OPINION: Iran’s Citizen’s Income Scheme and its Lessons

by Citizens' Income Trust | May 21, 2012 | Opinion

A big idea …

In December 2010, Iran became the first country in the world to establish a nationwide Citizen’s or Basic Income scheme. Interestingly, the scheme did not emerge by design but by default: it was the by-product of an effort to reform an outdated system of price subsidies that concerned primarily fuel products. A basic income proved to be the most practical way of compensating the population for the loss of subsidies that had been costing some US$100-120 billion a year.

When the first phase of the reform process became operational on 19 December 2010, nearly half of the subsidies were slashed overnight. At the same time, every Iranian became entitled to a monthly ‘cash subsidy’ of about US$40 payable to heads of households (e.g. $200 for a household of five members). In the first year of the scheme $40 billion were returned to households in compensation. Nearly the entire population of 75 million is now covered although some 1-2 million people have decided not to claim it. The second phase of the reform is expected to go into effect shortly, entailing further cuts in price subsidies and a corresponding addition to the transfer amount. Later phases will operate on the same principle until domestic prices of subsidised goods and services are brought into line with international or cost prices within the five year period of the reform effort.

The big idea has therefore been to convert price subsidies into cash subsidies. The objective is twofold: improving economic efficiency through rationalisation of subsidised prices, and reducing income disparities through cash transfers. These were reflected in the main provisions of the Subsidy Reform Law of January 2010 that is now being implemented.

… yielding results …

The reform process was launched over a year ago and evidence is now beginning to appear on the results. The Central Bank figures suggest that while the initial price shock accelerated inflationary pressures, the impact has not been as dire as had been predicted by some observers. The annual rate of urban inflation in the months preceding the reform was 9-10 percent. With the launch of the reform on 19 December 2010, this rate started climbing by about 1 percentage point a month to reach 20.6 percent in December 2011. The acceleration appears to have been entirely due to price reform. The relatively subdued impact on overall inflation – when subsidised prices had been raised several-fold – was due in part to price controls that were intensified when the reform was launched. Price controls have since been relaxed but not entirely withdrawn.

Official data also show substantial declines in the consumption of fuel across the board. Between 2010 and 2011, the years before and after the reform, the average daily consumption of petrol fell by 5.6 percent, diesel fuel by 10 percent, liquid gas by 10.6 percent, furnace oil by 36.5 percent, and electricity by 8 percent. These savings are all the more remarkable in view of past trends that witnessed growth of the order of 10 percent a year in the consumption of fuel and electricity.

Income effects too are likely to have been positive. The cuts in subsidies affect household incomes adversely in direct proportion to their consumption of subsidised goods and services. While some basic foods such as bread were among them, the cuts overwhelmingly concerned energy products whose consumption correlates positively with income. The compensatory transfers are however uniform for everyone and hence the short term impact of the reform on income distribution can only have been egalitarian, although the extent of it is not known since no hard data are available as yet.

… and some potential lessons

This basic income experience is in its infancy and it is still too early to draw definitive conclusions and lessons from it. Nonetheless, it may suggest possibilities that could help make basic income more of a realistic proposition in some contexts.

Advocacy for basic income:

The adoption of the subsidy reform and the birth of a de facto basic income in Iran owe much to the fact that cash transfers are universally seen as compensation for the loss of subsidies, not as a right or entitlement without a quid pro quo. That is how the hurdle of reciprocity was overcome. The rights-based arguments would have been a non-starter. Furthermore, a basic income was not a policy objective in itself but the fortuitous outcome of a broader effort aimed at correcting an inefficient and inequitable system of subsidies. It served to facilitate subsidy reform by making it more palatable to politicians and the public at large. In a sense, the country stumbled upon basic income while pursuing a different objective. This unique experience highlights the instrumental potential of basic income in smoothing the way towards better resource allocation and greater equality, the two objectives of Iran’s reform. The concept’s very simplicity appears to account for its emergence in the national search for an appealing alternative to an irrational system of subsidies. It just seemed to make sense.

