There are moves around the world to get rid of energy subsidies. Here s the
best way of going about it
Jun 14th 2014
FOR decades, governments from Egypt to Indonesia have subsidised the price of
basic fuels. Such programmes often start with noble intentions to keep down the
cost of living for the poor or, in the case of oil-producing countries, to
provide a visible example of the benefits of carbon wealth but they have
disastrous consequences, wrecking budgets, distorting economies, harming the
environment and, on balance, hurting rather than helping the poor.
Emerging markets are not the only places that distort energy markets. America,
for instance, suppresses prices by restricting exports. But subsidies are more
significant in poorer countries. Of the $500 billion a year the IMF reckons
they cost the equivalent of four times all official foreign aid half is spent
by governments in the Middle East and north Africa, where, on average, it is
worth about 20% of government revenues. The proceeds flow overwhelmingly to the
car-driving urban elite. In the typical emerging economy the richest fifth of
households hoover up 40% of the benefits of fuel subsidies; the poorest fifth
get only 7%. But the poorest suffer disproportionately from the distortions
that such intervention creates. Egypt spends seven times more on fuel subsidies
than on health. Cheap fuel encourages the development of heavy industry rather
than the job-rich light manufacturing that offers far more people a route out
of poverty.
For all these reasons the benefits of scrapping subsidies are immense. Emerging
economies could easily compensate every poor person with a handout that was
bigger than the benefits they got from cheap fuel and still save money. In the
process, they would help the planet. According to the International Energy
Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions
by 6% by 2020.
How to save $500 billion and the planet
Some emerging-market governments are persuaded by these arguments, and are
getting serious about reform (see article). Indonesia raised petrol prices by
more than 40% last year, and the front-runner in the upcoming presidential
election says he will consider a more comprehensive fuel-subsidy revamp. Iran
has just begun the second phase of a big subsidy overhaul, raising the price of
petrol, gas and electricity. Egypt s new president is being pushed towards
tackling energy subsidies by a gaping budget deficit. Morocco and Jordan have
cut subsidies in the past couple of years. Even Kuwait announced this week that
it plans to scrap diesel subsidies.
Yet the politics of reform are exceedingly difficult. Politicians are loth to
antagonise the urban elite; insiders benefit (often corruptly) from cheap fuel;
ordinary citizens do not believe they will be compensated. Many previous
attempts to cut subsidies have been abandoned in the face of popular protests
or rising global oil prices. Experience suggests that any attempt to cut
subsidies needs to be accompanied by a public-education campaign to explain the
costs and inequities of subsidies, to have a clear timetable for gradual price
increases and to be supported by targeted transfers to counter the effect of
higher fuel prices on poorer people.
Even with better politics and the best-laid plans, it would be a mistake to
expect too much too fast. Entrenched subsidies anywhere are devilishly
difficult to get rid of. If the oil price rises, so too will the pressure on
emerging economies to protect their citizens from dearer fuel. But, for the
moment, there seems to be a chance to accelerate reform. It is an opportunity
not to be missed.