 2: HEIS sample size and transfer recipients, 1389
Month <strong>of</strong> record Households Individuals Percent <strong>of</strong> households
in sample
receiving transfer
Urban Rural Total
Farvardin 3101 12425 0.3% 0.2 0.3
Ordibehesht 3332 13288 0.3 0.3 0.3
Khordad 3217 12987 0.2 0.6 0.3
Tir 3234 12984 0.2 0.8 0.3
Mordad 3176 12678 0.2 0.1 0.2
Shahrivar 3212 12725 0.1 0.1 0.1
Mehr 3211 12740 0.3 0.6 0.4
Aban 3172 12514 1.0 0.4 0.8
Azar 3133 12368 32.4 40.3 34.6
Dey 3189 12689 61.8 75.2 65.3
Bahman 3146 12519 63.4 76.0 66.7
Esfand 3109 12153 64.8 77.7 68.3
1389-Q4 sample 9444 37361 63.3 76.3 66.8
Notes: <strong>The</strong> HEIS distributes its sample <strong>of</strong> 38,232 households evenly across months <strong>of</strong> the year. Our
working sample consists <strong>of</strong> the observations for the last quarter.
Source: HEIS and authors’ calculations.
families in the survey reported receiving transfers, which is below the 80% the government
claimed at the time to be covering (Guillaume, Zytek, and Farzin 2011).
One complication in our identification procedure is that the TSR leaves the definition
<strong>of</strong> the family unit to applicants, while HEIS defines a household as the number <strong>of</strong> people
who live in physical unit and share expenditures. This caused some HEIS households to
have more than one TSR family. To account for this we considered a household (defined
by the HEIS) as being a transfer recipient if any its members reported any multiple <strong>of</strong>
890,000 not exceeding 38 (2x19, which is the largest household size in the sample). In a few
provinces, we found numbers that appeared to be cash transfers because they were multiples
<strong>of</strong> household size and a number close to 890,000. Adding these households to participants
does not change the analysis significantly.
Since we cannot determine with certainty how many people were registered in each
household we cannot estimate the number <strong>of</strong> individual recipients, and so choose to express
most <strong>of</strong> our results in terms <strong>of</strong> the number <strong>of</strong> households. With the definition just given, we
identify 34.6% <strong>of</strong> households as transfer recipients in the month <strong>of</strong> Azar (before bank funds
11

were released), 61.0% in Dey, 62.4% in Bahman, and 65.0% in Esfand. We should note that
our identification method has a degree <strong>of</strong> uncertainty. <strong>The</strong>re are false positives (people who
did not receive any <strong>subsidy</strong> but show a similar number in their miscellaneous incomes) and
false negatives (those who did but added it to another miscellaneous income). 9 Given that
our estimates fall well short <strong>of</strong> the proportion claimed by the government, especially in two
provinces <strong>of</strong> Tehran and Hormozgan, we may have many more false negatives than false
positives.
Another complication is that for some households transfers were combined with actual
miscellaneous incomes, where our method cannot detect them. To check, we subtracted
the expected real amount <strong>of</strong> transfer from each real miscellaneous income category from
1387 to 1389 and recorded whether a household had any positive income remaining in that
category. Comparing 1388-Q4 to 1389-Q4, we find a comparable percentage <strong>of</strong> households
with positive incomes, except in Khuzestan and Khorasan Razavi, where in 1389 positive
incomes were higher than usual, suggesting Type II error in these provinces. But even if
all the households with positive incomes remaining in the expected transfer category after
subtraction were actually transfer recipients, our household identification would increase
by only 3.4% for Esfand 1389, the month <strong>of</strong> the largest increase and the most important
month to our later analyses. Considering these results together, we expect that our Type
II error is moderate and the numbers we report based on the survey are only moderately
underestimating the administrative data.
Finally, variation in the amount deposited or thought to have been deposited may account
for under-identification <strong>of</strong> recipients. <strong>The</strong> transfer amount was changed several times
in 1388 (2010) before <strong>of</strong>ficials settled on 890,000, so it is possible that amounts other than
890,000 were deposited into recipients’ bank accounts or people reported not what was actually
in the bank accounts but what they recollected from earlier news reports. Amounts
equal to multiples <strong>of</strong> household size and other numbers (810,000, 820,000 or 900,000 rials)
were frequent enough to suspect that something like this happened. For instance, 22% <strong>of</strong>
households in Sistan reported a multiple <strong>of</strong> 900,000 exactly equal to their household size
in Esfand 1389, and 49.8% <strong>of</strong> households in Mazandaran reported a multiple <strong>of</strong> 820,000
9 In the months before the <strong>reform</strong> only 0.3% <strong>of</strong> households show up as “transfer recipients” using our
criteria. Though we searched for any multiple <strong>of</strong> 890,000 times 1 or 2 depending on the period, we do not
expect household size as measured by the HEIS to differ much from household size as measured by the TSR.
About 82.5% <strong>of</strong> recipients got a monthly transfer exactly 1 or 2 times their household size during the last
quarter <strong>of</strong> 1389. This figure rises to 95.3% when we let the multiple to vary between household size minus
or plus one, and to and 98.2% when minus or plus two. Our results are also consistent with the fact that
provincial SCI <strong>of</strong>fices were told to record the transfer in specific columns usually reserved for other items,
such as scholarships and the like.
12

