Public Sector Economics
Shahryar Zaroki; Ahmadreza Ahmadi
Abstract
Crude oil and the rents derived from it can present both advantages and disadvantages for oil-rich countries. Numerous studies have examined the impact of oil rents on various variables such as economic growth, inflation, and financial development. Among these, the potential role of oil rents in income ...
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Crude oil and the rents derived from it can present both advantages and disadvantages for oil-rich countries. Numerous studies have examined the impact of oil rents on various variables such as economic growth, inflation, and financial development. Among these, the potential role of oil rents in income inequality, particularly in light of the underground economy, appears to have been overlooked in previous domestic studies. To address this gap, the present research first calculates the relative size of the underground economy using a MIMIC method, revealing an average of 16.8% in Iran’s economy. Subsequently, employing a nonlinear autoregressive distributed lag (NARDL) approach, the study investigates and tests the effect of oil rents on income inequality while considering the underground economy over the period from 1978 to 2022. The long-run results indicate that positive shocks in oil rents are associated with a desirable (negative) effect on income inequality, while negative shocks lead to an undesirable (positive) effect. Furthermore, the underground economy acts as a double-edged sword; that is to say, an increase in the relative size of the underground economy has the potential to turn the favorable (negative) impact of positive oil rent shocks on income inequality into an unfavorable one, and conversely, it can transform the unfavorable (positive) impact of negative oil rent shocks on income inequality into a favorable one. Additionally, real GDP per capita exhibits an inverse U-shaped relationship with income inequality, while unemployment positively influences income inequality.
Shahryar Zaroki; Sahar Nasrnejad Nesheli; Niloufar Gorgani Firoozjah
Abstract
In any society, the focus of statesmen, policymakers, and researchers on poverty reduction and enhancing economic welfare is necessary. Given that most government economic policies affect relative prices and their fluctuations, which in turn impact welfare, analyzing the welfare effects caused ...
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In any society, the focus of statesmen, policymakers, and researchers on poverty reduction and enhancing economic welfare is necessary. Given that most government economic policies affect relative prices and their fluctuations, which in turn impact welfare, analyzing the welfare effects caused by price changes in different product groups seems necessary The aim of this study is to investigate the role of inflation of different commodity groups on Iran's economic welfare from 1972 to 2021. The research model is estimated using Autoregressive Distributed Lag (ARDL) approach. Economic welfare is measured using a composite index of well-being. The trend of the well-being index fluctuated during the study period reaching its peak in 1975 and its minimum in 1990. The long-term results of the estimation of the research model reveal several key findings:
First, total inflation and inflation of different groups of goods have an unfavorable effect on economic well-being.
Second, among different product groups, inflation in the housing, fuel, and lighting group has the most adverse effect on economic welfare.
Third, considering that the share and weight of the group of food, beverages and tobacco in the consumption basket of households is larger than other groups of goods, but the size of the effect of inflation of this group of goods on economic welfare is in the fourth place. Fourth, the increase in the inflation of the health and treatment group has the least adverse effect on economic welfare. Another finding is that per capita income and economic growth have a favorable effect on economic welfare. According to the obtained results, the government should take measures such as adopting appropriate measures in line with monetary discipline and preventing the irrational increase of monetary variables in accordance with inflation targeting to control inflation in order to improve welfare.
Introduction
The provision of economic welfare across different segments of society is a key concern for politicians in the country. Article 43 of the Constitution aims to ensure the independence of society, eradicate poverty and deprivation, and fulfill the basic needs of individuals as they progress, including housing, food, clothing, health, education, and the necessary facilities for family formation, along with providing working conditions and opportunities for full employment. To attain a comprehensive understanding of welfare and how to measure it, it is crucial to clarify the concept itself. Identifying the impact of various sectors such as housing, education, nutrition, health, and treatment on changes in welfare is essential. This allows for prioritizing efforts in each of these fields to enhance societal welfare, growth, and development. Monroe asserts that the primary objective of a society is to allocate resources among its members to maximize their welfare. Achieving this goal involves allocating resources in a manner that generates the highest overall income for society. In a free market economy, this allocation is typically accomplished through prices, which play a crucial role in determining changes in household welfare. Inflation and its fluctuations should be recognized as significant factors affecting welfare. Understanding the relationship between inflation and welfare enables policymakers to implement effective measures to mitigate its adverse effects and promote overall societal well-being.
