Plight of the poor: Alternatives to subsidy

What are the alternatives, if any and how can they be effectively provided to the deserving?


Chaudhry Shoaib Hamid February 07, 2011

Last week I hit upon the idea of no subsidies for the fuel sector, and now the real question arises. If we have no subsidies, how can the plight of the “unprofitable poor,” a term borrowed from Smith’s Wealth of Nations, be ameliorated? What are the alternatives, if any and how can they be effectively provided to the deserving?

Since 2003, many governments around the world have tried to do away with fuel price subsidies. Very few, though, have managed to do this without stiff opposition. The recent attempt of Evo Morales of Bolivia to increase fuel prices led to violent protests across the country, including the capital La Paz, on January 2, 2011 injuring 15 people. The Indian government decided to increase fuel prices for the second time in a month in January this year, which has led to widespread protests.  In October 2005, when the Australian government decided to increase petrol prices, protests ensued. Similarly, over the years countries such as Venezuela, Nigeria and Indonesia have seen regrettably violent protests and demonstrations against fuel price hikes. Pakistan is no different.

Governments have been known to capitulate in the face of such widespread opposition. However, the present economic landscape, does not allow the luxury of retreat in the face of opposition.

Two approaches that the government can use to reduce subsidies while providing protection to the poorer households are smart cards and targeted compensation.

Smart cards are basically vouchers issued to deserving households to buy a limited amount of certain fuel at a reduced price. This smart card can be limited to certain classes of users, for differing amounts of fuel. This system has been used successfully in Malaysia, which gives out these smart cards for public transport vehicles and fishing boats. In Pakistan, these smart cards can be issued to public transporters, fishing boat owners, tube well owners and households earning a specific amount of income, which can be determined with consensus among all stakeholders and political parties.

Another approach which has been used in different countries is that of targeted compensation. This is where instead of providing fuel subsidies across the board to all consumers, the government hands out cash transfers or a benefit in kind to protect lower-income households from rising fuel prices. According to a World Bank study, this is likely to be the most effective approach, provided two things are present. These are, a fairly accurate list of lower-income households to ensure that only the needy are provided with the cash transfers. And second, the government has to determine a low-cost mechanism to transfer the cash or benefits. In the case of Pakistan, both of these things are somewhat present, via the Benazir Income Support Programme (BISP). The budget allocation for BISP for the current fiscal year is Rs50 billion which is to be distributed among five million poor households in the form of monthly cash transfers of Rs1,000. On the other hand, subsidies for the current fiscal year have been budgeted at almost Rs127 billion, out of which Rs87 billion relate to energy. Now, this Rs87 billion is to be shared by all.

As discussed last week, Indonesia estimated that only 15% of subsidies reach the really poor and almost 70% is consumed by the top 40% of households. Let’s assume, in our case 20% or even 25% of the subsidies reach the actually deserving. That means that out of the total energy subsidies of Rs87 billion which have been designed to benefit the poor, only Rs23 billion reach them whereas Rs64 billion goes to people who are not really supposed to get them. It exceeds the total outlay of BISP for fiscal year 2010-11!

There is the option that subsidies be eliminated and the amount that the government saves be distributed among the poor. Several countries have already used a variation of this approach. According to World Bank data, in 2005 and 2006, Chile made one-time payments of $28 and $35 respectively to families earning less than $350 per month. For a period in 2006, China gave $1.24-2.48 per month to poor residents to offset the effect of rising fuel prices.

To make such a scheme successful in Pakistan, another crucial factor that is required is rooting out corruption. Pakistanis like you and me need to know that the amounts that we are relinquishing in not getting the subsidy is going to people who really need them, not just to political party affiliates. A transparent system needs to be in place, ideally audited by a reputed and independent audit firm. The annual audit report and quarterly review reports should be made public to evoke trust. Such a cash-transfer scheme coupled with trust generation has been used by Indonesia. In January 2003, the government of Megawati Sukarnoputri tried to raise fuel prices but was met with such wide scale protests that the decision had to be revoked. However, in 2005, the administration of Susilo Bambang Yudhoyono more than doubled fuel prices with no substantial opposition. The reason? A widely publicised cash transfer programme for 15.5 million households (some 28% of the population) which entailed quarterly payments of $30, along with greater belief and trust in the ability and intentions of the government.

Ghana, too, provides an insightful example. When in 2004 it decided that fuel subsidies are not sustainable, it started a Poverty and Social Impact Assessment (PSIA) for fuel. A steering committee was formed consisting of all stakeholders. This committee assessed the impact of fuel price increases on various income households. After one year of the committee’s work and assessment, the government decided to increase fuel prices by almost 50% and provide mitigation measures for the poor, as suggested by the Steering Committee. These were transparent, and widely publicised, explaining clearly the reasons for the increase. Although trade unions remained opposed to the price increases, the general public did accept them without much opposition.

Concluding my arguments, I believe that fuel price subsidies in Pakistan are not sustainable. What is more disturbing than their being unsustainable is the fact that they are not benefiting the people who they are supposed to benefit. The richer households, being the larger consumer, get a bigger slice of a cake which was not even baked for them. It is about time that we become responsible citizens and send a message out to the government that, “we do not want these subsidies. Yes, to an extent, we need them. It does make a dent in our pockets. But we can make do with it. I’ll walk my way to the market or use public transport maybe once a week. I’ll share my car with my younger brother or sister maybe. You, the government, take my subsidy and give it out to them who really need them.” They get Rs.1,000 a month! Imagine living ten days in that amount! It is about time to put things in perspective. The richer households can make do with expensive fuel. It won’t kill them that much I know. But as I write this and you read this, there are people actually dying of hunger and starvation, and of the cold.

Published in The Express Tribune, February 7th, 2011.

COMMENTS (3)

Aleem Zubair | 10 years ago | Reply Better ideas for providing direct subsidy than giving out cash (which as Afzal said, wouldn't be easy to manage in Pakistan) can be thought of. The two main areas that hit the poor are freight and transportation. If subsidy is to be directed to those clusters, hence reducing the absorption of subsidy by the rich, it could be executed with lesser chances of proliferation. Also, saving all those billions and investing it where it can generate income and thereby really addressing the plight of the poor could be a good idea... but then again, who has the time and tenure to think long term...
mohammad afzal sheikh | 10 years ago | Reply I wish the 'political leaders' who are opposing the increase in fuel prices should read this articele. However, the practices adopted by other countries to ensure that subsidies reach the deserving masses and not the class of society who can afford to pay the right price, might be a bit difficult to exercise due to the obvios reasons. Several years ago, in Lagos,then the capital city of Nigeria, due to heavy traffic on the roads, the government implemented Odd and Even car number system. If your car number started with an odd digit, this could come on the raod only on Mondays, Wednesdays, and Fridays whereas Tuesdays and Thursdays were reserved for cars with even numbers.This system reduced the numbers of cars on the roads on a particular working day to almost half. Saturdays and Sundays were open for all.People started sharing, rescheduling their car usage for their admissible days, resorted to using bus service etc. One should not be a genius to apprehend the possible benefits of the exercise.
VIEW MORE COMMENTS
Replying to X

Comments are moderated and generally will be posted if they are on-topic and not abusive.

For more information, please see our Comments FAQ

E-Publications

Most Read