Subsidy Reform Research Articles

Is income inequality reflected in consumption inequality in Iran?

ABSTRACT This paper presents a descriptive analysis of the evolution of labor supply, income, and consumption inequality in Iran using the 2005–2015 waves of the survey of Household Expenditure and Income (HIES). We document that the sharp decline in income and consumption inequality after the Subsidy Reform in 2010 was accompanied by a slight but persistent rise in respective inequality measures. We find that not only the level of income inequality is higher than consumption inequality but also that the fluctuations in income inequality are larger than those of consumption inequality. Moreover, income and consumption inequalities among rural households are higher compared to urban families. Finally, we show that within-group inequality, the inequality due to circumstances, can explain a considerable portion of the divergence observed between income and consumption inequalities.

ASSESSING THE ENERGY SUBSIDY REFORM IN INDONESIA THROUGH DIFFERENT SCENARIOS

This paper provides a comprehensive study on energy subsidy reform simulations in Indonesia by employing two new approaches, namely, the Almost-Ideal Demand System Iterated Linear Least-Square and SUBSIM. Periods of low and high oil prices are also accounted in this paper; further, it reveals that in 1999, when oil prices were low, this reform was possible due to Indonesia’s status as a net oil exporter and precise selected-reformed energy goods; however, the major concerns were the unsupporting welfare situations and the depreciation of the rupiah after the Asian Financial Crisis in 1997. In 2012, the evidence shows that despite high oil prices and Indonesia being a net oil importer, this reform saved more for the government and made significant welfare impacts. Overall, this paper suggests that this reform is feasible when at least some factors, i.e., stable national exchange rate, conducive welfare situations, availability of potential recipients’ database, and functioning government, are well-established. Keywords : Almost-Ideal Demand System; Energy goods; Simulation; Subsidy reform; Indonesia. JEL Classifications: D12, H53, I38, Q48 DOI: https://doi.org/10.32479/ijeep.9223

Phasing out Energy Subsidies to Improve Energy Mix: A Dead End

A major energy transformation is required to prolong the rise in global temperature below 2 °C. The Indonesian government (GoI) has set a strategy to gradually remove fuel subsidies to meet its 2050 ambitious energy targets. Using a recursive dynamic computable general equilibrium (CGE) model, the present study aimed to determine whether or not the current energy subsidy reforms would meet the targets of both energy mix and energy intensity. It also incorporated the environmental aspect while developing a source of a detailed database in the energy sector. The energy subsidy reform policy (followed by an increase in infrastructure and renewable energy investments) could be the most appropriate alternative policy if the government aims to reduce energy intensity and emission, as well as improve energy diversification without pronounced reductions in the sectorial and overall economy. However, all simulations suggested that the removal of energy subsidy does not enough in attaining the targeted energy mix and energy intensity goals. Thus, the Indonesian government should also introduce progressive programs in renewable energy.

Economics of energy subsidy reforms in Bangladesh

As in many countries around the world, subsidies to energy in Bangladesh impose a significant fiscal burden, with benefits that disproportionately accrue to high-income households. Using a computable general equilibrium model, this study investigates the economy-wide impacts of the removal of direct subsidies in the electricity sector and indirect subsidy in natural gas in Bangladesh. The study finds that the removal of energy subsidies would be beneficial to the economy and would increase GDP. The magnitude of the economic impact depends on how the budgetary savings from the removal of electricity subsidy and the increased revenues due to the removal of indirect subsidies to natural gas are reallocated to the economy. Recycling the savings (or the new revenues) to fund investment would benefit the country most, followed by the case of utilizing them to fund cuts in income taxes, and finally to fund cuts in indirect taxes. While the reallocation of budgetary savings to households through lump-sum transfers is found inferior to other recycling options considered, it could be the preferred from the distributional perspective. However, further analysis is needed to confirm this.

