The Nonlinear Effects of Oil Revenues on Social Welfare in Iran

Study of the effect of oil revenues on social welfare is one of the most important subjects for economic policy makers in oil-rich countries. Despite Iran's massive supply of natural gas and oil, poverty and unemployment have been critical issues in recent years for the majority of people. . In Iran, oil almost provides a significant percentage of government revenues independently from the other economic sectors. In economic studies, different nonlinear methods have been applied to examine the relationship between oil shocks and social welfare in both importing and exporting countries . This study focuses on the nonlinear effect of oil revenues on social welfare in Iran during the 1975-2014 periods.
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In this research, by modeling the effective factors on social welfare with emphasis on the role of oil revenues, a threshold regression model is estimated for Iran’s economy. Several classes of nonlinear autoregressive models were formulated for time series applications based on threshold models. In mathematical or statistical modelling, a threshold model is any model where a threshold value, or set of threshold values, is used to distinguish ranges of values where the predicted behaviour by the model varies in some important way.
Findings: The share of oil revenues in GDP has a nonlinear and threshold impact on social welfare. In other words, in low oil revenues regime- (when the share of oil revenues in GDP is lower than 9.35%) - increase in the share of oil revenues in GDP has led to a significant increase in social welfare, however, after exceeding the threshold of 9.35% and being in the high oil revenues regime, an increase in the ratio of oil revenues to gross domestic product had a negative impact on the social welfare index.
In low oil revenues regime, the positive effect of oil revenues on social welfare is due to the expansion of the oil industry and workforce transition from the traditional to the oil sector which lead to improvement in income level and income inequality reduction. Also, oil revenues in the early stages of entering the state budget are largely devoted to government’s development programs and infrastructure and development expenditures which are effective in improving growth and social welfare.
In addition, the entry of oil revenues, import of goods and services and urbanization all have effects on improving social welfare. However, with the increase in the share of oil revenue in GDP, the government rent seeking behavior by popular and anti-development current expenditures, crowding out effect, inefficient civil projects, non-targeted subsidies and strengthen the activities of rent-seeking will reduce social welfare.