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Should energy subsidies be abandoned?

Jul 06,2014 - Last updated at Jul 06,2014

Believe it or not, the Egyptian government’s expenditure on subsidising fuel and electricity is 10 times what it spends on health.  This, of course, is an extreme state of affairs but it can be found at various degrees among many Third World countries, which devote something equal to 20 per cent of their central budgets for subsidising energy. Such spending must be at the expense of other more important needs of the economy and the people.

Subsidising energy starts as a benign measure to help the poor and raise their standards of living, but subsidies end up in budget deficit, rising public debt, and wasting resources to the detriment of all concerned. 

In a recent issue, The Economist reported that a survey of energy subsidies in Third World countries revealed that, on average, the richest 20 per cent of the population take 40 per cent of the subsidy, while the poorest 20 per cent only benefit from 7 per cent of the total subsidy. 

In other words, the share of a rich family is six to seven times the share of a poor family. Yet governments are ready to waste a lot of the public funds ostensibly to support the poor, unnecessarily spending seven dollars in order that only one dollar will reach the deserving poor. 

Although subsidising energy is widespread among poor and developing countries, the present worldwide trend is pointing towards abandoning this practice and shifting the estimated cost of $500 billion towards health and education, which are more vital to the poor, and more effective in raising their standard of living, much more than enabling them to consume more energy.

To offer energy at low prices will not only hurt the financial position of the country concerned, it will also cause harm to the poor, not only in polluting the environment, but also in motivating investors to build large-scale industries that depend on subsidised energy and avoid making small labour intensive industries. As a side effect, energy subsidies reduce the job opportunities that the economy could have generated, had it not been for the distortion created by subsidies.

Fortunately, Jordan is among the developing countries that adopted a policy of reducing the energy subsidy in a step towards abolishing it altogether.

Jordan was successful in the case of fuel and oil derivatives, where prices are now determined monthly in accordance with global prices of petroleum.

It remains to be seen if the government will be equally successful in dealing with the electricity and water subsidies, which currently cost more than it is spending on health and education combined.

Jordan should not wait for advice from the World Bank or the International Monetary Fund to do the right thing and put an end to the policy of subsidising consumption, which is prone to corrupt economic life, waste resources and sometimes hurt the very dignity of the poor and limited income groups of society.

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