Welfare effects of alternative targeted food subsidy programs in Iran
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ORIGINAL PAPER
Welfare effects of alternative targeted food subsidy programs in Iran Abdoulkarim Esmaeili & Ayatollah Karami & Bahaeddin Najafi
Received: 21 January 2012 / Accepted: 2 April 2013 / Published online: 26 April 2013 # Springer Science+Business Media Dordrecht and International Society for Plant Pathology 2013
Abstract In many developing countries, consumer food subsidies are major parts of social safety net programs. The primary objective of these programs is to generate a sustained decrease in poverty in these countries. But, due to improper targeting, a large proportion of these food subsidies are “leaked” to high-income groups. Using a computable general equilibrium (CGE) model, the effects of alternative food subsidy reforms on production, foreign trade, households’ welfare and government expenditure in Iran was investigated. These were commodity targeting and cash transfer targeting of the food subsidy for needy groups. Replacing the existing food subsidy program with one targeted to foods consumed heavily in low income households would reduce government expenditure by 4.4 %, increase agricultural exports, reduce non-agricultural exports, and have a negative impact on consumer welfare for all urban consumers, and for all rural consumers except those in the poorest quintile. Replacing the existing program with a cash transfer targeted to poor households would reduce government expenditure by 3.1 %. Keywords Food subsidy . Food security . Iran . CGE model . Targeting . Welfare JEL classification . D58 . D63 . P36
A. Esmaeili (*) : B. Najafi Department of Agricultural Economics, Shiraz University, Shiraz, Iran e-mail: [email protected] A. Karami Agricultural Economics in the Department of Rural Development Management, Yasouj University, Yasouj, Iran
Introduction In many developing countries, consumer food subsidies are major components of social safety net programs, their primary objectives being to generate sustained decreases in poverty and to combat malnutrition (Maluccio and Flores 2004). However, they are under increasing criticism because of their expense. According to critics, food subsidies pose unnecessary burdens on the public budget and are economically inefficient. This is because much of their benefit is often not received by the poor but, owing to improper targeting, is “leaked” to high-income people (Adams 1998; Dutta and Ramaswamiy 2004; Farajzadeh and Najafi 2004). In many countries, the impetus for subsidy reforms is a desire to reduce fiscal costs of existing universal food subsidies and provide a higher share of transfers to the poor. The subsidy program in Iran is costly and consists of (i) controlled prices on food commodities exchanged in official markets (ii) universal subsidies through fixed prices without quantity limitations for bread, and (iii) a general coupon valid for specific goods up to some set quantity for sugar, edible oil and rice. The share of subsidy in gross domestic product, excluding oil, increased from 0.7 % in 1973 (561.5 billion Rials1) to 2.8 % in
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