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Hard cash and not subsidies is the way to go
Moving to money transfers may help the poor, but the poor rarely have the loudest voice.
- By Alan Beattie, Financial Times
- Published: 23:58 August 15, 2008
The Roman empire handed out free bread and put on circuses to keep its population happy.
Today, subsidising the cost of living means keeping a lid on fuel as well as food prices. With the energy and food crises inflating the cost of subsidies across the developing world, governments are being forced down a route that the World Bank and development economists have urged for years: cushioning poor families by targeted cash payments delinked from the cost of hydrocarbons and carbohydrates.
According to a survey of International Monetary Fund economists, explicit fuel subsidies in a sample of developing countries averaged 1.5 per cent of gross domestic product last year, and implicit subsidies through price manipulations, a hefty 4 per cent.
Even some oil-exporting countries, where subsidies are easier to afford, are rethinking them. In Iran, where petrol costs 11 cents a litre, President Mahmoud Ahmadinejad said last month that aid to buy fuel would be paid by cash into the bank accounts of poor people. The artificially low price of fuel not only costs the government $97 billion in forgone revenue, it encourages smuggling. There is interest in "conditional cash transfer" schemes in which families get assistance in return for socially beneficial behaviour such as keeping children in school. The idea was pioneered in Mexico and spread to Brazil. It is gaining footholds across Africa and Asia.
Introducing such schemes is not straightforward. Jeffrey Lewis, a development finance expert at the World Bank, says: "To move to an outcome that targets the poor you need to have a reasonably good administrative system in place. In many of the poorest countries they are weak or small in scope."
The programmes have been boosted by better technology, particularly the smart cards and cash cards used in developing countries. In Malawi, one of the poorest countries, schemes in the United Nations-supported Millennium Villages development project have distributed cash cards.
Perhaps the biggest obstacle to making the move remains the political risk to removing ceilings on energy and food costs. Even Mexico, though it has increased payouts through its "Oportunidades" cash-transfer programme to meet higher food costs, maintains expensive fuel subsidies on top.
In India, the government has long controlled fuel costs with a complex system of state-run distribution systems and price controls. In particular, kerosene and liquefied petroleum gas (LPG) used for cooking are heavily subsidised.
Economists say the LPG subsidy is an inefficient and badly targeted way of helping the poor, as it is disproportionately used by better-off urban households. Even kerosene, used by the urban poor for cooking, is used by both rich and poor in the countryside.
A recent study calculated that all India's rural poor could be lifted above the poverty line if the Rs1,800 billion ($77 billion) India spends annually on central-ised handouts were made direct transfers.
"When the expenditure on [centralised schemes] and subsidies in the name of the poor is enough to lift all poor people out of income poverty, and yet more than 300 million people remain poor, it is imperative that India undertake a radical shift."
As energy subsidies are often captured by the well-off, there is organised opposition to reducing them. Proposals by India to reform fuel handouts met storms of protest, and a dozen petrol stations in Iran were torched last June when the government rationed petrol.
Moving to cash transfers may help the poor but in developing countries, the poor rarely have the loudest voice.
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