Estimating the Welfare Costs of Reforming the Iraq Public Distribution System

Iraq’s public distribution system (PDS) is the only universal non-contributory social transfer system in the world. Through three decades of conflict and fragility, food rations delivered through the PDS have remained the single largest safety net among Iraq’s population. Reforming the PDS continues to be politically challenging, notwithstanding its heavy dependence on imports and associated economic distortions as well as an unsustainable fiscal burden. The fiscal crisis since mid-2014 has, however, put PDS reform back on the agenda. In this context, this paper employs a mixed demand approach to analyse consumption patterns in Iraqi households and quantify the welfare impact of a potential reform of the PDS in urban areas. The results of the ex ante simulations show that household consumption of PDS items is relatively inelastic to changes in price, particularly among the poorest quintiles, and that these goods are normal goods. Cross-sectional comparisons suggest that, with improvements in welfare, and with well-functioning markets, some segments of the population are substituting away from the PDS and increasing their consumption of market substitutes. Overall, the results suggest that any one-shot reform will have adverse and sizeable welfare impacts. The removal of all subsidies in urban areas will require compensating poor households by 74 per cent of their expenditures and the richest households by nearly 40 per cent to keep welfare constant. However, a targeted removal of the top 4 deciles from PDS eligibility in urban areas will leave poverty rates unaffected and generate cost savings, but will need to be carefully communicated and managed to counter public discontent.