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 Interestingly, the scheme did not emerge by design but by default: it was the by-product of an effort to reform an outdated system of price subsidies that concerned primarily fuel products.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.
by Guest Contributor | Jan 18, 2012 | News
Iran has had a nationwide basic income in place for the past year. It was introduced in the autumn of 2010 to replace inefficient subsidies of fuel and other commodities that had been in place for decades. The basic income was designed to cushion the blow of increased prices.
After a year of operation, the government is finding it necessary to lower the cost of the basic income and is considering means testing as one option. The plan would make the highest income-earners ineligible for the transfer. The number under consideration is 10 million people, or about 14 percent of the 74 million who currently receive the transfer.
The initial transfer amount (per person) was set much too high relative to the money saved from the elimination of subsidies, although understandable from a social and (short-term) political standpoint. That mismatch wreaked havoc with the finances of the program since nearly all of the net revenues generated from price increases went to households in transfers when their share was supposed to be 50 percent according to the Targeting Subsidies Law of January 2010. The other 50 percent was supposed to be divided between government spending and the business sector, which also suffered when the fuel subsidies were eliminated. The business sector got little of the 30 percent share allocated to them, and the government got none of the 20 percent share it had been allocated for improvement of infrastructure.
There is another problem that means testing might address. Whatever the level of funds available for transfer to households, there is a tradeoff between coverage and the amount of the transfer per person. If the rich are getting it, the lower income people will have less. That is the real dilemma now. The idea is to exclude some of the better off so that the amount of the transfer can be raised for the rest. Additional revenues are also expected from further cuts in subsidies in the second stage of the reform that is slated to begin in a few months.
The initial plan is to ask higher income earners to opt out voluntarily. Households with income above a couple of thousand dollars a month (a fairly large amount of money in Iran) will receive a letter from the government urging them to withdraw from the program voluntarily. No one knows how the recipients 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. The sad fact of the matter is that at the moment the funds going to the rich are entirely at the expense of those with lower income.
Hamid Tabatabai, writing for USBIG
For more information about the Iranian basic income go to these links:
https://www.bepress.com/bis/vol6/iss1/art3
https://presstv.com/detail/220308.html
https://www.dolat.ir/NSite/FullStory/News/?Serv=0&Id=209885
by Karl Widerquist | Jun 8, 2011 | News
As reported in past issues of this Newsletter, Iran has recently started distributing a small basic income to all citizens who apply. The program replaces an efficient system of subsidies on commodities such as fuel and food. Rachel Godfrey Wood, writing for the International Institute for Environment and Development, has taken notice of the program and suggest that it could be a model for getting other developing countries off subsidies. Her article is online at:
https://www.iied.org/sustainable-markets/blog/iran-sleepwalking-towards-universal-income-grant
by Yannick Vanderborght | Nov 9, 2010 | News
A report by Hamid Tabatabai
The concept of a Basic or Citizen’s Income is virtually unknown in Iran. In nearly three years of discussion and debate over the government’s new economic reforms, there has been no mention of it at all in political, academic or media circles. And yet, the country has just launched a nationwide cash transfer programme that has the hallmarks of a Basic Income in disguise. Some 60.5 million Iranians, or 81 percent of the population, have just had the first payment of 810,000 rials (about US$80) per person deposited in their bank accounts. The payments will be made every two months, involve no means testing, and are unconditional. They are also likely to double in amount over the next few years as implementation proceeds. The remaining 19 percent of the population opted out of the programme voluntarily, mainly because they do not need the money.
Remarkable as this is, the novelty does not end there. The tens of billions of dollars involved each year will not come from oil exports, or from government coffers. The transfers will be financed entirely through the higher prices the nation will henceforth pay for a variety of basic goods and services — mainly fuel products — that have been massively subsidised for decades. (Until now petrol has cost US$0.10 a litre and diesel fuel under $0.02. The same applies to natural gas, electricity and water charges, and bread.) Such subsidies have benefited the well-off far more than those with modest incomes (70 percent going to 30 percent of the population) and resulted in wasteful consumption of energy and foodstuffs, inadequate investment in new technology, and environmental pollution, not to mention smuggling to neighbouring countries. In order to put an end to this inefficient and unfair system, the “Targeting Subsidies Law” of earlier this year mandates the gradual phase-out, over five years, of nearly all implicit and explicit price subsidies, to be replaced with regular cash transfers to households and various economic and social sectors. The scale of price increases are not yet known (as of mid-November 2010) but they are likely to be huge, in some cases severalfold. Official announcement is expected towards the end of November with new prices coming into effect immediately.
Interestingly enough, the universality and uniformity of cash grants came about without anybody really pushing for them or even wanting them, either from the government side that put forward the original plan, or from those opposed to the plan in the parliament who wanted it modified, if not scrapped. The intention was firmly to target the cash transfers on the less well-off sections of the population, the haggling being over whether the beneficiaries should be the lowest two, or five or seven deciles of the population on the income scale. The idea was also to pay more to those with lower incomes, in the interests of social justice. If in the end it was decided to pay the same amount to everyone who bothered to register, it was only because a massive exercise in means-tested targeting (over 17 million household questionnaires were filled out and analysed) turned into a fiasco as public protests mounted over the results. The principle of equal payment to all forced its way in because it just made sense under the circumstances. There could hardly be a more dramatic vindication of Philippe Van Parijs’s characterisation of Basic Income as a “simple and powerful idea”.
