Structural analysis of demand growth and functional income distribution in the Iranian economy

Income of population’s lower deciles are generally associated with labor force (and not capital). Therefore, pro-labor economic policies along with economic growth objective can be used to improve income inequality and alleviate poverty. In this regard, this paper investigates the demand regime using a SVARX model for the period 1964-2017. Empirical results indicate that consumption expenditures are wage-led in the long run and aggregate demand is profit-led in the short run. Given Iran’s low degree of trade openness and its dependency on natural resources, this finding is consistent with theoretical expectations. Therefore, with the current structure of the Iranian economy, policy-making faces a dual problem. Pursuing pro-labor policies is not in line with profit-led growth of aggregate demand. Pro-capital policies will probably lead to growth of the real sector, but they worsen income distribution.