Method
The Index of Economic Well-Being (IEWB) serves as a comprehensive and inclusive measure utilized in the current research to assess economic welfare. This index encompasses various dimensions that contribute to overall well-being, including:effective per capita consumption flow, net social accumulation of reserves and wealth-generating resources, economic inequality and economic insecurity. Each dimension is assigned weights in a specific manner, reflecting their relative importance. Consequently, the weights allocated to each dimension may vary across different observations. (Ozberg and Sharp, 2009). The general form of this index is as follows:
The value of the economic welfare index is measured by four components, which are consumption flow (CF), productive asset balance (WS), individual income distribution (ID), and economic security level (ES) (Bakhtiari et al., 2013). In this research, the base year of 2015 was used to validate the variables.
In the following, in order to investigate the effect of inflation of the total basket and different groups of goods on economic well-being, the autoregressive approach with distribution breaks (ARDL) has been used. First, the research model is specified with the aim of explaining the effect of inflation in the total basket of goods and services on economic welfare. Then, with the aim of analyzing the effect of inflation in different commodity groups, the research model will be presented. So in these two specifications of the IEWB research model, economic welfare is expressed as a dependent variable, which is calculated with the combined index of welfare. Inf inflation of the entire basket of goods and services, inflation for each of the 7 product groups [including 1. Health and treatment group (Health), 2. Clothing and footwear group (Cloth), 3. Furniture, accessories and Services used at home (Furniture), 4. Food, beverages and tobacco group (Food), 5. Recreation, education, hotel and restaurant group (ECERH), 6. Transportation and communication group (Transport) 7. Housing, fuel and lighting group, RGDPPC per capita real GDP, EG is economic growth.
Based on the above model, it is possible to test the effect of inflation in the mentioned 7 groups on the welfare of Iran's economy in the short ـ term and long ـ term situation.
Result and Discussion
In the material dimension of welfare, people should have a balanced life that includes employment and sufficient income to meet their basic needs. However, in many societies, includingIran, inflation and the instability of real purchasing power often pose challenges to people's ability to maintain material welfare. This can directly impact household consumption patterns and overall economic welfare. Therefore, understanding the effects of inflation on economic welfare is crucial. Considering the necessity of explaining the effect of inflation on economic welfare in Iran, in the present study, an attempt was made to analyze the effect of inflation of total goods and services and inflation of different groups of goods on economic welfare. For this purpose, while calculating the economic welfare with the composite index of welfare in the period of 1973 ـ 2022, the research model was estimated with the autoregression approach with distribution breaks. Our findings reveal a fluctuating trend in Iran's economic welfare during the study period. Following an initial increasing trend, economic welfare experienced a decreasing trend from 1976 until the end of the war. It increased again after the war, but decreased again in the post ـ war period.
The maximum value of the welfare index with the value of 69.6 belongs to the year 1354 and the lowest value of the welfare index with the value of 1.16 belongs to the year 1991. The results of the model estimation in 8 different estimations indicate the existence of a negative effect of inflation (total and basket of goods) on economic welfare. Based on this, the comparative results in the long term indicate that firstly, the inflation of all goods and services and the inflation of different commodity groups have an adverse effect on welfare. Second, among the 7 product groups, the inflation of the housing, fuel, and lighting group has had the most adverse effect on economic welfare. Also, due to the fact that the share and weight of the group of food, beverages, and tobacco in the consumption basket of households is larger than other groups, but the size of the inflation effect of this group of goods on welfare is in the fourth place. The increase in the inflation of the health and treatment group has the least adverse effect on economic welfare. Per capita income and economic growth also have a favorable effect on welfare, as expected.
Shahryar Zaroki; Ahmadreza Ahmadi; Mehdi Hasanpour Varkolaei; Mohammad Reza Zare Chamazkoti
Abstract
This study investigates the impact of government subsidies on economic well-being in Iran, using both symmetric and asymmetric approaches. Economic well-being is first quantified using a composite index based on four components: consumption flow, wealth stocks, income distribution, and economic ...