exactly equal to household size, with none reporting these amounts before deposits began.
We therefore expand our definition to include households that received one <strong>of</strong> these unusual
amounts multiplied exactly by 1 or 2 times household size depending on the month. Our
expanded definition, which we rely on as our primary definition for the remainder <strong>of</strong> the
paper, raises the percentage <strong>of</strong> households we identify as receiving cash transfer to 34.6%
<strong>of</strong> households in Azar, 65.3% in Dey, 66.7% in Bahman, and 68.3% in Esfand.
5 Characteristics <strong>of</strong> recipients and selection
In this section we consider whether the TSR achieved its equity goal: namely, whether its
reach in terms <strong>of</strong> geography and household characteristics was equitable. Given that in 1389
about a third <strong>of</strong> families lived in rural areas, 25% <strong>of</strong> household heads were illiterate, and
most <strong>of</strong> these families likely did not have a bank account, one would expect that their initial
participation would be lower than average. But, as the survey results presented in Table
3 reveal, rural households had greater participation rates than urban households (76.3%
compared to 63.3%). In terms <strong>of</strong> family income, the TSR reached the middle income families
most effectively, at rates around 70%. Both the poorest and the the richest deciles were
the least likely to receive the transfer (59.6% and 55.0%, respectively). Participation rose
each month so that by Esfand, 1389, about 70.6% <strong>of</strong> the population (68.3% <strong>of</strong> households)
were receiving TSR payments. If we remove Tehran, which we suspect partially eluded our
identification procedure, the lowest participating province, then the percent <strong>of</strong> household
receiving the transfer rises to 81.2% and the number <strong>of</strong> people to approximately 82.6%,
which are consistent with the rates announced by the government.
A household’s geographic location was the most important determinant <strong>of</strong> whether they
received a transfer. Infrastructure development has lagged in areas such as Sistan and
Baluchestan, Hormozgan, and North Khorasan, where the population tends to be poorer,
more rural, and <strong>of</strong> minority ethnic and religious backgrounds, and the TSR’s first few months
were yet another instance when these areas were left behind. In this respect the TSR seems
to have had less success in overcoming these barriers. Figure 3 shows participation rates by
province for the last month <strong>of</strong> 1389 (March-April 2011). Hormozgan had the second lowest
participation rate (29.7%) after Tehran, whose 20.1% participation rate is almost certainly
due to lack <strong>of</strong> proper recording <strong>of</strong> miscellaneous incomes, and North Khorasan and Sistan
and Baluchestan had participation rates well below average (though the latter still received
3.6% <strong>of</strong> the total transfer money, commensurate with its population share). But there
were other disadvantaged provinces that did quite well, such as Golestan, the second least
13

Table 3: Percent households receiving transfers by income decile, last quarter <strong>of</strong> 1389
Decile Rural Urban Total
1 66.3 57.1 59.6
2 76.5 67.7 70.1
3 75.9 72.5 73.5
4 77.1 69.6 71.8
5 78.0 64.3 67.9
6 76.7 69.5 71.5
7 74.3 69.9 71.1
8 77.2 65.7 68.6
9 84.7 57.4 64.0
10 74.8 48.3 55.0
Total 76.3 63.3 66.8
Source: Authors’ calculations.
Note: Income deciles are calculated separately by month and rural-urban residence
developed province <strong>of</strong> Iran with a sizeable Turkmen population, where participation reached
91%. <strong>The</strong> equally poor province <strong>of</strong> Ilam also did exceptionally well, with a participation
rate <strong>of</strong> 93.9%. Variation in the rest <strong>of</strong> the provinces was relatively low: only five provinces
fell below the overall average <strong>of</strong> 68.3% and twenty had over 80% participation.
While income, urban-rural residence, and province were three <strong>of</strong> the most important
determinants <strong>of</strong> participation, gender and education <strong>of</strong> the household head, and household
size were also important. Female household heads received the transfer on average at a
rate <strong>of</strong> 8.2% less than male household heads, with a much larger rural disparity at 21.3%.
Households with a college-educated head were the least likely to receive the transfer, at
63.8%, while those with primary-educated heads were the most likely, at 70.5%. Illiteracy
does not seem to have been a serious impediment, with 68.0% <strong>of</strong> households headed by an
illiterate person receiving a transfer. Finally, larger households were more likely to receive
the transfer. Only 42.3% <strong>of</strong> one-person households participated in the TSR, while 68.1%
<strong>of</strong> 2-3 person households, 71.5% <strong>of</strong> 4-6 person households, and 75.3% <strong>of</strong> households with 7
or more people participated. Clearly, the larger the total size <strong>of</strong> the cash transfer the more
likely that a household would participate.
To understand the conditional effects <strong>of</strong> these factors on participation we estimated a
semi-parametric probit regression in which the probability <strong>of</strong> receiving the transfer (participation)
is a function <strong>of</strong> household characteristics and place <strong>of</strong> residence.
14

