“Why Fuel Subsidies in Developing Nations Are an Economic Addiction”
Bloomberg Businessweek, Mar. 13, 2014
“Once again, Ukraine is turning to Europe and the International Monetary Fund for assistance, this time a $15 billion bailout. For years, negotiations with the IMF had stalled over a single point: Ukraine spends 7 percent of its gross domestic product on natural gas subsidies for consumers. The IMF wants that cut by a third before approving any loans. … In the developing world, it’s tempting for a country to keep the price of fossil fuels artificially low. The subsidy can take the form of a price cap, preventing oil companies from charging too much at the pump. Or it can come as a tax break to a domestic oil producer, which then usually passes on the savings. In both cases, the government has to make up the difference. Subsidies usually start as an attempt to avoid inflation and shield citizens from the pain of price increases in global energy markets. But energy subsidies are expensive; they eat up national budgets. Benefits end up going mostly to the richest citizens and crowd out more productive government spending on education or infrastructure and reduce energy efficiency. Subsidies mess with the law of supply and demand, discouraging investment in both alternative energy and fossil fuel exploration. … Governments like to describe fuel subsidies as social programs. But the bulk of the assistance doesn’t reach the poor. The IMF says 61 percent of the benefit of gasoline subsidies goes to the richest 20 percent of citizens, who own cars; the number is slightly lower for diesel and natural gas.”
Quickie analysis: Fuel subsidies may be the world’s most popular self-made economic disaster.