Friday, April 19, 2024

BEHIND THE HEADLINES: Subsidising fuel ‘a failed policy’

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Subsidising energy imports, a wrong move in poor countries.
“In the end, they are very perverse fiscal and balance of payments effects.”
Charlie Skeete, a leading Caribbean economist who once served as Barbados’ ambassador in Washington and was a senior economic adviser at the Inter-American Development Bank for decades, was reflecting on a major problem and joining a vigorous debate about subsidies for gasoline and natural gas in developing countries.
It’s a fiscal challenge in nations that range from Trinidad and Tobago and many of its Caribbean neighbours, to Venezuela, Brazil, Egypt, Nigeria, Libya, Pakistan, Iraq and Ukraine among others.
“Subsidising energy imports can have some desirable effects,” Skeete told BARBADOS BUSINESS AUTHORITY in New York recently. “A lot of what determines the cost of living has to do with the cost of transport and the cost of providing energy in the form of electricity and gas to produce goods and services. So, if you subsidise energy you can keep the cost of living down by making it less expensive to transport goods and to provide overhead in the form of electricity and energy in providing services. Those are the advantages, especially for the less well-off members of the population, people of lower income these are some positive social effects.”
Because transport eats up “a big chunk” of people’s income, goes the argument, keeping down transport costs benefits the poor. But there is another side to the coin: the perverse balance of payments and fiscal effects of subsidies.
“If you subsidise carbon imports you will import less fuel efficient cars than you ought to be importing with the undesirable balance of payments effects they can and do have,” asserted the Barbadian.
“On the fiscal side, it is not sustainable. There are a lot of things that look desirable when you start them fiscally, such as subsidies on oil imports that you cannot sustain. You can only sustain them when your economy is booming and when that ceases, as all economies will eventually, and it goes into a flat period or down-turn it is not sustainable. Subsidising energy imports is fiscally counter-productive and it is counterproductive on the balance of payments.”
The negative outcome is clear: consumers end up purchasing equipment and transport vehicles that are not energy efficient.
“If you must have a vehicle, buy a small one,” the former ambassador advised.
Skeete gets strong support from Fatih Birol, chief economist for the International Energy Agency, IEA.
“It’s a failed policy, but we see that many countries continue to follow it,” Birol told Bloomberg BusinessWeek. “If something is much cheaper, we humans tend to use it in a wasteful manner.”
The International Monetary Fund agrees. The Fund put the global cost of subsidies for petroleum products, electricity, natural gas and coal in 2011 at $3.8 trillion or 2.5 per cent of gross domestic product, a figure that included the cost of damage done by subsidised fuel to public health, the environment and the infrastructure.        
But when such additional costs were subtracted countries ended up spending almost US$500 billion or 0.7 per cent of global GDP for subsidies. The trouble is 61 per cent of them went to the richest 20 per cent who can afford to pay the higher prices.
That’s not the only negative effect. “Price supports for oil and gas suppress investment in both oil exploration and alternative energy,” complained BusinessWeek. They also batter government budgets and distort markets.
Brazil is a classic example. It had reduced gasoline subsidies but when inflation came roaring back in the 1990s, triggered in part by escalating fuel prices, the country re-introduced them. The upshot: Petrobas, the state-run oil company, was forced to import gasoline and sell it at a 15 per cent discount.
Just as bad, Brazil’s ethanol producers are facing stiff competition, so much so that investments in new ethanol production have fallen since 2008.
“It is causing more problems than solutions,” said Adriano Pires, director of the Brazilian Center for Infrastructure, a think tank.
Which countries lead the world in energy subsidies? Iraq, Saudi Arabia, Bahrain, Ecuador, Libya, Egypt, Turkmenistan and Venezuela top the list for petroleum products, ranging from 14.3 per cent to 8.1 per cent of gross domestic product (GDP). The IMF says subsidies for natural gas account for as much as 25 per cent of GDP in Uzbekistan; almost 20 in Turkmenistan; 6.9 in the Ukraine; Trinidad and Tobago 4.5; and 3.3 per cent in Pakistan.
“Governments like to describe fuel subsidies as social programmes,” BusinessWeek stated. “But the bulk of the assistance doesn’t reach the poor.”
That’s why Skeete argues, quite persuasively, that in the end subsidies spawn fiscal and balance of payments problems that countries can’t afford.
Tony Best is a veteran journalist and NATION New York correspondent.

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