On May 11, 2007, at 7:50 AM, Yoshie Furuhashi wrote:
> In other words, after the reduction of inequality in the early phase
> of the revolution, neoliberal reforms began, with the Rafsanjani
> administration, which made the inequality of individual earnings rise
> sharply, and if the overall inequality has been stable despite that
> rise, it is only because of the redistributional impact of the
> government's expenditures on entitlements, social programs, and the
> like. The contours of these changes are important to understand.
What an interestingly selective rendition of this paper you present! And your picture of Rafsanjani is at odds with the author's.
Some excerpts:
The 1979 Revolution broke a twenty-year long period of rising living standards, making the post-Revolution economic decline seem like an unprecedented disaster. During 1960-77, GDP per capita grew at 6.6 percent per year, allowing it to treble in just one generation. By 1988, after the post-Revolution chaos, the 1980-88 war with Iraq, and the oil price collapse of 1986 had worked their way through the economic system, GDP per capita was only one-half of its 1977 level. Fifteen years later economic growth had brought incomes back to their pre-Revolution peak.
From the viewpoint of the national economy, the extent of economic decline is breathtak- ing, especially considering the rapid pace of growth that it reversed (Figure 1). Reversals of fortune of this magnitude in such a short period are rare in modern history.
[After laying out how the poor have done rather well since the end of the miserable 1980s, he comments:]
[T]hese results question the suggestion that pro-market reforms during the Rafsanjani and Khatami administrations left the poor behind, and thus contributed to the reformists' electoral defeat in June 2005. As it happens, the largest declines in poverty coincided with periods of reform, suggesting that, to the contrary, reforms may have been good for the poor. The critics often point to rise in poverty during the mid 1990s as evidence that the pro-market reforms (often labeled as structural adjustment to give it a neo-liberal twist) were anti-poor. But poverty actually fell during the first Rafsanjani adminstration in 1989-94 and only rose after market reforms stalled, in part in response to the external debt crisis in 1993.
[The poverty measures are of *absolute*, not relative poverty. So at the beginning of the section on inequality, he observes:]
The findings show that the Islamic government's success in poverty reduction does not extent to inequality. Poverty reduction, while an important achievement, is unsurprising when oil prices are rising and the economy is growing. Reduction in inequality is more complicated for inequality may worsen at times of growth, as it happened in 1970s Iran, when rising oil revenues seem to have favored the rich over the poor. Since 1984 inequality has been quite stable. The oil boom of 2000-04 has actually reduced inequality somewhat, which is significant for the populism thesis, and as contrast to the oil boom of the 1970s.
Economic growth in China and India has reduced poverty but has also made the distri- bution of income less equal. This is in line with Kuznets' famous generalization (Kuznets 1955, Milanovic 1994, Deininger and Squire 1996) which suggests that during the early stages of economic growth inequality worsens before it improves. The dynamic of Kuznets' curve depends on economic structure. In oil exporting countries, in addition to changes in the distribution of productivity, the dynamics is related to access to the oil rent, which is in turn Economic growth under these circumstance may cause inequality to rise if related to the distribution of political power. The Islamic Revolution brought about a large shift in political power in Iran but there is no evidence that the distribution of political power changed as much. Even the two presidential elections in 1997 and 2005, which seemed to entail significant shifts in political power, may have been more of a reshuffling of those in power than a different distribution of power. The remarkable stability of inequality of income and expenditures in the last twenty five years lends credence to these conjectures.
[...]
To summarize the results on inequality, the evidence presented in this section shows that on one hand the last ten years of economic growth, and even the oil boom in its latter half, have been good for equality as they have lifted all individuals more or less equally. On the other hand, in contrast to poverty, there has been little progress toward greater equality in thirty years of revolutionary and redistributive policies. At the household level, the Gini index in 2004 is about the same as it was in 1971-72. At the individual level, too, we observe a fair degree of stability for the last 20 years for which we have micro data. The revolution's impact was merely to reverse the increase in inequality that occurred in the late 1970s. Apparently, overall inequality in Iran has not been only resilient to policy changes but also to the revolution itself. A possible lesson from this observation is that, unlike poverty, inequality is more structural and therefore more resilient; a social revolution could not affect it, much less incremental policy. There is no doubt that the Revolution displaced many from their place on the economic ladder, sometimes violently, but perhaps because the economic ladder on which individuals must in the end find their place remained the same, the distribution did not change. Different people stand on the higher rungs of the ladder but the ladder itself has changed little.
[...]
