01.04.2021 New Publication: Effect of oil revenues on size and income of Iranian middle class

How the middle class (MC) size in Iran responds to positive oil rents shocks? What are the transmission channels of oil shocks? In a new article, Farzanegan, Alaedini, Azizimehr & Habibpour use various measures of MC to examine empirically its interactions with oil rents.

This study is published in Middle East Development Journal and is available at https://doi.org/10.1080/17938120.2021.1898232

Previous studies on the distributional effects of oil income have mainly focused on the overall measurements of income inequality. Less attention has been given in the resource-curse literature to the impact of oil booms or busts on the middle class. 

We start by discussing how Iran’s middle class has doubled in size since the 1979 Revolution – its ups and downs notwithstanding. A priori, it is not clear how the growth of oil income shapes Iran’s MS or how important oil is in explaining the middle-class size in the country.

We use a (VAR) model and apply the tools of impulse response (IR) and variance decomposition to the 1965–2017 data. Our IR indicate that an unexpected positive shock in oil – leads to the expansion of the MC. Results are shown to be robust after controlling for other channels.

How can we explain the positive response of middle-class size to positive oil-income shocks? There are different channels through which higher oil income may enlarge the size of the MC in Iran. One of them is imports of commercial goods.

Other possible channel is the service sector (including public sector). Following the end of the war & the launching of economic liberalization initiatives, not only the volume of Iran’s international trade increased but also the service sector experienced a steady expansion.

Channel of political institutions can also explain part of the MC-oil income nexus. Our analysis shows that the response of the Polity index as a measure of the quality of democratic institutions to a positive oil shock is negative but statistically insignificant.Finding shows that the response of the MC to a positive shock in the Polity is insignificant both in terms of size and in its statistical context. The expansion of the middle class in Iran is largely related to oil-based economic development and the trade sector.

Given the financial dependence of the middle class on the flow of oil income and the public sector in terms of economic welfare, we are not observing any significant interaction between the middle class and political development. We also use the relative measure of the middle class based on household income and expenditures surveys in Iran. Future research is needed to examine how political institutions and outcomes are shaped by the development of the middle class in oil-rich economies such as Iran.