Export constraint and domestic fiscal reform: Lessons from 2011 subsidy reform in Iran

This paper uses the 1987-2011 Household Budget Surveys from the Statistical Center of Iran consisting of 293,953 observations, coupled with the price data from the Central Bank of Iran, to estimate the structure of demand for goods and services in urban areas of Iran. The estimation procedure assumes a Quadratic Almost Ideal Demand System (QUAIDS) introduced by Banks et al. (1997). It then uses the estimated demand system to study the implications of the removal of the massive subsidies on energy and basic foodstuff that were in place in Iran at the end of 2010. It examines the changes in the economy's consumption patterns, income distribution, private and social welfare, and the environment. The paper's key contribution is to recognize and study how the results of this domestic reform depended on international trade barriers faced by the country. It shows how a seemingly welfare improving policy in the absence of export restrictions turned out to be quite the opposite-at least for the current generations of Iranians.