# **1. Introduction**

According to UNHCR (2020), 85% of the displaced population worldwide live in developing countries, where economic shocks are frequent, and a global crisis can damage more than the developed world (Gourinchas & Obstfeld, 2012). Previous studies suggest that migrants are disproportionately hit by economic downturns, and they might be used as a cyclical buffer to alleviate the consequences of recession (Dustmann et al., 2010). The unequal effect of economic shocks can be more severe for refugees as their employment relationships are commonly informal and in poorly regulated activities. Turbulent economic times may also escalate tensions between host and displaced communities by increasing competition over scarce resources.

The primary focus of forced displacement literature has been on the consequences of forced migration – for either receiving, sending, or displaced populations – and the disproportionate impact of economic shocks in the host country on indigenous and displaced communities is an understudied field of inquiry. This paper will contribute to the forced displacement literature by exploring the unequal impact of economic fluctuations in Iran on Afghan refugees and host communities.

Using representative household-level surveys, we study how the economic shocks due to Iran’s conflict with the United States in the 2010s affected inequality and social cohesion between Afghan refugees and Iranians. We examine how these shocks affect inter-community and intra-community inequalities and whether bad and good shocks have asymmetric effects on welfare and social cohesion. To measure social cohesion between the two communities, we utilize information on aid received by refugees from other households. For estimation, Afghan refugees are compared once with all Iranians and once with the matched sample of Iranians with similar characteristics.

We find that during turbulent times in Iran, Afghan refugees exit the country more often, spend less for consumption, and disproportionately receive less aid from other households than similar Iranians. The last evidence suggests that economic shock weakens trust as a dimension of social cohesion between refugees and host communities. Our findings show that the effects of bad and good shocks are not symmetric, and the economic effect of business cycles on Afghan refugees is different from its social effect. While in bad economic times, the shock homogenously affects economic outcomes it hinders social cohesion between communities. In contrast, good shocks disproportionately increase the income and expenditure of Afghan refugees, but it does not significantly affect our measures of social cohesion. Besides, we find that turbulent economic times increase both inter-community and intra-community inequalities and the relative increase is stronger in the former.

This paper provides timely evidence on Afghan refugees as the abrupt US withdrawal from Afghanistan and the resurgence of the Taliban has boosted the risk of an internal war and the outflow of displaced people from the country. Our findings will be helpful for UNHCR and World Bank to implement proper policies and funding decisions regarding the current situation in Afghanistan. In addition, the paper is policy-relevant as the global Covid-19 pandemic has caused a severe slowdown in world economic activity and has created evident threats to tolerance and social cohesion. It shows that macroeconomic shocks by increasing inequality and generating a disproportionate effect on charitable giving make life much harder for the vulnerable refugees. In this regard, humanitarian organizations need to develop infrastructure to identify needy refugees for better aid targeting. In the medium term, removing institutional discrimination against refugees in the labor market and investment in their human capital are two critical factors to promote social cohesion between refugees and indigenous communities.

# **2. Context**

In this section, we briefly review the history of Afghan refugees in Iran and then describe major events resulting in macroeconomic fluctuation in Iran’s economy between 2011 and 2019.

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