®
Figure 3: Geography <strong>of</strong> participation: percent <strong>of</strong> households receiving transfers by province
Esfand 1389
5
Percentage <strong>of</strong> Households Receiving Transfer
(90,100]
(80,90]
(50,80]
[0,50]
4
6
13
17
25
20
14
16
7
2
27
1
15
18
26
24
19
3
11
8
21
28
22
23
29
9
10
30
12
1. Markazi
2. Gilan
3. Mazandaran
4. E. Azarbaijan
5. W. Azarbaijan
6. Kermanshah
7. Khuzestan
8. Fars
9. Kerman
10. R. Khorasan
11. Isfahan
12. Sistan
13. Kurdestan
14. Hamadan
15. Bakhtiari
16. Lorestan
17. Ilam
18. Kohkiloyeh
19. Bushehr
20. Zanjan
21. Semnan
22. Yazd
23. Hormozgan
24. Tehran
25. Ardebil
26. Qom
27. Qazvin
28. Golestan
29. N. Khorasan
30. S. Khorasan
Source: HEIS, US Geological Survey, and authors’ calculations.
15

transfer = α 0 + α 1 decile + α 2 urban + α 3 female + α 4 headedu
+α 5 hhsize + α 6 married + α 7 prov+ɛ,
where transfer indicates receipt <strong>of</strong> a transfer, decile is the full set <strong>of</strong> dummies for per capita
income deciles, urban is a dummy indicating urban-rural residence, female indicates gender
<strong>of</strong> the household head, headedu is the education level <strong>of</strong> head, hhsize is household size,
married is marital status, prov are province dummies, and ɛ is the error term. <strong>The</strong> age <strong>of</strong>
the household head was not significant so it is not included. Much <strong>of</strong> what we learn from
estimating this equation (see Table 4) confirms our earlier observations.
<strong>The</strong> coefficients in Table 4 represent the increase in probability <strong>of</strong> receiving the transfer
with all independent variables at their means. <strong>The</strong> table presents three sets <strong>of</strong> regressions,
with the first including only income, urban, and gender; the second adds education and marital
status <strong>of</strong> the the head, and the last regression includes dummy variables for provinces.
In this discussion we refer to the last column as we believe that accounting for province
<strong>of</strong>fers a more revealing picture <strong>of</strong> participation by household characteristics. Including the
full set <strong>of</strong> province dummies increases the pseudo R 2 from 0.025 to 0.184. Households in
middle income brackets (5-8 deciles) were more likely to participate than those in the poorest
decile. <strong>The</strong> middle class, which was considered the likely loser <strong>of</strong> the <strong>subsidy</strong> <strong>reform</strong>,
at least participated more heavily than other income groups. <strong>The</strong> bottom and top income
deciles had the lowest unconditional and conditional participation rates. Urban families
and those headed by women show lower participation rates in the first column, in which
only income is controlled for, in line with our earlier discussion <strong>of</strong> the unconditional pattern
<strong>of</strong> participation. When we condition on province <strong>of</strong> residence, the gender effect disappears
while the urban effect survives, showing 14.2% lower probability <strong>of</strong> participation. In other
words, gender <strong>of</strong> the head did not matter as much within each province, but living in a
rural area meant greater likelihood <strong>of</strong> participation everywhere.
Larger families participated at higher rates. Larger households typically have fewer
earners per person and thus greater incentive to participate. Unmarried heads were less
likely to participate, though this effect is not significant in the full probit. Education only
mattered at the primary level; families headed by heads with only primary educations
were 19.1% more likely to receive the transfer than illiterate household heads, and college
educated heads were 22.0% more likely but the effect is not significant. Inclusion <strong>of</strong> variables
possibly connected with the ease <strong>of</strong> registration, such as possession <strong>of</strong> a car or internet access,
were not significant and did not significantly alter the probit results.
16

