Is Iran sleepwalking towards a universal income grant?

Blog by
2 December 2010

Almost unnoticed by the world, Iran has moved towards the adoption of a basic income grant to distribute money from its oil industry directly to its citizens. This could be a good example of how distorting fossil fuel subsidies used in many developing countries could be repealed without adversely impacting upon the poor. Furthermore, the outcomes of this policy could have a wider impact on the way rents from natural resources are used - allowing households to choose how to spend profits from resource extraction.

There is an ever increasing consensus in development and environmental circles that most subsidies for fossil fuels are bad. Firstly, they encourage high carbon dioxide emissions. This is more of an issue in developed countries, where tax breaks and incentives to large fossil fuel companies exceed those given to renewable energy. In developing countries, though, subsidies for fossil fuels are also significant – they exceeded $400 billion for the top 20 non-OECD countries in 2008.

Such subsidies are usually aimed at reducing the price of consumption, and are generally framed as measures to reduce costs for the poor. The extent to which they actually achieve this goal, though, is highly debatable. Broad subsidies of such ubiquitous goods are not specifically targeted at the poor. Because the rich consume more, the majority of benefits of subsidisation accrue to them.

Getting off subsidies in Iran

But even though they are environmentally harmful, inequitable, and costly, fossil fuel subsidies are notoriously hard to remove. Doing so can indeed harm the poor, and perhaps more importantly, the interest groups that have benefitted the most from them. Historically, efforts to remove such subsidies have frequently been halted in the face of violent protests.
Iran, however, might just be drifting towards its own solution. As a paper by Hamid Tabatabai explains, discussions about ‘compensating’ citizens in a planned removal of fossil fuel subsidies have gradually taken the country down an unexpected road - towards a universal basic income transfer. Although this was never intended by proponents of the reform, they appeared to have sleepwalked into a social policy which could have profound lessons for the world.

The implications of this have not been lost on Paul Segal of the University of Sussex, who has argued that if rents from resource extraction were paid directly to citizens in the form of a ‘resource dividend’, the impacts in terms of poverty and inequality reduction would be substantial. If applied across developing world countries, the number of people living on under $1 a day would be cut by 27-66 per cent, while countries like Russia, Egypt, and Iran itself would be transformed into ‘highly egalitarian countries’.

Cash transfers galore?

Beyond the suggestion that there´s far more about Iranian politics than immediately meets the eye, the really important conclusion is that cash transfers (in this case unconditional and untargeted) have again been identified as a viable policy tool. As previously noted on Due South, cash transfers could be a crucial tool for improving the capacity of the poor to adapt to climate change.

And it doesn´t stop there. In developed countries, it seems increasingly likely that policies to genuinely reduce greenhouse gas emissions will only be politically viable if the majority of the finance generated by governments is returned directly to citizens to protect them from rising energy costs.

Whether the goal is poverty reduction, educational attainment, food security, subsidy reform, climate change adaptation or mitigation, there is increasing evidence that cash transfers need to be recognized as one of the most potent tools at policymakers’ disposal.