Financing a basic income: A major hurdle facing a basic income scheme is often finding sufficient resources to fund it. In Iran, the problem was turned on its head: substantial funds were going to be available from price increases but a use for them had to be found. The basic income emerged as a way of using up a large portion of those funds. This method of financing a basic income is not discussed much in the literature but it has its merits. One is that it puts no new claim on existing sources, for example the national budget or oil export revenues. Another is pointed out by Philippe Van Parijs who contrasts Iran’s approach with that of Alaska, noting:

In many places, this is a far more realistic option than an Alaska-type permanent fund program…the Alaska scheme is funded out of the interest collected from investments made worldwide with revenues generated by the production of oil at some point in the past, whereas the Iranian scheme should be understood to be funded out of a tax on the current consumption of oil. The Alaska-type scheme is therefore restricted to resource-rich (sub-) countries that manage at some point to exercise sufficient political self-restraint to create and develop a substantial fund. The Iranian-type scheme, by contrast, is available to any country that wants to price the consumption of oil in an ecologically responsible way and to buffer the effect on people’s standard of living in a socially responsible way. For this road to basic income to be a real option there is no need to first accumulate a large fund, nor indeed to be an oil-producing or resource-rich country. (Philippe Van Parijs, ‘BIEN 2010 Congress: A Brief Personal Account,’ BIEN NewsFlash 62, 2010, pp. 2–4. www.basicincome.org/bien/pdf/Flash62.pdf)

Over the longer term however, the Alaska model has the advantage of a permanent flow whereas the Iran model does not. Since the subsidies are being cut permanently, one might presume that the compensatory transfers too would continue indefinitely. But this is by no means certain.

Universal coverage and the transfer amount:

One of the main justifications for universality lies in the shortcomings of targeting, but universal coverage has its cost too when the resources available are exogenously given or “fixed,” as is the case in Iran since the funds available depend on the extent of price hikes and the volume of goods and services sold, not on the scheme’s coverage or the transfer amount. The distribution of the funds is thus subject to a trade-off between the number of beneficiaries and the amount of the transfer to each. The universality thus comes at the expense of the lower income people who could have received more had those with higher incomes been excluded. At the time of writing (April 2012), there is increasing evidence that the principle of universality in Iran’s scheme may be sacrificed with some better-off households being dropped from the programme. The current plan is to urge higher income earners to opt out of the transfer scheme voluntarily. Households with an income above a couple of thousand dollars a month (a fairly large amount of money in Iran) are being invited to consider giving up their cash subsidy in whole or in part (the options are the entire amount, half the amount or any addition to the transfer amount in the second phase of the programme). No one knows how they will respond. If enough of them agree to withdraw, the matter will have been settled. If not, the government will have to decide how to proceed.

Constituency building:

The subsidy reform in Iran was a government initiative that, far from enjoying public support, aroused deep anxiety throughout the society. It was the most radical economic transformation Iranians were going to experience in living memory. The cash transfer component of it was designed in part to alleviate public concern and build support for the reform on the strength of the argument that a large part of the population would in fact receive more in cash subsidy than they would lose from cuts in price subsidies. Universal coverage came about for lack of a practical alternative. It had few advocates per se and may yet prove to be short lived, even if retreating from it may be harder now that it is in place. But even if some of the better-off households are excluded from the transfer scheme, their number is unlikely to be large. The success of the reform depends on the vast majority of the people feeling that they are not being cheated out of their fair share of the oil wealth.

To sum up the potential lessons:

• overemphasis on rights may not always be the best political strategy for promoting basic income;
• the compensatory nature of the transfers can help overcome objections rooted in the principle of reciprocity;
• piggybacking on a larger issue may open up fruitful opportunities for the promotion of basic income;
• one can conceivably stumble on a basic income under certain circumstances;
• Iran’s model of generating resources for a basic income is potentially applicable in many other countries as well, even those that may not have fuel resources of their own or subsidized fuel;
• the Alaska model of dividend payment may have greater long-term sustainability;
• there is normally a trade-off between universality and transfer amount in the context of a developing country;
• universal entitlement need not mean universal payment if the better off can be induced to forego their entitlement voluntarily;
• cash transfers, once in place, can develop a large constituency behind them, for both economic and political reasons; and
• public support of cash transfers could be strengthened if they also addressed widely acknowledged problems (for example, irrational consumption patterns).

For more on the subject, see
Hamid Tabatabai, ‘The Basic Income Road to Reforming Iran’s Price Subsidies,’ in Basic Income Studies, vol.6, no.1, June 2011, pp.1–24, www.bepress.com/bis/vol6/iss1/art3
‘Iran: A Bumpy Road towards Basic Income,’ in Basic Income Guarantee and Politics, Richard Caputo (ed.), New York: Palgrave Macmillan, forthcoming;
‘From Price Subsidies to Basic Income: The Iran Model and its Lessons,’ in Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World, Karl Widerquist and Michael Howard (eds.), New York: Palgrave Macmillan, forthcoming;
‘Reforming Energy Subsidies: The Iran Model,’ in Oxford Energy Forum, Oxford, United Kingdom: Oxford Institute for Energy Studies, forthcoming.