Table 4: Probit regressions for the probability <strong>of</strong> receiving cash transfer, Esfand 1389
(1) (2) (3)
dF/dx z dF/dx z dF/dx z
Income decile
2 0.105 1.07 0.130 1.31 0.023 0.21
3 0.231* 2.26 0.261* 2.52 0.179 1.59
4 0.210* 2.03 0.248* 2.35 0.145 1.25
5 0.322** 2.87 0.356** 3.12 0.282* 2.24
6 0.270* 2.49 0.320** 2.86 0.282* 2.25
7 0.326** 2.96 0.377** 3.3 0.222 1.78
8 0.396** 3.46 0.469** 3.93 0.403** 3.08
9 0.177 1.58 0.263* 2.21 0.255 1.92
10 -0.039 -0.35 0.069 0.55 0.022 0.16
Urban -0.172** -3.19 -0.194** -3.51 -0.142* -2.32
Female -0.372** -4.86 -0.061 -0.52 -0.151 -1.18
Household size 0.040* 2.37 0.062** 3.36
Not married -0.265* -2.34 -0.206 -1.66
Education <strong>of</strong> head
Primary 0.138* 2.09 0.191** 2.65
Middle 0.059 0.70 0.064 0.69
Secondary -0.080 -0.90 -0.003 -0.03
College 0.120 1.06 0.220 1.75
Province
Fars 0.889** 3.44
Ilam 0.927** 3.39
Lorestan 1.055** 3.62
Sistan -0.364* -1.99
Tehran -1.379** -8.08
Constant 0.659** 9.29 0.416** 3.85 0.357* 2.08
Pseudo R 2 0.019 0.025 0.184
No. observations 3109 3089 3089
Notes: <strong>The</strong> final regression includes all provinces, but only selected provinces are displayed.
p

<strong>The</strong> importance <strong>of</strong> province-level effects suggests that central administrative input affected
participation. 10 With the exception <strong>of</strong> Tehran and Hormozgan (with -137.9% and
-126.5% lower participation probabilities), where we suspect our identification strategy may
be at fault, the variation is probably due to the diligence with which the government promoted
the program, the lead time between start and actual implementation, and the development
<strong>of</strong> the banking infrastructure. <strong>The</strong> lower likelihood <strong>of</strong> participation in Sistan
(-36.4%) is in line with its marginal status, both in terms <strong>of</strong> economic development and cultural
and religious affinity with Tehran. A similar explanation is likely for North Khorasan
(-47.9%).
<strong>The</strong>se results <strong>of</strong>fer a mixed report card for the equitable reach <strong>of</strong> the cash transfer
program. Whereas rural residents and those with low education fared well, residents <strong>of</strong>
marginal provinces did not. We turn to the <strong>impact</strong> <strong>of</strong> the transfer in the next two sections,
starting with a general overview and then <strong>of</strong>fering a detailed analysis <strong>of</strong> the TSR’s <strong>impact</strong>
on poverty and inequality.
6 <strong>The</strong> TSR balance sheet for households
When the government enacted the TSR it struck a bargain with households to exchange
higher energy prices for direct cash transfer. <strong>The</strong>re have been claims and counter claims
from the government and its critics about whether households or the government won in
the bargain. Our survey data allows us to find some answers for the first three months for
the program. Since we do not know the added household expenditures as a result <strong>of</strong> price
increases, we compare the total expenditures on subsidized items with the cash transfers
(Table 5).
According to these estimates, during the first three months <strong>of</strong> the TSR households spent
approximately $3.25 billion on energy products and water and received $7.77 billion in cash
transfers (all numbers converted at the then prevailing exchange rate <strong>of</strong> 10,000 rials =
$1). Deposits were made for two months in Dey 1389 (December 2010) and one month in
Esfand 1389. This suggests that up to the end <strong>of</strong> this period households were way ahead
in the direct exchange with the government. 11 How did this balance hold for households in
different income brackets? Table 6 shows the same data by deciles <strong>of</strong> income.
Figure 4 shows that the total cash transfer received by families in different income
10 We show the effects for selected provinces only. Markazi province near Tehran is the reference.
11 We call this the direct exchange because even though we deflate the value <strong>of</strong> cash transfers by the CPI
for each month there are indirect general equilibrium effects that change the net gains by households).
18

Table 5: Expenditures on subsidized items and transfers paid out in USD billions, 1389-Q4
(2010-Q1)
Month Energy & water Cash Transfer Balance
Dey 0.80 4.28 3.48
Bahman 1.03 2.36 1.32
Esfand 1.42 1.13 -0.29
Q4 Total 3.25 7.77 4.52
Note: Expenditures and cash transfers are based on information collected from the households in the survey.
Source: Authors’ calculations from HEIS files
Table 6: Expenditures on subsidized items and total transfers by decile in USD PPP billions,
Q4, 1389
Decile <strong>of</strong> Expenditures on Cash
Expenditures Energy Transfer
1 0.61 6.41
2 0.87 6.42
3 0.91 7.26
4 1.06 7.07
5 1.08 6.77
6 1.26 6.45
7 1.38 6.71
8 1.60 6.35
9 1.77 5.18
10 2.44 3.08
Q4 Total 2.89 6.92
Note: Expenditures and cash transfers are based on information collected from the households in the survey.
Source: Authors’ calculations from HEIS files
19