Changing the narrative on fisheries subsidies reform: Enabling transitions to achieve SDG 14.6 and beyond

The World Trade Organization (WTO) is in the final stages of negotiating an agreement to prohibit harmful fisheries subsidies, thereby achieving UN Sustainable Development Goal (SDG) 14.6. An effective agreement should be viewed as an opportunity for nations to proactively transition towards sustainable and equitable fisheries and pave the path for other SDGs. Supporting fishers does not require harmful subsidies, and we provide evidence-based options for reform that highlight equity needs while reducing environmental harm. Subsidy reforms need clear goals, co-design, transparency, and fair implementation. An agreement on SDG 14.6 could be a turning point for the oceans and for the well-being of those that depend on the oceans for livelihoods and nutrition. Responsible seafood production will require international cooperation not only at WTO, but among governments, fisher organizations, civil society, and the wider public.

Impact of subsidy reform on the kingdom of Saudi Arabia's economy and carbon emissions

Seeing the uprising economy and population of Saudi Arabia, some of its energy subsidies may be acceptable or even necessary to reach the country's social and economic objectives. Nevertheless, an over-subsidisation and poor implementation may lead these subsidies to deviate from their initial objectives or even contradict them. This paper uses the price-gap approach to estimate the size of energy subsidies in Saudi Arabia. The results indicate that the value of kingdom's energy subsidies amounts for $80 billion in 2012, representing 11% of the country's GDP. Oil products, gasoline and diesel, are the most subsidised followed by electricity and finally natural gas. The Input-output model was used to quantify the effect of a reform on the economy. The findings show that a total removal of energy subsidies with no social safety nets would affect negatively Saudi Arabia's economy and mostly the energy intensive industries, especially the quarrying and mining sector. However, a total removal of subsidies accompanied with a targeted cash transfer towards social and health sectors would affect positively the majority of the country's economy apart from sectors that relays heavily on energy consumption. The paper also proposes subsidies reform options, like implementing compensatory measures to cover the energy prices increase to protect the limited and low-income households, using and reinforcing the social safety networks to face any changes in energy prices.

Oil Price Shocks, Fuel Subsidies and Macroeconomic (In)stability in Nigeria

This paper studies the macroeconomic implications of oil price shocks and the extant fuel subsidy regime for Nigeria. To do this, we develop and estimate a New-Keynesian DSGE model that accounts for pass-through effect of international oil price into the retail price of fuel. Our results show that oil price shocks generate significant and persistent impacts on output, accounting for about 22 percent of its variations up to the fourth year. Under our benchmark model (i.e. with fuel subsidies), we show that a negative oil price shock contracts aggregate GDP, boosts non-oil GDP, increases headline inflation, and depreciates the exchange rate. However, results generated under the model without fuel subsidies indicate that the contractionary effect of a negative oil price shock on aggregate GDP is moderated, headline inflation decreases, while the exchange rate depreciates more in the short-run. Counterfactual simulations also reveal that fuel subsidy removal leads to higher macroeconomic instabilities and generates non-trivial implications for the response of monetary policy to an oil price shock. Thus, this study cautions that a successful fuel subsidy reform must necessarily encompass the deployment of well-targeted safety nets as well as the evolution of sustainable adjustment mechanisms.

Instruments of energy subsidy reforms in Arab countries — The case of the Gulf Cooperation Council (GCC) countries

Energy subsidies can account for a large share of government expenditures in some GCC countries. In light of fiscal imbalances since 2014, these countries have reiterated their intention to decrease subsidies and substitute them with more targeted support systems. This paper briefly outlines the extent of energy subsidies. The scope and the drivers of the subsidy reform agenda are outlined, citing recent literature. Some instruments are explained such as adjustment of electricity or water tariffs, increasing of fuel prices, and compensation of citizens through cash transfers. However, the adopted reforms are not yet comprehensive and do not alter the social contract of rentier states.