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This study investigates the impact of government subsidies on economic well-being in Iran, using both symmetric and asymmetric approaches. Economic well-being is first quantified using a composite index based on four components: consumption flow, wealth stocks, income distribution, and economic security. The study then applies an ARDL & NARDL model to assess the linear and non-linear effects of subsidies on economic well-being over the period from 1973 to 2022.
The findings reveal a significant decline in economic well-being from 1975 until the end of the Iran-Iraq War, followed by an upward trend until the Sixth Development Plan. The average index value increased from 20.9 in the First Plan to 60.3 in the Fifth Plan, but then fell to an average of 8 in the Sixth Plan. The share of subsidies in total government expenditure increased from 1973 to the end of the war and during the First to Fourth Development Plans, but decreased thereafter, particularly in the Sixth Plan.Long-term estimates indicate that both increases and decreases in subsidy expenditures directly impact economic well-being. However, the effect of subsidy reductions on economic well-being is more significant than that of increases, suggesting the presence of an asymmetric impact. Moreover, the analysis of the optimal subsidy level reveals that subsidies enhance economic well-being up to a threshold of 8.8% of government expenditure; beyond this point, increasing subsidies has a detrimental effect on economic well-being.Additionally, the study highlights a marked decline in economic well-being during the periods 1976-1989 and 2017-2022, with the post-JCPOA period witnessing a more substantial decline due to the intensification of sanctions.
Introduction
The issue of well-being and its improvement is one of the central concerns of societies, with politicians often claiming to prioritize the creation of well-being for their citizens. Economic well-being is influenced by numerous factors, including population size, economic complexity, globalization, exchange rate fluctuations, economic growth, unemployment, inflation, sanctions, production volatility, government size, and government spending. Empirical studies by Sowa and Edpri (2007), Nan and Zhang (2018), Sunita and Mahendra (2022), and Wu and Liu (2023) highlight the significant impact of government expenditures, such as subsidies, on both economic and social well-being. These studies establish a notable relationship between government spending and economic well-being.
Among the key factors influencing economic well-being, government expenditures, and specifically subsidized spending, play a critical role. These expenditures can directly or indirectly affect economic well-being. Consequently, analyzing changes in government expenditures, particularly subsidies, is crucial for policies aimed at promoting economic growth and improving well-being. Given the close relationship between these two variables, determining the optimal level and composition of government spending can have substantial implications for macroeconomic policy.
It is important to note that the relationship between government expenditures, subsidies, and the factors influencing them is not necessarily symmetrical. Rather, it may exhibit asymmetry. This study seeks to first calculate economic well-being over the past fifty years using a composite index. Second, it aims to analyze both the symmetric and asymmetric effects of subsidy expenditures on well-being in Iran from 1973 to 2022 through three separate models. The autoregressive distributed lag (ARDL) model, incorporating both linear and nonlinear approaches, is employed for model estimation. Additionally, the study explores how variations in subsidy spending impact economic well-being, particularly by distinguishing between the effects of subsidy increases and decreases.
This research is innovative in several ways. First, it uses a comprehensive economic well-being index, as opposed to the Amartya Sen social welfare index, over a more extensive time period (1973-2022), which covers significant political and economic events, including Iran’s development plans, the Iran-Iraq War, the revolution, and international sanctions. Second, while previous studies have not specifically examined the asymmetry in subsidy effects on well-being, this research distinguishes between the impacts of subsidy increases and decreases. Third, the study aims to determine the optimal level of government subsidy expenditures for maximizing economic well-being.
Method
For this study, the IEWB (Index of Economic Well-Being) is used as a comprehensive measure to analyze the economic well-being of Iran over the period from 1973 to 2022. The IEWB index incorporates four key dimensions: effective per capita consumption flow, wealth stocks, distribution of individual income, and economic security. Each of these dimensions is weighted based on its relative importance.The general formula for the IEWB index is as follows:
IEWB=CF+WS+ID+E
Where:
CF = Effective per capita consumption flow
WS = Wealth stocks
ID = Distribution of individual income
E = Economic security
To calculate the economic well-being index, each of these components is assigned a coefficient based on their relative importance. Following the methodology of Osberg and Sharp (2009) and prior studies, the coefficients are as follows:
4 for consumption (CF),
for wealth stocks (WS),
25 for income distribution (ID),
25 for economic security (E).