deciles (the bars) and as percent <strong>of</strong> total income (the line). <strong>The</strong> amount <strong>of</strong> transfers going
to decile 1-7 was about three times <strong>of</strong> the richest. Transfers also constituted a much larger
percentage <strong>of</strong> the incomes <strong>of</strong> the poor: more than 28% for the lowest decile, falling to 2%
for the richest.
Figure 4: Total amount <strong>of</strong> transfer received by income decile in billions <strong>of</strong> 2010 PPP USD
and transfer as a share <strong>of</strong> household income, Esfand 1389
2.5
30
2010 PPP dollars
2.0
1.5
1.0
0.5
25
20
15
10
5
Percent <strong>of</strong> total income
0.0
1 2 3 4 5 6 7 8 9 10
Source: HEIS and authors’ calculations
0
While the distribution <strong>of</strong> the transfer was far more progressive than energy subsidies,
price increases still disproportionately affected the poor. As seen in Table 7, the TSR
caused expenditures on subsidized items to grow by non-trivial figures across all income
deciles, particularly for the lower deciles. Whereas before the TSR the poorest three deciles
used between 4.5% and 6.2% <strong>of</strong> their expenditures on subsidized goods (with the greatest
expenditures on heating their homes), in Esfand, 1389, the third month after the TSR
began, those figures grew to 7.8% and 11.2%. As seen in Table 7, while all deciles saw
increases in their expenditures on affected items, the budget share <strong>of</strong> affected items was
largest for the poor and smallest for the rich.
20

Table 7: Per capita monthly expenditures on subsidized items by amount (rirals) and percent <strong>of</strong> total expenditures, year
1388 and Esfand 1389
1388
Home heat Water Electricity Utilities Bread Fuel Total
1 24488 2.1 7600 0.6 9589 0.8 47498 3.9 22480 2.4 7253 0.4 69209 6.2
2 26969 1.8 9282 0.6 10572 0.7 53127 3.5 23587 1.8 7659 0.4 76092 5.2
3 29346 1.6 9659 0.5 12713 0.7 59365 3.1 23898 1.4 8951 0.4 82635 4.5
4 29819 1.3 10476 0.5 12454 0.6 62152 2.7 24215 1.2 10828 0.4 85803 3.8
5 30656 1.1 10800 0.4 13486 0.5 66240 2.3 24096 0.9 12737 0.3 89926 3.2
6 31316 0.9 11469 0.3 14896 0.4 72361 2.0 23713 0.7 15883 0.3 95870 2.7
7 33652 0.8 11926 0.3 15352 0.4 78815 1.7 24096 0.6 19533 0.3 102586 2.3
8 33787 0.6 12435 0.2 16456 0.3 83267 1.4 24413 0.5 22203 0.3 107539 1.9
9 39476 0.6 15275 0.2 19939 0.3 98370 1.4 24914 0.4 25989 0.3 122963 1.8
10 54741 0.5 18314 0.2 28523 0.3 143844 1.2 28536 0.3 46112 0.3 171981 1.4
Esfand 1389
Home heat Water Electricity Utilities Bread Fuel Total
1 59061 4.1 9267 0.8 13484 1.0 81222 5.8 53927 5.1 9605 0.4 142167 11.2
2 87195 4.4 12166 0.7 18301 1.0 117052 6.0 55963 3.2 14678 0.6 186331 9.7
3 78903 3.4 14379 0.6 19542 0.8 111697 4.7 55520 2.6 16750 0.5 181311 7.8
4 97514 3.2 16559 0.6 22441 0.8 135232 4.6 58147 2.2 25440 0.6 216041 7.3
5 104165 2.9 17165 0.5 27056 0.8 147725 4.2 64057 2.1 29219 0.6 239512 6.9
6 136091 2.7 17008 0.4 25695 0.6 177815 3.7 57954 1.3 36103 0.6 267950 5.5
7 112734 2.2 17035 0.4 26075 0.5 154105 3.0 57217 1.2 47417 0.7 257197 4.9
8 143360 1.7 23618 0.3 28470 0.4 193794 2.4 61855 0.9 58627 0.6 308835 3.9
9 129476 1.8 22272 0.4 35483 0.5 185611 2.6 66345 1.1 67662 0.5 312716 4.1
10 217530 1.7 33852 0.3 54444 0.4 303450 2.4 65303 0.9 110342 0.6 472515 3.8
Source: HEIS and authors’ calculations.
21

