Assessing effects of alternative food subsidy reform in Iran

Abstract

The food subsidy programs and its long-term effects have emerged as major developmental issues in many developing countries. The programs might increase social welfare to individuals but they pose both an unnecessary burden on the public budget and are economically inefficient because their benefits are often not received by the poor. Furthermore, due to improper targeting, a large part of food subsidies is “leaked” to high-income people. This study aims to investigate the effects of alternative food subsidy reforms on households’ welfare and government expenditure in Iran. For this purpose, computable general equilibrium (CGE) model was applied. The scenarios consist of, gradual omission of subsidy during 3 and 5 years period and instant complete omission of food subsidy. The results indicated that in these polices government expenditure decreases by 5.8%, and resulting to decrease in import and export of agricultural and non-agricultural goods, but decreases in import exceeds the export reduction. In addition, results showed that the welfare of households’ decreases for all scenarios, since decreases in urban households is greater than as rural households. Furthermore, between quintiles groups, decreases among welfare in high income quintiles are greater than the lower income ones groups. Based on the result, it is recommended to implement the food subsidy reform in 5 years period and targeted to lower income segments of the society. The most important policy implication of this study is the reallocation of food subsidy gradually among lower income quintiles groups.