Oil Revenue Uncertainty and Income Distribution Inequality: An Emphasis on the Role of Sanctions in the Iranian Economy

Document Type : Research Paper

Authors

1 Assistant Professor, Department of Economics, Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran

2 Ph.D in Economics, Faculty Member of Management and Accounting Department, Ramsar Institute for Higher Education, Ramsar, Iran

Abstract

Introduction: Income distribution is one of the economic variables in the field of macroeconomics whose improvement is always a concern of governments. Income distribution shows the share of each member of the society in national income. The most important results of an increase in income inequality are increased rents and corruption, reduced entrepreneurial rate in the society and increased size of government. Also, the existence of a large traditional sector with low potential for modernization and a low and volatile level of economic growth rate is another characteristics of economies with high inequality in income distribution. All economies are somehow faced with macroeconomic shocks, but the dependence of oil-exporting countries on foreign exchange earnings from oil sales has made changes in oil revenues, which is a major cause of economic fluctuations in these countries. In Iran, exports and government budgets depend heavily on oil revenues, so that any move to the global oil market severely affects the government budgets and the structure of the economy. Thus, the prominent role of oil revenues in the structure of the government budgets and the social security programs has distinguished the Iranian economy from other economies. Studies show that countries with a high share of natural resource exports experience two to three times more fluctuations in their foreign trade than other countries. Oil wealth harms the poor by creating economic fluctuations in the countries that export this product through two channels that include creating economic shocks and destabilizing government revenues, and increasing income inequality. Therefore, considering the importance of the subject, the main purpose of this study is to investigate the impacts of shocks and uncertainty of oil revenues and sanctions on the income distribution in the Iranian economy.
Methodology: In this study, in order to investigate the impacts of oil market shocks (good and bad news) and sanctions as well as the effects of uncertainty in the income distribution inequality, the index of VARMAX GARCH-in-Mean Asymmetric BEKK model has been used for the period of 1991: 1 to 2019: 1.
Results and Discussion: The results showed that positive shocks to the oil revenues led to improved revenue distribution in the short term. One of the strengths of the present study is to consider the effects of the structural failure of the variance of variables in the studied model, which has led to an increase in the accuracy of estimating the model coefficients. The significance of the structural failure coefficients (across the origin) in the equations of variance indicates that, in terms of structural failure (variance) in the model, the amount of turbulence in all the variables increased, so in the period when production variance had structural failure compared to the period when there was no structural failure, there was less relative stability in the economic growth. In addition, the results of estimating the research model confirm the existence of asymmetric effects of shocks (good and bad news) on the turbulence of all the variables, so that the intensity of these asymmetric effects in the turbulence of oil revenues, economic growth and inflation was relatively higher. These variables are highly sensitive to the arrival of bad news, and this type of news is an important factor for the instability of the variables studied in this period. According to the estimation of the GARCH sector coefficients, the turbulence of all the variables is transmitted to the turbulence of the income distribution inequality index, and the instability in each of these sectors leads to its transfer to the income distribution index. Also, the significance of the estimated coefficients in the GARCH sector confirmed the transfer of the sanctions turbulent overflow to all the sectors, including income distribution, which confirms the effective role of sanctions in creating instability in Iran's macroeconomy. Therefore, if the sanctions continue, the establishment of relative stability will face a serious challenge.
Conclusion: Despite the view of many economic thinkers that one of the main causes of poverty and income inequality is lack of capital, and money accumulation, the experience of many oil-exporting countries, including Iran, with regard to oil revenues shows the opposite. Many studies have shown that, despite the abundance of oil resources and high government revenues from oil revenues in countries with oil reserves, including Iran, income inequality is exacerbated. This is due to their lack of attention to tax revenues, over-dependence on oil revenues, lack of strong links between oil-related industries and other economic sectors, the lack of proper influence of this sector on employment, and the orientation of public spending towards the wealthy classes,. In contrast, studies in developed countries indicate that reducing inequality and improving income distribution by increasing transfer costs and targeted subsidies from sources of increased energy revenue have led to improved health and education indicators.

Keywords

References

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The Journal of Economic Policy
Volume 14, Issue 27
September 2022
Pages 303-338

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