While these are by no means estimates <strong>of</strong> the welfare effect <strong>of</strong> the program, even for
the early phase <strong>of</strong> the program, they do reveals that households received much more in
cash transfers than they paid for their energy products in total during the fourth quarter
<strong>of</strong> 1389 (winter 2011). Subsequently, as prices <strong>of</strong> other products and earnings adjusted to
higher energy prices, the balance in the exchange must have changed, perhaps against the
households because wages and salaries do not appear to have kept up with inflation, at
least for the middle class. In 2011-12, as international sanctions against Iran intensified,
real wages have most certainly declined, but we do not know how much <strong>of</strong> the setbacks for
households is due to <strong>subsidy</strong> <strong>reform</strong>.
7 Impact on poverty and inequality
Energy subsidies are highly regressive, but the poor typically spend a much larger portion
<strong>of</strong> their budgets on subsidized goods. This means that price increases following the removal
<strong>of</strong> subsidies hit the poor the hardest. <strong>The</strong> keys to the <strong>impact</strong> <strong>of</strong> Iran’s <strong>reform</strong> program on
poverty and inequality are in the cash transfer program and nonlinear pricing <strong>of</strong> gasoline and
utilities, which partly protected the poor against the price hikes. In this section we consider
the change in the poverty rate and in inequality during the first three months <strong>of</strong> the TSR.
We compare standard measures <strong>of</strong> poverty and inequality <strong>of</strong> the actual distribution with a
simulated distribution in which we subtract the cash transfers from household incomes.
We begin with a look at the entire distribution <strong>of</strong> incomes. Figure 5 displays the cumulative
distribution functions for the actual and two simulated distributions. <strong>The</strong> dashed line
is the actual distribution <strong>of</strong> households, the solid line is the no-transfer distribution in which
cash transfers are subtracted from incomes, and the dotted line is the simulated distribution
labelled “universal coverage”, which adds transfers to incomes <strong>of</strong> those households that did
not report receiving transfers. <strong>The</strong> no-transfers simulation (simulation 1) shows what would
have happened had the <strong>reform</strong> not included any cash transfers, and the “universal coverage”
simulation (simulation 2) represents complete and uniform targeting. Cash transfers clearly
raised incomes across the board because the distribution represented by the dashed line
stochastically dominates the one represented by the solid line. A similar view is <strong>of</strong>fered by
the Generalized Lorenz curves depicted in Figure 6 for the three distributions. GL curves
compare distributional information as well as the means <strong>of</strong> these distributions. As these
graphs show, cash transfers have unambiguously increased the welfare for all income groups
during the first three months <strong>of</strong> the TSR.
Table 8 <strong>of</strong>fers specific measures for poverty and inequality based on these distributions.
22

Figure 5: CDFs <strong>of</strong> log per capita income for observed data and two recipient simulations
with US $3 day and regional poverty lines, Esfand 1389
Probability

<strong>The</strong> top two panels, labeled “Observed”, present our estimated poverty rates using the last
month <strong>of</strong> the surveys for 1388 (2009) and 1389 (2010). We use regional poverty lines calculated
by Salehi-Isfahani and Hashemi (2007) for the rural and urban areas <strong>of</strong> 30 provinces
based on the methodology developed by Chen, Datt, and Ravallion (1993). This methodology
usually is applied to distributions <strong>of</strong> expenditures, but since cash transfers are registered
as incomes not expenditures, we interpret the expenditure poverty lines in Salehi-Isfahani
and Hashemi (2007) as income thresholds that we use to define who is poor. <strong>The</strong> poverty
lines in 1389 rials are 14,909 per person per day in rural areas and 23,702 in urban areas
(about PPP $3 and $4.5). Observed poverty is lower in Esfand, 1389, compared to the same
month the year before (9.7% vs. 11.1%). This decline may be due to cash transfers but it
is possible that other factors were at work. A rigorous <strong>impact</strong> analysis is not possible given
the nature <strong>of</strong> our data, but to get an idea <strong>of</strong> the magnitude <strong>of</strong> the cash transfers relative to
the incomes <strong>of</strong> the poor we compare the observed poverty rates in 1389 with those from the
simulated distribution that subtracts transfers from each household’s income (simulation
1). Doing so, increases the poverty rate from 12.0% to 20.2% in rural areas and from 8.8%
to 12.0% in urban areas. In this definition <strong>of</strong> “<strong>impact</strong>”, transfers can be said to have lifted,
albeit temporarily, 8% <strong>of</strong> the rural population, or 1.8 million people, and 3.2% <strong>of</strong> the urban
population, or 1.7 million people, out <strong>of</strong> poverty. Nationally this amounts to a reduction in
the poverty rate <strong>of</strong> 4.7%, or 3.5 million fewer poor people.
Turning to measures <strong>of</strong> inequality, also in Table 8, we note that the Gini coefficient
hardly changes when we remove transfers from the incomes <strong>of</strong> all households. <strong>The</strong> Gini
for the observed data is 0.39 compared to 0.41 for the no-transfer simulation. This could
be that initially higher income groups participated in the TSR at lower rates. But since
cash transfers were more important for incomes at lower deciles, the Gini, which is equally
sensitive to changes in upper and lower parts <strong>of</strong> the distribution, is not the appropriate index.
For this reason we also employ General Entropy indices which allow placing the emphasis
on different parts <strong>of</strong> the distribution. Interestingly, GE(-1), which is more sensitive to
redistribution at the lower end <strong>of</strong> the income distribution, shows the inequality difference
due to cash transfers to be much higher, 0.38 for the actual distribution versus 0.47 for the
one without transfers. <strong>The</strong> GE indices with higher parameter values behave more like the
Gini index.
<strong>The</strong> results <strong>of</strong> this section challenge the widely held beliefs that pro-market <strong>reform</strong>s,
especially those that reduce subsidies, are rarely in the interests <strong>of</strong> the poor. This has also
been one <strong>of</strong> the principal reasons for opposition to <strong>subsidy</strong> <strong>reform</strong> in Iran. What we notice
from examining <strong>impact</strong> during the initial phase <strong>of</strong> the TSR is that it reduced both poverty
24