To be sure, Iran’s ‘cash subsidy’ (that’s the official designation) falls short of a fully-fledged Basic Income grant as commonly understood. The entitlements of all household members go to the head of the household alone, not to individual members, even if adult. There is no word on the duration of the programme, although it should in principle continue as long as Iran is able to produce oil for its domestic consumption. Means-tested targeting has not been abandoned altogether and may be resurrected if the government decides at some point that it can do a better job of targeting than its last attempt. The rights-based underpinnings of the Basic Income have no place in the current Iranian discourse on cash grants. The payments are not regarded as ‘income’ to which the citizens are entitled by right, but as another type of subsidy to compensate for the loss of price subsidies (though whether this makes any practical difference is an interesting question). Neither do they come anywhere close to a decent subsistence income (the US$200 of a family of five per month is about two-thirds of the monthly minimum wage). They also exclude more than two million Afghan and Iraqi refugees who have been living in Iran for years, sometimes decades, and will now have to bear the full brunt of price hikes. And last but not least, once price rises go into effect in the days ahead, and if inflation gets out of hand due to mismanagement, there is genuine fear that the whole edifice might come crashing down.
On the other hand, it might be argued that the hardest obstacles towards a national Basic Income have already been overcome. The programme is enshrined in law. The payments are universal (except for those rich enough to forfeit their right by simply not signing up). Funding is assured and looks destined to continue in the medium term. And if the reforms succeed even partially in achieving their stated objectives of rationalising consumption patterns, boosting investment and efficiency, redistributing incomes in favour of the have-nots and reducing poverty, their future should be fairly secure. The continuation of the programme will also allow its shortcomings to be identified and put right, particularly if this enormously important shift in social policy is subjected to rigorous, comprehensive and continuing impact evaluation as it unfolds and progresses in the months and years ahead.
The replacement of price subsidies by a cash transfer system of unprecedented scope and scale has placed Iran in the forefront of all countries in advancing towards a nationwide Basic Income. The fact that such a transition takes place first in a developing, Middle Eastern, Islamic state, not in a developed country in Northern Europe as many had presumed, underlines the relevance of the concept of Basic Income for a broad range of countries. The specificities of the Iranian experience should of course not be ignored. It is in large part the combined availability of domestic fuel resources and an exceptionally distorted pricing policy that has made it possible, indeed almost inevitable, for a de facto Basic Income to emerge as part of the solution. But the model may still have some relevance for other countries, in particular mineral producing nations. There may also be scope in some countries with large subsidy bills to explore the feasibility and wisdom of rerouting subsidies to fund a Basic Income, without additional taxation. Iran’s experience may hold some lessons of wider applicability, if they are properly drawn and are convincing.
For more on the subject, see Hamid Tabatabai, “The ‘Basic Income’ road to reforming Iran’s subsidy system”, in Basic Income Studies, forthcoming, or contact hamtab@gmail.com.
by Guest Contributor | Aug 12, 2010 | News
By Hamid Tabatabai
Iran is on the verge of becoming the first country to introduce a basic income. This dramatic development is happening with little international attention and for reasons that have little to do with the international discussion of basic income.
Iran is trying to get rid of a horribly inefficient system of implicit fuel subsidies. As one of the world’s largest oil producers, the Iranian government makes about $70 billion per year from the oil exports, but it loses an estimated $100 billion dollars per year (30% of its GDP) by directing its state-owned enterprises to sell various products, mostly gasoline, far below their international price. Thus, Iran’s system of subsidizing the consumption of fuel at home actually costs more than Iran makes exporting fuel abroad.
This system of subsidies is one of the main benefits Iranians receive from their government, and many Iranians have grown dependent on cheap fuel and other commodities. The government cannot get rid of the subsidies without providing something else for the people to cushion the blow. After several years of debate, basic income has emerged as the only realistic form of compensation for the withdrawal of subsidies.
Thus, basic income has arrived in Iran through the backdoor, sidestepping most of the issues usually discussed in the international debate. The money will come from eliminating obviously inefficient subsidies. The money should go to everyone, because everyone will suffer from the loss of the subsidies, and everyone has equal claim to own the state enterprises. The money can’t be targeted because the government doesn’t have the ability to collect the necessary information to ensure that targeting is accurate.
According to the new law, the government will use half of the increased revenue for other government services, and it will distribute the other half of the money directly to the people as a grant to all who apply. When fully phased in, that amount has the potential to provide a basic income of $60 per person per month ($720 per year) or more. This figure is still well below the poverty line, but it is a very significant amount. Iran has a per capita income of only $3,500 per year, less than one-tenth of Alaska’s per capita GDP of $42,000. Nearly 70 million people will be eligible for the Iranian basic Income, more than 100 times the number who receive the Alaska dividend. Considering also the enormous difference in the cost of living in the two places, it is clear than a $720 basic income in Iran will be more significant than the existing $1000 to $2000 dividend in Alaska.
There are drawbacks to the current plan. Although every citizen of Iran is entitled to the grant, the money will be paid to “heads of households,” who are overwhelmingly male. Thus, some men may have the power to keep their wives, children, and other dependents from benefiting from the grant. Also, foreigners living in Iran (mostly Iraqi and Afghan refugees) will not receive the grant even though they will suffer as much as other residents from the loss of the subsidy.
The phase-in is scheduled to begin sometime between September 2010 and March 2011. There is no clear word on how long the phase-in will take. The law has been passed; more than 90% of Iranians have already applied for their grants, but the Iranian political system is chaotic, and there could yet be substantial changes. We can’t be sure exactly what will happen until it happens. We can only wait and see.
The source for this article is “The ‘Basic Income’ Road to Reforming Iran’s Subsidy System,” by Hamid Tabatabai, paper presented at the 13th International Congress of the Basic Income Earth Network (BIEN), June 30 – July 2, 2010. There is much more to this issue than I have had room to discuss here. For more information, or for a copy of that paper, please contact Hamid Tabatabai at hamtab@gmail.com.
