Effects of Changing Agricultural Subsidies on Production and Exports in Iran

Abstract

Subsidy is a tool used by governments as a form of financial aid to support specific economic sectors. Today subsidy is common in several countries such as Iran due to different political and economic reasons. This study has examined the effects of changing agricultural subsidies on, production and exports. For this purpose, a computable general equilibrium model (CGE) for the year 2012 was used in social accounting matrix form in 2001 as the statistical basis. For the extraction and transportation of nonlinear programming model "mixed complementary problem" (MCP) was used. Social Accounting Matrix was divided into main sectors: agriculture, oil and gas, textiles, energy, industry and services. Then, the effect of agricultural subsidies and its effect on endogenous variables were investigated. Results showed that reducing agricultural subsidies, decreases the level of agricultural production by 21.3 percent and increases prices which in turn causes deviation of real exchange rate from equilibrium that prevents the exports in this sector. Moreover, by reducing subsidies the unemployment rate increases and welfare decreases.