Many Asian governments offer subsidies to hold down energy costs mostly as a populist ploy that allows leaders to take credit for spending money taken from taxpayers. Despite assertions used to rationalize them, there is no evidence that keeping prices low for energy has contributed to economic growth.
Indeed, the opposite if probably true. Such supports were mostly possible due to higher rates of economic growth than experienced in other parts of the world.
But with the rising costs of crude oil, these fuel subsidies are creating budgetary pressures for governments throughout the region. Rising budget deficits are being worsened by these subsidies and may force governments to curb other spending, including infrastructure investments needed for economic growth.
The tragedy is that once these populist measures are put into place it is extremely difficult to muster the political will to end them. Street protests and agitation by political opponents tend to force a retreat from decisions to increase prices.Running away from these problems is a classic instance of politicians choosing political expediency over economic reality. Faced with costs in the short-run, politicians inevitably avoid immediate pain even when long-run gains for the entire community are substantial.
From a political perspective, fulfilling these populist promises places an enormous strain on state budgets while also opening up opportunities for corruption. And the economic effects caused by oil subsidies involve distortions that interfere with communicating the full costs of energy use to both consumers and producers.
Forcing down prices to consumers makes them less inclined to conserve fuel so that their may be more environmental degradation. At the same time, businesses and manufacturers are less likely to invest in fuel-efficient equipment. This latter point is supported by the fact that production in Asia consumes more energy per unit of output than in other parts of the world.
Among the Asian countries offering fuel subsidies is Indonesia where subsidies on petroleum products lead to petroleum fuels that are as much as 60 percent below world prices. It is expected that the Indonesia government might have to spend over US$6 billion this year on fuel subsides, an amount that exceeds spending on both health and education.
And now with international oil prices at around US$50 per barrel, the primary beneficiaries of this largesse are likely to be fuel smugglers and corrupt officials that allow fuels to be bought at low prices locally and sold at higher prices in foreign markets.
Because of large price differentials in neighboring countries, there is a large temptation for smugglers to buy at low subsidized prices and sell offshore for considerable profits. It is bad enough that smuggling benefits corrupt officials and criminals, such operations result in domestic taxpayers extending a subsidy to foreigners who buy from smugglers!
Since it is an oil exporter, Indonesia suffers from opportunity losses from not selling its refined products on global markets for higher prices. These sales would bring in more dollar earnings to add to foreign reserves and aid in future economic development.
Since reducing subsidies for any goods or services always creates a problematic political issue, they should never be implemented. In the first instance, the primary beneficiaries of are not the poor. Indeed, many the beneficiaries are those whose income places them well in the middle class or higher. However, the largest amount of financial gains from subsidies goes to industrial users.
Many companies receiving advantages are exporters, so foreign buyers of their products constitute a large but undeserving group of beneficiaries. This form of "corporate welfare" harms the poor by diverting public funds from programs that offer greater benefits to lower income groups, like improved public transportation.
artificially low also has serious environmental consequences. Much of the air pollution that plagues large cities arises from low prices that encourage waste and create dependency on private vehicles instead of encouraging use of public transit systems.
Subsidies on fuel offer an object lesson in the corrosive effect of populism as a tactic of looting the public treasury for the purpose of buying votes. This is evident in the fact that fuel subsidies have the perverse effects of rewarding the wealthy, damaging the environment, reducing costs for rich enterprises, and providing benefits to foreigners at the expense of locals.
Professors and students in countries with fuel subsidies should be leading street demonstrations to bring an end this populist ploy. After all, they are nothing more than a form of corporate welfare that is harmful to the environment and involves transfers to the rich that can also lead to unnecessary gifts being made to citizens of neighboring countries.
Christopher Lingle is visiting professor of economics at Universidad Francisco Marroque in Guatemala.
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