Analysis of the Welfare Effects of Eliminating Subsidies on Basic Goods: An Application of the GTAP Model

Objective: Payment of subsidy for any purpose causes deviation of production and investment due to disruption in the price system. The most important point about consumption subsidies is that due to the higher consumption of high-income households, their benefit from subsidies is also higher. Therefore, many economists consider the payment of public subsidies to increase the welfare of poor households to be very expensive. In many countries, this has caused the payment of consumption subsidies to be directed towards other social assistances, and in addition to reducing subsidies, it also helps to target them.

At the macro level, policies tend to increase the production of basic goods. The increase in the price of agricultural products in the short term, due to creating the necessary incentive for investment, improves the production technology and reduces the cost of production, and in the long term, it leads to a decrease in the price of basic goods and an increase in production. But the issue that should be considered in the transition from short term to long term is that the deprived class of the society gets hurt in this process. An increase in the price of basic goods causes an increase in the real income of producers, a decrease in the real income of consumers, more deprivation of poor groups and an increase in death among children in the short term. Therefore, although the removal of consumption subsidy in order to increase domestic production is a reasonable and logical goal, but finding an implementation way to prevent the harm of the disadvantaged groups such as the landless villagers and the urban poor of the society, whose high share of their income is spent on buying basic goods, emphasizing Increasing effective demand for basic goods through increasing employment and income should be considered. In this situation, short-term government interventions are necessary to maintain the purchasing power of this group. In development literature, paying subsidies for basic goods is a tool to address this issue. But dissatisfaction with the focus on the existence of public subsidy is increasing. This issue has caused the movement from general subsidy to targeted subsidy to be considered as a method of structural adjustment. In this regard, the important issue for the policymakers is that at what level, when and how to adjust the subsidy of basic goods without causing any chaos.

The issue of general government intervention is an effective and comprehensive method on the price of basic goods in most countries, and many studies have been conducted on these interventions.

As an oil-rich country, Iran has spent a significant part of its wealth in the form of implicit and explicit subsidies for basic goods and services, which has been reported as an ineffective policy both in terms of economic growth and income distribution. For example, the implicit subsidy of oil and natural gas in 2018 was more than 55 billion dollars. Also, the government has spent about 909,855 US dollars in 2008 for the procurement of wheat, flour and bread. These policies do not necessarily lead to poverty reduction by themselves and require the government to commit permanent costs due to the dependency of the poor.

Considering the importance of the issues raised, the motivation of the present study is to understand the welfare effects of removing subsidies for basic goods using the GTAP model for Iran.

Method: In the present study, experimental analysis and quantification of the results have been done using the GTAP model. The GTAP model is one of the types of CGE models, the software related to it (GEMPACK, RunGTAP) and the database are provided to the researchers by its designers. Due to the open source feature of the GTAP model, the model can be expanded and adapted based on research objectives. In this study, GTAP database version 10 is used. The data includes the social accounting matrix of 141 countries and 65 sectors. According to the purpose of the study, the data of the social accounting matrix can be aggregated, and GTAPAGG software is used for this purpose.

In the current research, the data has been gathered in the form of four sectors (dairy, rice, sugar and other foods) and two regions (Iran and other parts of the world) and the analysis has been done in two scenarios. The first and second scenarios are designed as follows:

First scenario: 50% reduction in the subsidy paid to consumption;

The second scenario: 100% reduction in the subsidy paid to consumption.

Results: The results showed that the 50% and 100% reduction of the subsidy paid on the consumption of domestic goods in all four sectors will decrease and increase the welfare of Iran and rest of the world, respectively.

Conclusion: Considering the further reduction of Iran's economic welfare in the second scenario, it is recommended to gradually remove the subsidy for basic goods. Also, as a suggestion for future studies, with the inclusion of the time variable in the model, it is possible to examine the welfare effects of reducing the consumption subsidy in a dynamic model.