Diversification effects of energy subsidy reform in oil exporters: Illustrations from Kuwait

For oil exporters, energy subsidy reform and economic diversification are critical policy responses to recent fundamental changes in the global oil market and oil price declines, yet the relationship between them is little understood. This article investigates linkages between energy subsidy reform and accelerating economic diversification away from hydrocarbons in a low oil price environment, using illustrations from Kuwait. It employs an economy-wide, general equilibrium model with oligopolistic industrial structure, the first of its kind for an economy in the Middle East and North Africa, that embodies unique elements of the country's economic structure—oil dependence; public sector dominance; subsidies; sovereign wealth funds; industrial collusive pricing behaviour; and guest workers. The article argues that, contrary to common popular discourse, Kuwait's economy has a diversified economic base, but this base fails to diversify export or government revenue needed for economic sustainability. Results show that weak economic diversification in oil exporters with a similar economic structure is not primarily due to “Dutch disease,” as dominant in the literature, but to economic constraints and distortions that impair structural change and exacerbate overdependence on hydrocarbons. Labour and competition reforms relax some constraints, achieving large efficiency gains that extend economy-wide and can expand non-energy tradable sectors. The analysis has important policy implications. First, the potential role of pricing regulation in small economies in moderating economic impacts of negative oil shocks. Second, in oil economies characterized by pervasive oligopolies, microeconomic reform can be a channel to achieve efficiency and better diversification effects of subsidy reform.

Between Populism and (Electric) Power: Reconciling a Green Shift and Popular Legitimacy in Kuwait

Kuwait faces the double challenge of potentially destabilising effects of climate change as well as a changing international energy market in favour of renewables that may threaten the foundation of the oil-based economies dominating the region. Both these challenges point to the need for a transition towards more renewable energy sources and not least more sustainable patterns of energy consumption –– a transition that will be demanding for state and society alike. A successful green shift depends on a certain level of popular support or acceptance, yet it has proven difficult for the Kuwaiti government to gain support for their proposed solutions, and to reconcile the necessary changes with the existing relationship between state and society. This paper explores these challenges by studying public discourse concerning two contentious issues that are at the heart of the government’s economic reforms and of Kuwait’s planned efforts to cut GHG-emissions, namely fuel subsidy reform, and water and electricity conservation.

Economic Diversification and Energy Security in Oman: Natural Gas, the X Factor?

Given its limited oil and gas resources compared to its neighbours, energy diversification has been Oman’s stated goal since at least the 1980s. Yet, this paper argues that, due to the country’s structure of power generation, both issues of economic diversification and energy security are intimately linked and cannot be dissociated. Oman’s national policy for the energy sector, the political and economic challenges of the energy subsidy reforms implemented since the mid-2010s and the energy priorities as highlighted in the new long-term “Oman Vision 2040” national strategy are examined here. This paper also shows that the energy debate has played a critical role in the shaping of Oman’s foreign policy towards its Gulf Cooperation Council (GCC) counterparts, Iran and India, out of a desire to keep Oman’s –– more symbolic than real –– independence in working out its energy needs.

Is Income Inequality Reflected in Consumption Inequality in Iran?

This paper presents a descriptive analysis of the evolution of labor supply, income, and consumption inequality in Iran using the 2005-2015 waves of the survey of Household Expenditure and Income (HIES). We document that the sharp decline in income and consumption inequality after the Subsidy Reform in 2010 was accompanied by a slight but persistent rise in respective inequality measures. We find that not only the levels of income inequality is higher than consumption inequality but also that the fluctuations in income inequality are larger than that of consumption inequality. Moreover, income and consumption inequalities among rural households are higher compared to urban families. Finally, we show that within-group inequality, the inequality due to circumstances, can explain a considerable portion of the divergence observed between income and consumption inequalities.

To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What are the Drivers?

