Why Study Inequality?
In a recent survey of 1767 leaders from academia, business, government, and nonprofits, the World Economic Forumâs Global Agenda Council found increasing income inequality to be the top global concern in 2015, followed by increasing joblessness, and lack of leadership across countries (WEF 2015). Inequality indeed matters and there is a rich literature investigating its relationship with economic development. Okun (1975) argues that in pursuing increased economic efficiency, trade-offs in terms of increased inequality may be necessary to facilitate capital accumulation and technological innovation and encourage economic agents to invest in education and health. There is a larger body of literature, however, that highlights the long-term negative effects of increasing income inequality on sustainable and inclusive development. In their study of 174 countries, Berg and Ostry (2011) contend that countries with lower income inequality enjoy higher growth rates in the long run, after controlling for market structure and other institutional factors. BĂ©nabou (1996) also shows that economic growth in countries with high income inequality is slower than economies with lower levels of inequality. It has been further argued that inequality is associated with business recessions and economic crises. For example, income inequality and the ratio of debt to income saw rapid increases before both the Great Depression of the 1930s and the 2007â2008 Great Recession (Kumhof et al. 2015). By increasing concentration of income, inequality can reduce aggregate demand in an economy, leading to recession. This is mainly due to the lower marginal propensity to consume associated with the wealthy in comparison to middle- and lower-income groups (Carvalho and Rezai 2014). In explaining the global financial crisis of 2007â2008, deepening income inequality has indeed been highlighted as a major culprit (see Stiglitz 2012). Inequality affects the poor by reducing their ability to invest in their health and human capital formation (Galor and Moav 2004; Aghion et al. 1999). It also influences social mobility across generations, as childrenâs future earnings are significantly affected by their parentsâ earning profiles (Corak 2013). Finally, it has been shown that inequality damages economic growth through intensifying conflicts and political stability. Increasing inequality reduces the opportunity cost of engaging in conflicts (Lichbach 1989).
Aside from the effects of inequality on socioeconomic variables, there is also a relatively extensive literature examining inequalityâs drivers. What are the possible causes of inequality? Part of the literature investigates the role of socioeconomic and political factors behind changes in inequality across countries. One key factor is education. Enhancing education and skills can increase potential access to more promising job opportunities, higher income, and economic security. An educated generation is increasingly able to cope with technological change that can potentially lead to rapid economic growth. Higher levels of education influence occupational choices and signal higher productivity to the job market (Dabla-Norris et al. 2015). Yet, the net effect of education on inequality depends on the degree of access to quality educational opportunities and the rate of return on education (see Mincer 1958; Becker and Chiswick 1966). Globalization, with increasing trade openness and higher degrees of foreign direct investment (FDI), is also probed in the literature as a potential driver of inequalityâyielding mixed results. Expansion of trade can increase demand and wages for abundant lower-skilled workers in emerging economies and raise purchasing power (Dabla-Norris et al. 2015). This indicates that globalization is negatively associated with income inequality. However, there are also studies that underscore the negative consequences of globalization and trade openness. Financial globalization in the form of higher FDI may act to increase income inequality. When FDI is concentrated in sectors with skill- and technology-intensive activities, the effect can be a widening wage gap in an economy (see Freeman 2010). Financial deepening, in the form of greater liquidity in the economy, can increase access to funding opportunities for households and firms. Combined with an inclusive financial market, financial deepening might, at first glance, be expected to lead to decreases in income inequality. However, Greenwood and Jovanovic (1990) suggest a nonlinear relationship between financial deepening and inequality. At earlier stages of financial development, we may observe a worsening of income distribution. Yet, after a certain threshold, financial development may benefit most of the population and lower income inequality. This said, Claessens and Perotti (2007) show that those who have more assets and capital also have greater access to financial markets. Financial deepening in such societies implies higher growth in the skill premium and potentially higher returns to capital.
Why Study Inequality in Post-revolutionary Iran?
Over the past half a century, Iran has experienced a series of momentous political economic events with significant implications for its income distribution and social development. Thanks to increasing oil revenues, between 1960 and 1977, Iranâs GDP per capita grew at impressive rates that averaged 9.6 percent per year (Amuzegar 1993: 5). An undesirable consequence of rapid economic growth was a sharp increase in inequalityâas suggested by the rise in the Gini coefficient as well as the ratio of the richest decile to the poorest decile (CBI 2015). Inequality reached its peak in 1976âwith a Gini coefficient of 0.502. However, it started to decline two years before the 1979 Revolution, possibly due to âtrickle downâ effects of large investment expenditures directed at the poorer sections of the society (Salehi Esfahani and Pesaran 2009).