The timing of declines in poverty, economic reform, and increases in oil income offer additional lessons. There is little evidence to support the thesis that economic reforms during the Rafsanjani and Khatami administrations have left the poor behind and have thereby contributed to a populist backlash in the 2005 presidential election. In fact, this period coincided with substantial decline in poverty. It is difficult, however, to decide on the extent to which reforms were actually responsible for decline in poverty. While a number of policies favored the poor, it may have been increases in oil incomes that played the critical role in poverty reduction. These policies ranged from subsidy for food, energy, and medicine, to investment in electricity and water, to health and family planning. More detailed analysis of the data is needed to evaluate the effects of specific programs or policies on poverty.
If the rise of populism is not a reaction to rising poverty and inequality or economic reform, what political lessons can reformers derive from recent history? Immediately after the 2005 presidential election, many blamed reformers' electoral defeat on their focus on democratic reforms instead of economic justice. Michael Ignatieff described the dilemma felt by reformers in Iran as follows: "The political task ahead for the liberal thinkers of Iran is to find a program that links human rights and democracy to the poor's economic grievances."25 If the assumption that neglect of the poor fueled popular discontent lacks empirical support, the change in focus suggested by Ignatieff may not be the cure. The right political strategy depends on a correct identification of the root causes of economic discontent in Iran. The experience of the last three decades provides several reasons why various segments of the society should feel disappointed and dissatisfied. One obvious reason is faulty sub jective comparisons. Dissatisfied Iranians who complain to visitors and reporters conveying the impression of living in desperate times, are unaware of how Iran compares to other countries in terms of income and poverty. A very different impression was provided above in Table 1. Most Iranians now have but a foggy memory of life before the Revolution. Lacking objective criteria to compare the quality of life in present day Iran with that in the 1970s, many depress themselves by using for comparison either an imaginary pre-Revolutionary Iran or some present day advanced country which a distant relative calls home.
[...]
There is also the interesting possibility, suggested by the polarization literature (Duclos, Esteban, and Ray 2004), that Iranian society may be more polarized even though it is more egalitarian. The poor are not only better off now but they are also more similar to each other–all have basic education, access to basic services, refrigerator and television. At the same time, as a group they still remain distinct from other social groups, perhaps on cultural grounds such as attachment to western ideas and way of life. Thus polarization may have increased along social lines while economically the society has become more equal.
Finally, economic growth in a distributive society relying on oil rents, especially one also imbued with a deep sense of economic justice, such as Iran's, may create envy and frustra- tion. In such an economy individual incomes may increase not only with higher productivity but also as a result of better rent seeking. Lack of economic transparency, in part inherent to the rent seeking process, exacerbates envy. Most Iranians who express dissatisfaction with their economic system seem to have exaggerated ideas about the size of oil income and are suspicious of how it is distributed. Wild speculations about accumulation of wealth by Iranians inside and outside Iran is indicative of how little information exists about the size and the distribution of the oil rent in Iran.26 Not surprisingly, corruption rather than reliance on markets is the main reason why Iranians suspect the oil money has not found its way to their dinner table, to paraphrase Ahmadinejad's effective election slogan. For decades large oil rents have blurred the connection between individual productivity and income. Because rewards appear detached from productivity, individuals lack a firm basis on which to build their aspirations and expectations. The faster the rise in average incomes, the larger they infer must be the pie that is being divided, and greater the possibility that one's own share of the bounty is not large enough. Reduction in poverty would seems less impressive if the poor believed that their gains were small relative to others. Under these circumstances, economic growth, even when it lifts all incomes evenly, may create social envy and resentment and even lead to political instability. It is a remarkable but little noticed fact that significant popular political shifts in Iran, first in late 1970s and again in 2005, have taken place during economic booms. One possible explanation for such shifts toward populism is the understandable tendency of the lower classes to turn to a leader with a modest personal fortune (Khomeini in 1979 and Ahmadinezad in 2005) at times when the state is in a position to dispose of a large amount of oil money. Lack of transparency in the Iranian economy in general, and about how the oil rent is distributed in particular, thus fuels envy and complicates politics precisely at times when the economy is posed for rapid growth.
These possibilities suggest the need to examine and test more complex reasons for the recent shift to populism in Iran against data than widespread poverty and increasing inequal- ity. Abandoning economic reform by going back to the policies of the 1980s–re-introducing price controls and spending even more on subsidies–may be the wrong lesson to learn from the setback suffered by reformists at the polls in 2005. At this point we simply do not know enough about the links between economic change and social and political change in Iran to draw such conclusions.