Role of IMF-backed elimination of universal social protection in protests

Widespread protests in Iran have followed continued decline in real incomes in the country. Like the ITUC, several media have identified declining living standards and plans that would further worsen these as the root cause of the protests. For example, a New York Times article stated: “The initial catalyst for the anger appears to have been the leak by President Rouhani last month of a proposed government budget [that] proposed to end cash subsidies for millions of citizens, increase fuel prices and privatise public schools.”

29_December_2017_protests_in_Kermanshah,_Iran

However, few media reports on the protests have pointed out that the IMF had urged the country to adopt and implement some of these unpopular measures. The Fund did so most recently on 18 December after its mission completed an annual Article IV consultation with Iranian authorities. (It should be noted that Iran has not borrowed from the IMF since the early 1960s, but the government appears to have made efforts to regularise its relations with the Fund and comply more closely with its advice since the 2015 nuclear agreement.)

The unpopular measures that will affect most Iranians’ living standards include the end of a universal cash transfer programme introduced in 2011 to compensate for the elimination of subsidised fuel. An IMF analysis last February stated that the universal cash transfer scheme had contributed to a significant drop in income inequality, lowering the Gini coefficient by 2¾ points. However, because the transfer has not been increased to keep up with inflation it has lost half of its value since 2011.

Despite the decline in real terms, the IMF paper proposed that the cash transfer programme should no longer be universal but rather made selective by “targeting transfers more specifically at the poor” so as “to create fiscal space”, i.e. reduce the government deficit. It estimates that in the first year, targeting would result in savings equivalent to 0.7 per cent of GDP.

In last year’s Article IV consultation staff report for Iran, also released in February, the IMF endorsed targeted rather than universal cash transfers because of the need free up funds to clear public sector arrears and finance bank recapitalisation, among other needs.  However, it admitted that “administrative difficulties” would make it difficult to identify who should continue to receive the benefit and who should not. Experience in other countries has shown that the proxy means tests to target this kind of assistance typically exclude 50 per cent or more of those who should be eligible by virtue of their income level (see this Development Pathways paper).

Last year’s Article IV report also called for increased tax revenue, notably though the value added tax, a source of revenue that typically has a regressive impact, i.e. the less one earns, the more one pays as a proportion of one’s income. The report observes that “the VAT rate remains low despite its increase from 3 to 9 per cent” and is critical of the fact that in Iran “direct taxes [namely personal and corporate income taxes] still account for almost half of total tax revenues”.

The IMF’s latest Article IV mission to Iran, completed in mid-December barely two weeks before the protest began, expressed enthusiastic support for elimination of the universal cash transfer. “The IMF welcomes the reform of the universal cash transfer system to target income support to the poor in the proposed 2018/19 budget…. The reform of the universal cash transfer scheme to target the poor secures much needed fiscal space.”

Peter Bakvis is the director of the Washington office of the International Trade Union Confederation (ITUC), which represents 181 million members in 163 countries. His duties include preparing reports on IMF and World Bank policies as they affect labour conditions, employment and social programmes. Prior to assuming this position in 2000, he was employed for over 20 years with the Confédération des Syndicats Nationaux, a trade union organisation in Quebec.

Peter Bakvis is the director of the Washington office of the International Trade Union Confederation (ITUC), which represents 181 million members in 163 countries. His duties include preparing reports on IMF and World Bank policies as they affect labour conditions, employment and social programmes. Prior to assuming this position, he was employed for over 20 years with the Confédération des Syndicats Nationaux, a trade union organisation in Quebec.

The IMF’s communiqué follows up on earlier IMF recommendations and supports further measures to create even more fiscal space, notably by removing exemptions to the VAT. The communiqué also calls for a yet-to-be-defined pension reform, again with the objective of reducing public expenditures. It is safe to assume that no one among those participating in the recent protests was consulted by the IMF mission before it endorsed Iran’s 2018/19 budget and issued recommendations for its economic and social policies.

These types of policies have been promoted by the IMF in many other countries. An ILO-South Centre-IPD review of more than 600 IMF country reports in The Adjustment Decade 2010-2020: A Review of Austerity Trends in 187 Countries shows that IMF advice focuses on: (i) eliminating universal subsidies, including on energy, agriculture and food products (in 132 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 130 countries); (iii) targeting of safety nets, such as in Iran (in 107 countries); (iv) pension reforms (in 105 countries); (v) labour market reforms (in 89 countries); and (vi) healthcare reforms (in 56 countries). Many governments are also considering revenue measures that can adversely impact vulnerable populations, mainly through introducing or broadening consumption taxes such as VATs (in 138 countries), as well as privatising state assets and services (in 55 countries).

Contrary to public perception, austerity measures have not been limited to Europe; in fact, many of the principal adjustment measures feature most prominently in developing countries. These measures are not only unpopular, as the protests clearly demonstrate, they are also not conducive to economic recovery and the achievement of the Sustainable Development Goals. Policymakers should be aware of the high human and developmental costs of poorly-designed adjustment strategies and consider alternative policies that support socio-economic development for all.

2 Responses to “Role of IMF-backed elimination of universal social protection in protests”

  1. Very insightful article. The advice given by the Bank and the IMF in various countries to replace subsidies with poverty-targeted cash transfers seems to reflect a very poor grasp of basic political economy. Fuel subsidies are usually regressive and I’m sure most of us would endorse them being replaced by more progressive social policy. However, they are universal in principle, in that any citizen can potentially benefit from them (of course, only if they purchase fuel). On this basis, the logical path to move away from fuel subsidies would surely be to gradually replace them with UNIVERSAL social policies that maintain this principle, yet have a progressive distribution. The wealthy in society will inevitably get less in this scenario, but will still be part of the system, and most in society will likely get a net benefit.

    The idea of replacing fuel subsidies with poverty targeted transfers, on the other hand, is politically problematic. Given that most poverty-targeted transfers only target a poorer minority of the population, moving to this approach means a large share of the better-off and (more importantly) those on modest incomes will be set to lose. I can’t think of a better way of undermining a government’s political base.

    The irony here is that it seems Iran’s government understood this dynamic quite well with the introduction of the universal cash transfer in 2011. Indeed, I’ve not yet seen many successful moves from fuel subsidies to progressive social protection, partly as countries seem to get lost in the problematic logic of the Bank and IMF. Let’s hope Iran sees the error of its ways in backtracking on universal social protection.

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