Free Web Hosting Provider - Web Hosting - E-commerce - High Speed Internet - Free Web Page
Search the Web

Per Capita Income Drops But Consumption Goes Up

Sobhe Emrooz (Morning Daily)
Nov. 20, 1999, No. 268
By: Ahmad Reza Roshan

Summary: Per capita indicators in Iran show that compared to 1976 or 20 years ago the people in Iran have become poorer by about 25 percent in 1996. Despite the fall in annual revenues in Iran the percentage of families who are using household utensils in urban areas has at times risen above 50 percent.

The table of urban consumption of household utensils by Iranian urban citizens and the various opinions of experts in this connection can shed light on this puzzle.

Text: Per capita income is the most important economic yardstick that measures the amount of public welfare in various countries. Per capita income (i.e. average income of an individual in a year) shows that in 1977 the average income at 1982 fixed prices was 292,000 rials. This means that by calculating the price of goods in 1982, the individual per capita income was 292,000 rials in 1977. But in 1996 per capita income (at 1982 prices) was reduced to about 217,000 rials. In other words, if we revert the price of goods and services to the 1982 prices, it will mean that the per capita income of an Iranian citizen in 1996 has dropped by 25 percent compared to 1977. Per capita income means division of the nation's revenues versus total population and indicates the average share of each Iranian from that revenue and in order to calculate the family income one should multiply that figure to the number of family members.

On the other hand, statistics indicate that the percent of families using household utensils in urban areas in Iran during the years 1977 to 1996 has increased remarkably. For example before the victory of the Revolution 23.1 percent of urban families were using washing machines whereas this figure jumped to 54.1 percent or nearly doubled in 1996. Meanwhile the use of freezers and freezer/refrigerators, and video sets which were not at all popular before the revolution increased by 27.5 percent and 12.4 percent respectively in 1996 by urban families.

But the question is that now that the real purchasing power of the Iranian people has been reduced, why are families so eager to buy household utensils. One proven principle in economy says consumption drops with the fall of income, but why such things have not happened in Iran and we are faced with reduced income and rising consumption?

REDUCTION OF INVESTMENT
One economic analyst has given four reasons for this phenomenon. First of all, on the nationwide level investment has decreased and consumption has risen. For example before the revolution 25 or 30 percent of gross national production (GDP) was used for formation of gross investment or was invested whereas right now only 16 percent of the gross national production (GNP) is invested. Thus reduced investment has led to increased consumption in the country. In fact people prefer to buy goods instead of depositing their money in banks and financial institutes.

Secondly, consumption pattern has been changed from consumption of short lived, and fairly durable consumer goods. For example during the 70's travels abroad had become a family consumption habit.

The third reason is related to a more fair distribution of revenues.

Subsidies and support of the agricultural sector, have helped the medium and lower classes in the society to save their income and use it for consumption.

The fourth reason is that by domesticating the fabrication of durable equipment and goods, their price has been reduced compared to their foreign rivals in Iran. For example per capita consumption of calorie has risen in Iran compared to international average because production of domestic calorie has increased.

This economic expert believes that our economic policies in the past 21 years was a popular policy which has given much more weight to people's purchasing power than to other subjects. With such policies in mind this year we will be importing 9 million tons of foodstuff worth 5 billion dollars.

MONETARY ILLUSION
Regarding change of consumption pattern, Mohammad Javad Salehi, an economic expert, says at one time purchasing a black and white television set was a lofty aspiration by people. In other words a black and white television was regarded a luxury item in those times, but nowadays possession of a color TV set is considered a basic requirement in the family, i.e. to say television, refrigerator and even a freezer have been converted into basic commodities in the family. But with the nominal rise of income, families have been deceived, and the people employ this superficial rise of income to buy luxury commodities assuming that their real income has increased and with this illusion they have changed their consumption pattern to the benefit of manufacturers of household utensils.

THIRD CLASS MANAGER!
Dr. Ebrahim Razzaqi, professor of economy from Tehran University, put the most emphasis on the increased number of rich people and their influence over the consumption pattern in the community. According to Razzaqi, before the revolution the number of rich people was very few and only the Shah and his associates or the so called `thousand families' who formed a very small percent of the aristocrats in the northern districts in Tehran sought a luxurious life. But nowadays a third class manager also wishes to lead a luxurious life specially after the war that they are receiving higher salaries.

