When helping the poor doesn't help
In a new study, the International Monetary Fund takes aim at energy subsidies, a common practice by countries to help the poor or benefit consumers and industry. The costs far outweigh any benefits, especially for the poor, finds the IMF.
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That’s the tough-love theme of a new study by the International Monetary Fund (IMF) that analyzes the damaging effects of government subsidies for gasoline, electricity, and other traditional energy sources.
The IMF’s advice is simple: It is far better to be transparent and true to consumers about the real price of energy than to mask subsidies as a good deed.
Subsidies, in fact, help the rich six times more than they do the poor because the rich consume more energy. And the $480 billion spent on direct government supports in developing countries would benefit the poor far more if that money were spent in areas like education and roads, the IMF concludes.
In Africa, government spending on energy subsidies is as high as on health care. And because Africa’s electricity suppliers are forced to sell power at low prices, they are not investing in new electricity capacity or improving service.
Overall, subsidies are a major drag on public finances, economic growth, social equity, and the environment. Even in wealthy countries like the United States, ending tax breaks and other indirect subsidies for fossil fuel producers would benefit everyone by slowing down climate change.
This may surprise many: The US is by far the largest subsidizer at $502 billion, with China at $279 billion, and Russia at $116 billion. If the US took into account the real cost of oil pollution and traffic congestion, the IMF calculates, it would need to raise the tax on a gallon of gasoline by $1.40.
Perhaps the country that best illustrates this subsidy trap right now is Egypt. Its money reserves are running dangerously low and yet government still spends a fifth of its budget on oil subsidies. As a condition for a bailout loan, the IMF insists that Egypt steadily end this onerous cost while also shielding the poor from the immediate impacts (temporary cash payments is one way). The price of 90-octane gasoline would need to triple.
That’s not an easy task in the midst of Egypt’s political turmoil with an election coming soon. The now-democratic nation is facing a huge problem left behind by a dictatorship that bought support from the poor by providing cheap energy (and bread) for decades.
Fortunately, countries like Egypt can learn from countries like Ghana, Turkey, and the Philippines that have started down the road of reform. An important step is to be transparent and clear with consumers about the real cost of energy and involve them in the decisionmaking. In South Africa, for example, the government posts the daily price of imported petroleum on a website. Truth is a helpful political lubricant.
Such lessons are not new. Many social programs once thought to lift the poor have had to be adjusted or abandoned when they proved to create adverse effects, either by stimulating long-term dependency among recipients or becoming unaffordable for government.
Giving in general, whether it is a subsidy or a charitable donation, is a noble impulse, but it often requires hardheaded insight, planning, and reassessment. Sending food aid to a hungry nation, for example, can sometimes dampen the incentives for farmers to improve their agriculture in the long term.
Many aid agencies learned long ago that they must “do no harm” in their generosity. Now it’s time for many governments to do the same with energy subsidies.