Find us on Google+

Sunday, 6 July 2014

Politics of Energy Subsidies

A recent article  from Economist Magazine provides some interesting commentary on current trends around the world to get rid of energy subsidies. It notes that energy subsidies have wrrecked budgets and the environment alike :
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….

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.
Its an argument well made. However, I would not put down the antagonism purely to entrenched interests. Part of the problem is the credibility of the politicians themselves. Public support for removing subsidies is harder when they see the money being wasted and diverted. This is the problem we have had in Zambia .The tragedy of PF is that it turned a good policy into a bad one. 

When GRZ scrapped the energy subsidies it promised people that money would be “saved” but without explaining how and where. So when Finance Minister Alexander Chikwanda later stood up and said no money has been saved from the removal of fuel subsidies because money went on "on other developmental projects which could have suffered if such funds were still being allocated to subsidies..." people were confused. Up to now he has not said what amount and where the money has gone precisely.

The money on subsidies could only have been "saved" in a real sense if it resulted in a reduced budget deficit and government debt. But both of these things have ballooned since PF came to power. The money "saved" from fuel subsidies went on funding the large unprecedented increase in public sector wage bill. In short, money intended for the poor went on larger salaries for the employed. 

The idea of removing subsidies in hindsight turned out to many people to be the most retrogressive policy undertaken in recent times. Why? Because it took money from the poorest people and gave it to workers with jobs already. To make matters worse,  by PF wasting the money saved on energy subsidies on public sector wages and other wreckless spending it has made it political harder in the future for GRZ to reduce subsidies in other areas or cut waste in general.

So the whilst the Economist magazine is correct that the idea of removing energy subsidies is sound, for many poor countries with weak institutions the benefits may be harder to realise. In Zambia’s case money should have been given back to the poor in form of income transfers or even invested in alternative energy like biofuels - to support the environmental goals. Instead what happened was the large wage increases.

The lesson of course is that the politics matters. Yes, the economic theory makes sense. The policy us correct, all things being equal. But all things were not equal! Policy development should pay attention to the people and institutions executing it. We too readily decouple policy from its environment. That is not only bad morally it is also not sound economics in the end. We cannot afford to merely "assume" that our leaders have our best interests at heart. We cannot sacrifice process for assumed outcomes.

Chola Mukanga 
Economist | Consultant | Researcher 
Copyright © Zambian Economist 2014


  1. I don't agree with the idea that the money has been wasted. By spending this money on increasing wages govt has given enough spending power to the people which gets them much more involved in the economy. They will get some of that money back in form of taxes and that some money will help promote more industry by encouraging manufacturers to produce more due to the rise in demand. There is really no direct way of govt "transferring" wealth to the poor. This is the best way to spend that money. It is sound and responsible.

  2. Hi cho interesting topic Firstly we need to understand the major beneficiary of the fuel subsidy. It was the mines as this group even today consumes the greater portion of fuel (50%) and not a poor person in a rural area who uses a bicycle for distant movements A lot of money($200million) of fuel subsidy which is about 1% of Zambias unrebased Gdp was basically benefiting the mines. Apart from fuel these mines are paying lower electricity tarrifs than an ordinary zambian consumer who with the latest upward revision of tarrifs effected in July is paying about 6 cents per kilowatt hour (inclusive of taxes I.e vat & excise duty) but the mines are paying a paltry 5 cents per kilowatt hour which is 20% lower in cost than what an ordinary zambian is paying.They have rejected the recent tarrif upward revision from 5 to 6 cents per kilowatt hour claiming that it is very expensive despite other regions like South Africa and Ghana who charge 10 and 15 cents per kilowatt hour respectively.

    On the other issue regarding application of the savings from fuel subsidy income transfers may not be an answer given our huge population About 60% of our people are poor and so we are talking about 7,000,000 If we distributed the saving in fuel subsidy $200million per person we will have something like $28 per year or $2 per person per month which at current exchange rate of k 6.2 per dollar is simply a paltry of k12 per month . We have seen a lot of attention being paid to the social sector such as the setting up of 750 health posts,clinics and construction of schools including universities. This is the way to go and am sure by end of 2015 most zambians will appreciate the benefits as most people will feel them through improved health care and pupil enrolment.


All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.