While many developing countries limit the international fuel price pass through to domestic fuel prices, others do not. Against this backdrop, we examine the factors that determine whether governments allow international fuel price changes to be passed through to domestic prices in developing countries using a dataset spanning 109 developing countries from 2000 to 2014. The paper finds that the pass-through is higher when changes in international prices are moderate and less volatile. In addition, the flexibility of the pricing mechanism allows for higher pass-through while exchange rate depreciation and lower retail fuel prices in neighboring countries inhibit it. The econometric results also underscore the fact that countries with inflation tend to experience lower pass-through, whereas those with high public debt exhibit larger pass-through. Finally, no evidence is found that political variables or environmental policies matter with regard to fuel price dynamics in the short-term. These findings, which are consistent across fuel products (gasoline, diesel and kerosene), allow us to draw important policy lessons for fuel subsidy reforms.

Oil Price Shocks, Fuel Subsidies and Macroeconomic (In)stability in Nigeria

This paper studies the macroeconomic implications of oil price shocks and the extant fuel subsidy regime for Nigeria. To do this, we develop and estimate a New-Keynesian DSGE model that accounts for pass-through effect of international oil price into the retail price of fuel. Our results show that oil price shocks generate significant and persistent impacts on output, accounting for about 22 percent of its variations up to the fourth year. Under our benchmark model (i.e. with fuel subsidies), we show that a negative oil price shock contracts aggregate GDP, boosts non-oil GDP, increases headline inflation, and depreciates the exchange rate. However, results generated under the model without fuel subsidies indicate that the contractionary effect of a negative oil price shock on aggregate GDP is moderated, headline inflation decreases, while the exchange rate depreciates more in the short-run. Counterfactual simulations also reveal that fuel subsidy removal leads to higher macroeconomic instabilities and generates non-trivial implications for the response of monetary policy to an oil price shock. Thus, this study cautions that a successful fuel subsidy reform must necessarily encompass the deployment of well-targeted safety nets as well as the evolution of sustainable adjustment mechanisms.

Can government transfers make energy subsidy reform socially acceptable? A case study on Ecuador

Energy subsidies cost Ecuador 7% of its public budget, or two thirds of the fiscal deficit. Removing these subsidies would yield local economic and environmental benefits and help implement climate targets set in the Paris Agreement. However, adverse effects on vulnerable households can make subsidy reforms politically difficult. To inform policy design, we assess the distributional impacts of energy subsidy reform using Ecuadorian household data and an augmented input-output table. We find that subsidy removal without compensation would be regressive for diesel and LPG, progressive for gasoline, and approximately neutral for electricity. We then analyze how freed up public revenues could fund in-kind and in-cash compensation schemes to mitigate income losses for poor households. Our results indicate that removing all energy subsidies and increasing the cash transfer program, Bono de Desarrollo Humano (BDH), by nearly US$ 50 per month would increase the real income of the poorest quintile by 10% while leaving more than US$ 1.3 billion for the public budget. Finally, we conduct interviews with local policy makers and experts to identify two reform options that are progressive and considered feasible: eliminating subsidies on gasoline while increasing the BDH and replacing universal LPG subsidies with targeted LPG vouchers.

Ecuador

A 36-month Extended Fund Facility (EFF) arrangement with access of SDR 3.035 billion (435 percent of quota or about US$4.189 billion) was approved on March 11, 2019. The first review was concluded on June 28, 2019. At the beginning of October, an economic reform package was announced, including the immediate liberalization of prices for gasoline and diesel. Following protracted protests and social unrest, the authorities retracted the decree mandating the removal of fuel subsidies. The government continues to negotiate a revised fuel subsidy decree with a broad representation of civil society and hopes to reach an agreement in the foreseeable future. Completing the upgrade of the social safety net, recently initiated by the government, remains a priority and a prerequisite for a successful fuel subsidy reform. On November 17, 70 out of 133 legislators voted to reject an urgent package of economic laws, including key reforms under the program: a tax code, central bank code, and organic budget code. The government submitted a revised version of the tax code to the National Assembly as an urgent economic reform; this version was approved with minor modifications on December 9. The government also intends to submit revised drafts of the central bank and organic budget codes separately in the coming months, after internalizing feedback from lawmakers. Economic growth has slowed as projected in 2019, and in 2020, a less contractionary fiscal stance and higher oil production than previously expected should help mitigate the potential negative impact of political uncertainty and provide a fillip to the economy.

