How do manufacturing firms respond to energy subsidy reforms? An impact assessment of the Iranian energy subsidy reform

Research in Progress Seminar with Zahra Zarepour
PhD student
Zahra Zarepour
Thursday 13 Jan 2022, 13:00 - 14:00
Spoken Language
Online via Zoom
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Zahra (Farzane) Zarepour

In this Research in Progress Seminar, Zahra Zarepour assesses the impact of the 2010 Iranian Energy Subsidy Reform on manufacturing performance.

Energy prices increased several folds due to the 2010 Iranian Energy Subsidy Reform. This study assesses the impact of the reform on the performance of manufacturing firms using a detailed micro-panel dataset at the 4-digit ISIC level for the period 2009 to 2013.

Since the reform was universal and affected all firms, the analysis relies on a quasi-experimental framework implementing:

  1. an exploratory before-after design with fixed-effects and
  2. a difference-in-difference analysis exploiting energy sensitivity.

The subsidy removal led to a reduction in output and value-added of at least 3 and 7%, respectively.  This resulted in a decline in profits by nearly 9%.

Manufacturing firms have been affected through three channels:

  • increasing costs of direct energy inputs
  • pass-through costs for inputs from upstream firms¬†
  • an energy-price-induced demand contraction

To successfully implement an energy subsidy reform while maintaining growth in the manufacturing sector, not only the direct but also the indirect, pass-through effects have to be considered since large scale capital or technology-led responses to mitigate the negative repercussions of the reform are unlikely in the short-run.

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