WASHINGTON DC, January 28 (IPS) – Situational Review. Faced with growing fiscal stress, the government of an energy exporting country decided to cut subsidies generously, causing fuel prices to double overnight.
Protesters took to the streets, clashing fiercely with security forces called in to maintain law and order. They vent their frustration not only with rising fuel prices but also with the cost of living, lack of social services, crumbling infrastructure, corruption and political repression.
Faced with the prospect of a popular uprising, the government limited reforms and reinstated subsidies, postponing difficult decisions to a later date.
This is Kazakhstan in 2022. It is also Ecuador in 2019, Nigeria in 2012, Bolivia in 2010, Indonesia in 2005 and several other energy exporters have been trying to end, or at least reduce, fuel subsidies over the past two decades.
The list would grow significantly if we included importers more exposed to fluctuating international energy prices. Interestingly, the story plays out almost exactly the same way, and the consequences of both action – and inaction – are also very similar.
For resource-rich countries like Kazakhstan, Ecuador, Bolivia and Nigeria, subsidized energy, especially from fossil fuels, is one of the few tangible ways that citizens may feel that they have a claim to national resources.
Although the level of subsidy varies, at around $228 per person or 2.6% of GDP in 2020, of Kazakhstan is high but not the highest among exporting countries. In a situation where the government is often seen as repressive, incompetent and corrupt, food and fuel subsidies help mask deeper grievances. It is economically damaging but politically appropriate, a fragile equilibrium that many countries have sought to manage over the past few decades – with little success.
Our research has shown that there is a better way to implement energy subsidy reform. Offering direct money transfers to offset rising energy prices could be a “win-win” solution. Simply put, energy offset transfer (ECT) allows households, especially the poor and the vulnerable, to absorb the shock and reallocate resources according to their needs. surname.
By eliminating the difference between subsidized and market prices, ECTs can also reduce corruption, improve distribution, and encourage efficient energy use. Countries such as Iran, India, Jordan and the Dominican Republic have been relatively successful in this type of reform, and Their experience is a lesson for other countries that choose to embark on this path.
Digital technology can significantly assist in identifying beneficiaries, providing them with necessary guidance and information, and directing payments to individuals and households. The three key drivers of ECT are a universally accessible identification system, robust communications, and broad access to financial accounts.
Multiple databases can be cross-checked to verify eligibility criteria, and a claims settlement system can help minimize exclusion of actual beneficiaries. As shown, for example, by India’s LPG Subsidies ReformCountries can gradually tighten eligibility criteria over time to target the poorest segments of the population.
Ultimately, ECT could provide the impetus for a more transparent and accountable pension management system, which improves public confidence and supports the government’s reform agenda in the long run.
So why don’t more countries follow this approach? For a, most energy subsidy reforms were pushed forward in times of economic crisis. ECTs require political commitment, open participation in public dialogue, building consensus among stakeholders and vested interests, establishing systems of implementation and working across ministries, various government departments and agencies.
Direct compensation is also more transparent than often opaque subsidy systems that favor the rich, given their higher energy consumption, even when justified by the need for protection. poor.
ECT is not a simple solution and often requires time to implement. On the surface, it seems simpler to just raise energy prices overnight through an administrative order. However, rewards have important implications for sustainability, economic outcomes, social cohesion and political stability.
The sooner countries can take a long-term approach, the better they can manage the transition to a more sustainable system that supports those who need it most.
Kazakhstan is the first country in 2022 to see widespread unrest due to rising fuel prices. It almost certainly won’t be the last.
Anit Mukherjee is a policy fellow at the Center for Global Development. Alan Gelb is a senior fellow at the Center for Global Development.
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