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.
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