Presently the minimum monthly salary of a laborer is 350,000 rials but that of a workshop manager is between 8 million or 10 million rials. By simply walking in the streets one can see this difference of income and the latest model cars in the streets can better display the class difference in the community. Formerly the people's income was not so obvious and they did not expose their wealth to others. Despite widespread media propaganda that people must lead a simple life, consumption has been on the increase.

"Nowadays the possibility of earning higher income has increased and many people can bag enormous profits without paying taxes, and such rich people consume more than others. Luxury and extravagant spending starts at the top of the cone and then spreads to other people at the lower elevations so that even a number of clerics have resorted to luxurious lives. Such behavior has led to an explosive situation and has increased the expectations of Iranian citizens so that an 18 year old young man wishes to have a car, a shop and a house which is impossible. As a result a sort of rising anger and frustration prevails in these young persons specially when they observe that the rich category do not differ with them in intelligence, knowledge, humanity or creativity and many are even inferior to them," says Razzaqi.

Such a rush for consumption may cause a man with low income to buy expensive cigarette smoked by the rich or spend his money on such things which does not correspond to his income.

In order to have money fur such luxuries, a man must overlook his other needs. For example he may reduce his meat, milk or egg but it is absolutely necessary for him to buy a color TV set.

CONCEALING INCOME AND UNDERGROUND ECONOMY
Ali Mazrooie, another expert, has also an interesting answer to this question. According to him, estimates have shown that underground economy (that part of economic activity which is not conducted officially or registered in statistics) forms between 30 to 50 percent of the GNP. Many people are engaged in mysterious occupations that nobody is aware about them. Many transactions are conducted in an unofficial manner. People may refuse to declare their occupation and income source and this will lead to increased revenue and GNP, but such revenues are not taken into account in official statistics. Naturally part of such underground gains are consumed and encourage consumption. In other words one may say that real per capita income in Iran is far higher than that which is reflected in official statistics.

OTHER REASONS
But the reason for rise of consumption among families whose income has been lowered is not limited to the above reasons. Advanced technology might lead to fabrication of new goods which did not exist in the family consumption basket in the past. For example mass production of video, computers, and satellites which did not exist before has recently become popular. Therefore production of such new commodities has caused these goods to enter the family consumption basket. Meanwhile lack of economic security has reduced the people's desire to save their money or invest it and has encouraged them to buy goods. Expansion of communication and advertisement is another reason for such high consumption pattern. Meanwhile compared to the pre-revolution era the number of urban citizens in the country have risen from 47 percent to 61 percent in 1996 and the rate of literacy has improved from 50 to 80 percent. Larger circulation of magazines and newspapers and longer TV broadcasting hours has intensified communication and increased the press and these all guide the family towards higher consumption.

THE AVERAGE CLASS
Other experts believe that by classifying the community one can better understand the reason for change of consumption pattern in families. From the point of view of sociology a community is divided into four groups; peasants, workers, the average class and the upper class or the rich. In the contemporary world the average class plays the biggest role in influencing the community. Since this class does not perform manual work, it is considered superior to the labor class and since it does not earn very high income, it is distinguished from the upper class or rich class.

Studies have revealed that the total medium class population in Iran has increased from 20 percent in 1976 to 28 percent in 1986 and since the majority of the medium class are composed of technocrats and bureaucrats, one can expect their number to rise. Staff employees, students, clerics, petty shop-owners and employers of small workshops are classified as average class citizens. This class pays special attention to their status and appearance in the community. In other words it is important for the medium class and medium family to display a becoming appearance that can suit their rank. For that reason rivalry is more conspicuous in this class to the extent that the district of their residence, their car model and household utensils (all of which are social symbols), are far important to them than their food. Probably one reason for reduction of per capita consumption of meat and fruit in the community compared to the pre-revolution era is that the medium class which forms a considerable part of the community gives much weight to outward appearance and luxury.

It seems that the average class is the only class that can answer why is it that despite reduced income they are consuming more. The more the community becomes modern and advanced, the more the medium class influences and changes the community. With the nation moving towards more advancement we may witness much influence from the medium class in the economic, social and specially political arenas of the community in the future.

Percentage of families using household utensils in Iranian cities during years 1977 and 1996

Source: Indicators of income distribution in Iran, Helen Ahoobim, Ravand magazine, #24 and 25