The Political Economy of Energy Subsidy Reform

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Untargeted price subsidies could easily be construed as one of the most expensive and most regressive fiscal policies in low- to middle-income countries. In fact, public expenditure on subsidies often exceeds the entirety of these countries’ social safety net expenditures many times over, making this a critical area of reform that can reap important benefits for social welfare and macroeconomic and fiscal stability. In some cases, the energy subsidy bill is enormous—straining countries’ fiscal capacity, skewing the distribution of income away from the poor, and perpetuating large distortions in economic activity toward capital-intensive and environmentally damaging activities. In these places, no other single policy failure is as consequential as subsidies. Although there is ample evidence of the unfavorable fiscal and benefit incidence of subsidies, the economic arguments on behalf of fiscal sustainability and equity are often not enough to allow for reforms to take hold.

Why are subsidies so difficult to reduce? And when governments have eventually managed to reduce subsidies, what disrupted the political equilibrium that gave rise to them in the first place? Relatively few World Bank reports provide a political economy perspective on this issue. Instead, most of the work on subsidies has focused on their sectoral efficiency, fiscal sustainability, or distributional impacts. Even so, most do point to the critical role of political economy in subsidy reform. 

This volume was initiated at the request of World Bank country teams working in countries considering energy subsidy reforms. Their main complaint was that although they understood the macroeconomic, fiscal, and distributional reasons for recommending a reform, they had difficulty in providing examples of the political economy circumstances that might allow reforms to take place. The request was to provide an in-depth account of the timing and sequencing of countries that had successfully reformed energy subsidies—and to do so within a broader political economy context. Observing the political economy climates of governments that have grappled with subsidy reform provides a rich source of learning for other countries with comparable political climates. Instead of drawing up a prescriptive road map for reform, the idea was to derive lessons and to point to the circumstances that enabled reforms to take place. 

The team assembling this volume reached out for expertise outside the Poverty and Equity Global Practice. First, to a colleague with expertise on the determinants of political incentives to pursue economic development, Philip Keefer (who helped to put together the conceptual framework at the concept note stage), and then to David Victor, professor of political science at the University of California, San Diego. Subsequently the composition of all the country teams contributing to this volume has been a mix of macroeconomists as well as poverty, social development, and energy specialists who have benefited greatly from collaboration with global and country-level experts.

Last Updated : Sun,2018-06-24