Given that the dimensions are measured using different units, each component is first normalized before calculating the weighted average. The normalization process ensures comparability across the dimensions, and it is carried out using the following formula:
Here, represents the normalized value, while and denote the minimum and maximum values of the respective dimension. Using this approach, the economic well-being index was calculated for the period from 1973 to 2022.
As mentioned in the introduction, the main goal of this research is to analyze and investigate the symmetrical and asymmetrical effects of subsidies on economic well-being in Iran. The research model focuses on examining how subsidies affect economic well-being, specifically distinguishing between the effects of subsidy increases and decreases. The asymmetric model specification follows Shin et al. (2014), who examined how coefficients of factors affecting a dependent variable may differ during periods of economic well-being versus recession. Building on Pesaran et al.'s (2001) work, they developed the non-linear autoregressive with distributed lag (NARDL) model. This study applies their pattern in two formats (symmetrical and asymmetric) to analyze our research variables. Additionally, a third model is specified to calculate the optimal ratio of subsidy to total government expenditure.
Results and Discussion
The present research investigates and analyzes the effect of subsidies on Iran's economic well-being based on symmetrical and asymmetrical approaches. Additionally, in a separate model (the third model), the optimal ratio of subsidy to government expenditure was calculated. For this purpose, economic well-being was first calculated using the composite index of well-being based on four dimensions for the period 1973-2022, and the coefficients were estimated using three patterns with ARDL & NARDL approaches.
The results of calculating the well-being index and describing the data show that the well-being index increased consistently from the first plan to the fifth plan, rising from 20.9 in the first plan sub-period to 60.3 in the fifth plan sub-period. Furthermore, after the third plan sub-period, the level of well-being remained higher than the average of the studied periods.
The long-run estimation results indicate that subsidies have a direct and asymmetric effect on economic well-being. The direct effect of subsidy decreases on economic well-being is greater than the effect of subsidy increases. Additionally, subsidies demonstrate an inverted U-shaped effect on economic well-being. The optimal ratio of subsidy to total government expenditure for maximizing economic well-being is 8.8%. When subsidies are
below this 8.8% threshold, increases in subsidies are associated with improved economic well-being; above this threshold, additional subsidies lead to decreased economic well-being.
Real GDP per capita and economic growth show positive effects on economic well-being, while inflation demonstrates a negative effect. Based on these findings, it is recommended that policymakers focus on policies to increase subsidy expenditures. However, given the significant negative impact of inflation on economic well-being, policymakers should carefully consider inflation when increasing subsidized expenditures. Non-inflationary methods should be prioritized when financing subsidized expenditures wherever possible.
Mohammad Reza Zare Chamazakhti; Zahra Karimi Moughari; Shahryar Zaroki
Abstract
According to principles 29, 31, and 43 of the Constitution of Iran, one of the goals of the Islamic Republic is to deal with poverty and economic and social inequality in the country, and for this purpose, two strategies have been followed in parallel after the revolution. One of these strategies ...
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According to principles 29, 31, and 43 of the Constitution of Iran, one of the goals of the Islamic Republic is to deal with poverty and economic and social inequality in the country, and for this purpose, two strategies have been followed in parallel after the revolution. One of these strategies was the extension and side assistance of the government to fight against poverty and deprivation. In this context, the government implemented policies and plans in the form of economic and social development plans. Therefore, according to this necessity, the aim of the current research is to investigate the impact of economic growth on poverty: comparative studies of the first and third development plans. The results of the estimation of the research model based on the autoregression method with distributed lag indicate that economic growth (from 1978 to 2021) has a positive and significant effect on poverty in the long term, while economic growth (the first and third development plans) and oil rents have a negative and significant effect on poverty, and social security expenses have no effect on poverty in the long term. Therefore, it can be said that economic growth alone is not enough to deal with poverty, but along with the dynamic growth process, improved infrastructure for society (including the poor) and institutional reforms should be implemented in parallel.