Table 8: Inequality and percent in poverty for urban and rural areas, actual and simulated,
Esfand 1388-89
Poverty GE(-1) GE(0) GE(1) GE(2) Gini
percent
Observed, Esfand 1388
Rural 13.4 0.35 0.25 0.24 0.32 0.37
Urban 10.3 0.40 0.25 0.23 0.27 0.37
Total 11.1 0.46 0.28 0.26 0.32 0.40
Observed, Esfand 1389
Rural 12.0 0.32 0.24 0.25 0.33 0.38
Urban 8.8 0.33 0.24 0.24 0.32 0.37
Total 9.7 0.38 0.27 0.27 0.36 0.39
Simulation 1: No transfer, Esfand 1389
Rural 20.2 0.45 0.29 0.29 0.39 0.41
Urban 12.0 0.37 0.26 0.26 0.34 0.39
Total 14.4 0.47 0.30 0.29 0.39 0.41
Simulations 2: Universal coverage, Esfand 1389
Rural 10.5 0.27 0.22 0.23 0.32 0.37
Urban 7.2 0.29 0.23 0.23 0.31 0.37
Total 8.2 0.33 0.26 0.26 0.35 0.39
Impact: Simulation 1 minus simulation 2, Esfand 1389
Rural 8.2 0.12 0.05 0.04 0.06 0.03
Urban 3.2 0.05 0.02 0.02 0.03 0.01
Total 4.7 0.09 0.03 0.03 0.04 0.02
Notes: <strong>The</strong> no-transfer case subtracts transfers from recipients’ incomes. <strong>The</strong> universalcoverage
case adds transfers to incomes <strong>of</strong> all households.
Source: Authors’ calculations, HEIS 2010.
and inequality. This may be the single most important reason why <strong>subsidy</strong> <strong>reform</strong> in Iran
did not meet the kind <strong>of</strong> opposition and revolt that similar <strong>reform</strong>s in developing countries
have faced.
25

8 Beyond the early phase
In September 2013, the TSR has been in operation for two and a half years. In this period,
both energy prices and cash transfers have remained constant while prices have doubled.
While the household sector was by and large (over)compensated, energy price hikes have
dealt a serious shock to production. In some sectors, such as transportation, price increases
were rolled back (diesel prices increases were kept to 9 times instead <strong>of</strong> 22 times), but
general lack <strong>of</strong> flexibility in the movement <strong>of</strong> productive factors, both capital and labor,
combined with price controls, slowed the adjustment <strong>of</strong> firms to the new environment. A
year after the TSR went into effect, tightening <strong>of</strong> international sanctions against Iran dealt
an even more serious blow to the economy. Iran’s oil exports, which account for 80% <strong>of</strong>
the country’s foreign exchange earnings, dropped by half precipitating a currency crisis,
devaluation and more inflation (Salehi-Isfahani 2012). Lack <strong>of</strong> clear evidence regarding
the <strong>impact</strong> <strong>of</strong> the TSR on the ensuing macroeconomic instability has led many observers
and policy makers in Iran to be highly sceptical <strong>of</strong> the wisdom <strong>of</strong> the initial program and,
more importantly, <strong>of</strong> continuing with energy price adjustments. A serious impediment in
identification is the inability to pinpoint the source <strong>of</strong> the huge rise in liquidity in the last
two years. <strong>The</strong> government has purposefully restricted the dissemination <strong>of</strong> macroeconomic
data citing the emergency conditions surrounding Iran’s nuclear dispute with the West.
<strong>The</strong> TSR was not fully funded and estimates <strong>of</strong> its deficit range from $15-25 billion, but
other unfunded government programs, such as the Maskan Mehr noted earlier, are likely
bigger contributors to rising liquidity and inflation. But citing, its inflationary potential,
the TSR’s opponents have so far successfully blocked the implementation <strong>of</strong> its “Phase 2”,
which promised to energy raise prices again and raising the amount <strong>of</strong> sash transfers. Given
the presumed deficit <strong>of</strong> the first phase, and the high inflation in the last few months <strong>of</strong> 2012,
the proposal to increase cash transfers one more time could not garner sufficient support in
Iran’s parliament.
<strong>The</strong> record <strong>of</strong> price increases since the introduction <strong>of</strong> the TSR indicates the importance
<strong>of</strong> these other factors. Figure 7 plots the (annualized) monthly inflation rates for the last
two years. <strong>The</strong> vertical line to the left marks the <strong>subsidy</strong> <strong>reform</strong> in December 2011 and the
one to the right marks the tightening <strong>of</strong> sanctions a year later. Not surprisingly, inflation
appears to increase immediately after subsidies were removed, to about 50% annually, but
declined to less than 20% three months later. This is consistent with the fact that energy
price increases were a one-time event and the dampening effect <strong>of</strong> price controls. Inflation
picked up with renewed vigor several months later with the first bout <strong>of</strong> devaluation, and
26

