Welfare effects of alternative targeted food subsidy programs in Iran

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 %.