Economic development and institutional factors affecting income distribution: the case of Iran, 1967‐1993

The purpose of this paper is to investigate the relationship between economic development and income distribution for Iran. Using time series data for the period 1967‐1993, it is found that there is no significant relationship between the Gini coefficient for household expenditure and per capita income. This result means there is no evidence in Iran, for the period analysed here, of there being a U‐relationship between these two variables as suggested by Kuznets. However, the empirical econometric results lend support for the view that institutional or structural variables affect income distribution. This paper has four policy messages for Iranian decision makers. First, income inequality can be reduced by stimulating the goods‐producing sectors of the economy such as agriculture, manufacturing etc. Second, expansion of most of the service sectors, such as trade, real estate etc., in Iran, because of the association in such sectors with rent seeking behaviour, is found to be positively related to inequality. Third, government subsidies and transfers have not decreased income inequality in Iran. On the contrary, the empirical evidence indicates that government transfers have exacerbated inequality. Fourth, government per capita expenditures (current and capital) have played an important role in alleviating relative poverty.