Publication: Estimating the Welfare Costs of Reforming the Iraq Public Distribution System: A Mixed Demand Approach
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Published
2019-12-06
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0022-0388
Date
2020-01-08
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Through three decades of conflict, food rations delivered through the public distribution system (PDS) have remained the largest safety net among Iraq’s population. Reforming the PDS continues to be politically challenging, notwithstanding the system’s import dependence, economic distortions, and unsustainable fiscal burden. The oil price decline of mid-2014 and recent efforts to rebuild and recover have put PDS reform back on the agenda. The government needs to find an effective way to deliver broad benefits from a narrow economic base reliant on oil. The study described here adopts a mixed demand approach to analyzing household consumption patterns for the purpose of assessing plausible reform scenarios and estimating the direction and scale of the associated welfare costs and transfers. It finds that household consumption of PDS items is relatively inelastic to changes in price, particularly among the poor. The results suggest that any one-shot reform will have sizeable adverse welfare impacts and will need to be preceded by a well-targeted compensation mechanism. To keep welfare constant, subsidy removal in urban areas, for example, would require the poorest and richest households to be compensated for, respectively, 74 per cent and nearly 40 per cent of their PDS expenditures.
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Publication Estimating the Welfare Costs of Reforming the Iraq Public Distribution System(World Bank, Washington, DC, 2017-06)The Iraqi Public Distribution System is the largest universal, in-kind subsidy system in the world. In 2012, the Public Distribution System transfers accounted for as much as 30 percent of incomes of the poorest 10 percent of the Iraqi population and provided 70 percent of the calories of the poorest 40 percent. In effect, the Public Distribution System remains the only safety net program that covers all the poor and vulnerable in the country. Yet, it is a very inefficient and expensive means to deliver transfers to the poor and creates distortions in the economy as well as an unsustainable fiscal burden. The fiscal crisis since mid-2014 has put reform of the Public Distribution System back on the agenda. This paper employs a mixed demand approach to analyze the consumption patterns of Iraqi households and quantify the welfare impact of a potential reform of the Public Distribution System in urban areas. The results show that household consumption of Public Distribution System items is relatively inelastic to changes in price. Consumption is more inelastic for the poorest quintiles and, for much of the population, these goods are not inferior, but rather normal goods. Cross-sectional comparisons suggest that with improvements in welfare levels, and with well-functioning markets, some segments of the population are substituting away from the Public Distribution System and increasing their consumption of market substitutes. 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