Figure 7: Monthly rates <strong>of</strong> inflation following <strong>subsidy</strong> <strong>reform</strong>
then again after September 2012 which saw the collapse <strong>of</strong> the rial.
<strong>The</strong> <strong>impact</strong> <strong>of</strong> the TSR on household welfare beyond its first three months is in considerable
doubt. General price increases have no doubt been followed by increases in most
wages and salaries. Government salaries have not kept up with inflation, hurting a large
section <strong>of</strong> the middle class for whom the rebates have been less significant. <strong>The</strong> economic
decline engendered by the sanctions and the unstable macroeconomy may have wiped out
much <strong>of</strong> the gains by lower income families from the cash transfers. <strong>The</strong> opposition to the
<strong>reform</strong> mounted such that the program was essentially suspended. <strong>The</strong> new government
which took <strong>of</strong>fice in August 2013 has promised to revive the program, but fear <strong>of</strong> inflation
may cause further delay. In the meantime, energy prices are falling in real terms and the
old consumption habits are returning.
9 Conclusion
By the late 2000s Iran had the largest energy subsidies in the world. While the deficit was
mentioned, the government was more concerned with waste, smuggling, and inefficiency.
Equity was second order but close behind, with wealthy Iranians disproportionately enjoying
energy subsidies. A major problem for implementing <strong>reform</strong> was political acceptance, an
anxiety made serious by the failures <strong>of</strong> the liberal Khatami and Rafsanjani governments to
secure <strong>reform</strong>. <strong>The</strong> populist, Ahmadinejad, was able to straighten the kinks that constricted
previous presidents and met his equity goals by making large cash transfers available to all
Iranians, a compensation for the large and immediate price increases, the successful other
27

half to the steep price rises <strong>of</strong> the Targeted Subsidy Reform program (TSR).
Fuel subsidies are common in the developing world but <strong>reform</strong> is not. When countries
such as Bolivia, Nigeria, and Pakistan attempted large price increases they did not also
compensate their citizens with cash payments; each had to abandon its <strong>reform</strong>s. In Iran,
as in Indonesia, payments helped cushion the shock to poorer families. While it is still too
early to draw firm lessons from Iran’s experiment with <strong>subsidy</strong> <strong>reform</strong>, and in some ways
it is particular to the situation in Iran, there are a few aspects <strong>of</strong> Iran’s program that may
have wider relevance. For one thing, Iran’s program was less motivated by the need for
budgetary considerations because much <strong>of</strong> the <strong>subsidy</strong> was foregone earnings in the form
<strong>of</strong> the country’s own oil and gas distributed at low cost. This allowed the government to
sell the <strong>reform</strong> package as one <strong>subsidy</strong> program replacing another, replacing the regressive
fuel subsidies with uniform cash transfers, rather than as a scheme to save money for the
government. In the event it <strong>of</strong>fered a generous exchange to households and lost money in
the bargain. In addition, Iran’s program was seen as the attempt by a populist president
with a long standing promise to distribute oil revenues more equally. <strong>The</strong>se two elements
went a long way in preventing an immediate negative reaction from lower-income urban
people. We show that in fact, at least during its first three months, the program did deliver
on its promises <strong>of</strong> redistribution to ordinary Iranians: there were significant improvements
in poverty and inequality as a result <strong>of</strong> the TSR transfers.
Other parts <strong>of</strong> the program that <strong>of</strong>fer lessons for future programs are related to TSR’s
innovative implementation. <strong>The</strong> government devised a mechanism to make the transfer
easy to obtain, implementing an easy registration process, expanding the banking sector to
increase coverage in rural and other disadvantaged areas, depositing transfers directly into
bank accounts <strong>of</strong> applicants, and undertaking a public relations campaign. In particular, we
believe that letting depositors see the cash transfers in their bank accounts before prices were
jacked up went a long way to establish trust between the government and the population
regarding the impending exchange.
<strong>The</strong> significance <strong>of</strong> the TSR is not limited to its immediate aims <strong>of</strong> reducing waste and
distortions and redistributing income to the poor. In a country that has received about
half a trillion dollars <strong>of</strong> oil revenues over the last decade, this was the very first time that
ordinary people have received a direct transfer representing their rights as citizen in sharing
in that wealth. Iran’s oil wealth has been shared with the country’s poor before, but always
in indirect ways as expenditures on infrastructure, health and education, or as oil money has
trickled down the economic ladder. While direct transfers may be less effective in generating
economic growth, cash transfers are more effective from a political economy perspective.
28

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