Natural gas subsidies in the industrial sector in China: National and regional perspectives

This paper seeks to investigate the regional heterogeneity in natural gas subsidies of China's industrial sector. Price-gap approach and logarithmic mean Divisia index method (LMDI) are combined to accomplish this goal. The results show that there exists regional heterogeneity in the decomposition on the variation of industrial natural gas subsidy in China. In other words, the factors that contribute to the changes in subsidies differ from a regional basis. During 2007–2013, consumption exerted a positive impact on the increase of industrial natural gas subsidies, contributing more than 80% both in the eastern and northeastern regions, followed by 70.66% in the western region and 69.54% in the central region. During 2013–2016, the main factor affecting the changes in industrial natural gas subsidies is the pricing mechanism. The pricing mechanism played a significant positive role in the decline of industrial natural gas subsidies, with contribution rate of 367.73% in the northeastern region, 80.64% in the eastern region, 75.68% in the central region and 74.34% in the western region. Based on the results, we suggest that the policy measures enacted by government should differ in regions when promoting subsidy reform, especially for developing countries with unbalanced regional development.

Global fossil-fuel subsidy reform and Paris Agreement

The recent downward trend in the international energy prices, combined with the rapid transition in the national energy mix and widespread efforts towards national energy market liberalization have challenged the mitigation potential of the global fossil-fuel subsidy reform. In this paper, we focus on 25 countries with large fossil-fuel consumption subsidies and estimate the impacts of fossil-fuel subsidy reform on achieving country-specific emissions reduction targets defined by the Nationally Determined Contributions (NDCs) under different oil price projections. Our results suggest that the elimination of the fossil-fuel consumption subsidies could be an effective mechanism for meeting NDC targets for an important subset of countries, even if only leading to global emissions reduction of between 1.8 and 3.2% in 2030 depending on the oil price scenario. Out of 17 countries with binding unconditional NDC targets, nine overreach their 2030 commitments under high oil price scenario and six under low global oil prices. Furthermore, eleven countries reach at least 50% of their NDC reduction targets following subsidies elimination under low global oil price path.

“Welfare impact of electricity subsidy reforms in Pakistan: A micro model study”

Electricity subsidies in developing countries have always been debated in economics circles. Despite their popular appeal of providing relief to the poor, the research has proven otherwise. They increase the magnitude of deadweight loss and taper consumer welfare. However, complete withdrawal of a subsidy will make electricity unaffordable for the underprivileged. Therefore, in the context of developing countries, there is a need to determine the optimal level of subsidy, which will have the least economic impact and benefit the maximum number of users. Pakistan has been marred by deep energy crises and the government is forced to provide very large subsidies for electricity. Using Pakistan as a case study, this study uses a uniform and non-uniform price increase to determine the optimal level of electricity subsidies. This study employs a micro-model technique for the calculation of deadweight and welfare losses when the price of electricity is increased uniformly or non-uniformly across different consumption groups. This study also introduces a targeted subsidy approach for curbing the mounting deadweight loss due to immense electricity subsidies. Our research has identified that the targeted subsidy approach not only generates fiscal savings but also improves the welfare of the vulnerable in society.

Colombia

Energy Subsidy Reform is a key pillar of Colombia’s national development plan. Rising fiscal challenges in Colombia—which have been exacerbated by the adjustment costs associated with recent large migration flows from Venezuela—can risk derailing the government from their commitment to meet both its headline deficit target of 2.4 percent in 2019 and its structural deficit target by 2022, under the existing fiscal rule. The government is committed to embark on a reform strategy that aims at safeguarding the fiscal framework. Energy subsidy reform is one element of the government’s strategy to address fiscal pressures. It is also consistent with efforts to enhance spending efficiency and free up additional fiscal resources for development needs, in line with the recommendations made by the expert commission on spending.