The main message of the 1979 Revolution incorporated the goals of social justice, addressing the plight of the downtrodden, and representing the lower social strata in the government. It also included the aims of reducing the countryâs overreliance on oil revenues and self-sufficiency. The Revolution was followed by an eight-year war with Iraq, postwar privatization and economic liberalization initiatives carried out under the Rafsanjani and Khatami administrations, the ascendance of a populist economic platform under the Ahmadinejad administration, and most recently the lifting of energy and financial sanctions in January 2016 under the Rouhani administration.
In the immediate aftermath of the 1979 Revolution, an idealistic social justice agenda was adopted by the new establishment. The Constitution of the Islamic Republic requires the government to provide adequate shelter, employment, and means of subsistence for all citizens. The socioeconomic objectives of the Constitution also extend to uprooting regional imbalances and especially tending to rural populations. Major activities undertaken to fulfill these promises over the last three and a half decades have included the provision of basic services in rural areas as well as inner-city low-income neighborhoods, extensive subsidies on various commodities and amenities, direct cash transfers, and land allocations for housing. At the dawn of the post-revolutionary period, Ayatollah Ruhollah Khomeini, the undisputed leader of the Revolution, decreed the establishment of several large foundationsâsuch as Bonyad-e mostazâafan (Foundation of the Downtrodden), Bonyad-e shahid (Foundation of the Martyrs), and Komiteh-ye emdad-e Emam Khomeini (Imam Khomeini Relief Foundation). The creation of these foundations was financed by large-scale confiscation of property belonging to those associated with the ancien rĂ©gime as well as through donations. These extra-governmental institutions have been active in providing a wide range of social services to their target groups. For example, the Imam Khomeini Relief Foundation, established just 22 days after the victory of the 1979 Revolution, was mandated to uproot poverty, support the deprived, and provide relief to the oppressed. Apart from claiming a share of the governmentâs annual budget, this para-statal organization funds its programs through receiving religious taxes as well as from donations deposited in charity boxes installed at every corner. 1
A major post-revolutionary episode with serious economic consequences was the eight-year Iran-Iraq War. The war period, which lasted through August 1988, was associated with significant reductions in per-capita incomes and high rates of subsidies provided by the state to control inflation (Nikou 2010). 2 The war inflicted tremendous damage on the Iranian economy. Privatization and economic liberalization efforts spearheaded by the Rafsanjani administration after the war diluted some of the earlier social justice goals in favor of new economic opportunities, a major part of which was reaped by individuals and groups with tight political connections to the establishment (see Klebnikov 2003; Bjorvatn and Selvik 2008).
The most important features of the subsequent Khatami administration included efforts toward international détente as well as political and cultural reforms. Yet, lack of adequate attention given to economic issues as affecting the lower-income strata of the society arguably had damaging political consequences for the reformists (Farzanegan 2009b). Specifically, neoconservative forces grabbed the opportunity to present their own alternative, new in one sense and associated with the 1979 revolutionary slogans in another (Ehteshami and Zweiri 2007: 46).
Oil-income redistribution under the populist administration of Ahmadinejad was carried out in a number of forms. One was through the establishment of Sanduq-e mehr-e Emam Reza (Imam Reza Charity Fund) in 2005, officially claimed to be used to help young people secure jobs, afford marriage, and purchase homes (see Dolat-e Bahar 2014; Farzanegan 2009b). Another program under the title Saham-e edalat (Justice Shares) was implemented under the Ahmadinejad administration to distribute shares of government-owned companies among lower-income individuals. Other initiatives included the creation of additional funds for employment generation and rural development as well as a banking account scheme facilitating the marriage of young people. Yet, in November 2008, a group of 60 Iranian economists voiced their concern about the negative consequences of these populist programs by ironically highlighting the increasing inequality as one of their side effects as well as lack of economic growth, increasing unemployment, runaway inflation, and a crisis in the capital market (Deragahi 2008). Internatio...