A recent article on the World Bank blog made the
case that in “MENA: Uniform cash transfers are better than subsidies”, citing,
among others, the Jordanian subsidy reforms. However, in spite of the
overwhelming worldwide agreement about the superiority of cash transfers to
subsidies, the proponents of cash transfer seem to forget several concepts,
some theoretical and others practical, related to the implementation of the cash
transfer mechanism.
اضافة اعلان
One of the basic arguments against subsidies is that
even though subsidies are meant to protect the poor, they tend to favor the
rich. Take, for example, a blanket fuel or energy subsidy: a rich consumer may
receive more than a poor consumer, since the former has more and larger assets
(car/s, house/s, etc.). Producers, on the other hand, are less incentivized to
find better or more advanced means of production since energy is a relatively
cheap resource.
The same applies to food subsidies, where the rich
are capable of consuming more than the poor and thus the subsidy enables not
only waste among the rich and poor, but also misdirection of resources in the
economy. A similar argument can be made with water subsidies.
Cash transfer is therefore considered superior in all respects. Moreover, recent empirical research has shown that cash transfer offers the receiver a greater feeling of control as he or she chooses where best to spend the money.
Of course, the worse forms of subsidies are those
that guarantee a certain fixed price for the commodity because as commodity
prices rise, the size of the fiscal burden on the budget grows.
Cash transfer is therefore considered superior in
all respects. Moreover, recent empirical research has shown that cash transfer
offers the receiver a greater feeling of control as he or she chooses where
best to spend the money. However, there are caveats:
1) The shift from subsidy to cash transfer should be
coupled with a private-public sector dialogue, and the pros and cons should be
clearly explained. In Jordan, the shift from fuel subsidy to cash transfer was
suddenly made in November 2012, and complete liberalization followed shortly
afterwards, also in an abrupt manner.
2) The government must possess accurate data, and if
it does not, it should expand the target group to ensure full coverage, even if
waste does occur. Ultimately, the better the database the less the waste. In
Jordan, in the case of the fuel subsidy removal, almost 70 percent of the
population was included in the coverage.
3) Availability of administrative capacities and
efficiency is a basic requirement for implementing the new direction.
Otherwise, corruption, incompetence, delays, and other mishaps, which may typically
occur in third world countries, more than in the advanced economies, could
easily degrade the gains from the shift.
4) Quality
health and education facilities should be available, especially when the
removal of the subsidies may impact these two necessary developmental
requirements. Countries where these two basic publicly provided services are
not readily available should think twice before shifting from subsidies to cash
transfers.
5) Many times the high cost of the subsidy is due to
monopolistic practices, which are quite spread in Jordan. Most claims of
efficiency loss in literature are based on the supply and demand model, which
assumes perfect competition in the market — a completely fictitious,
non-existent market. The real world is run by monopolies, monopolistic
practices, and imperfect competition, which tend to raise prices when cash
transfers occur. Look, for example, what happened in the developed countries
after governments pumped trillions of dollars in their economies.
6) Often times the need for subsidy may arise from
government-created inefficiencies, such as not modernizing a refinery or buying
food at a spot rate instead of using sophisticated purchasing mechanisms. It is
far better to address such government-created shortfalls before delving into
whether to give cash or subsidize.
The upshot is that the making of economic policy is
never a straightforward exercise. The economy is a highly complex, constantly
changing and evolving organism. Hence, shifting toward a cash transfer system
instead of granting subsidies is not, and should not be, a remedy for all.
Yusuf Mansur is CEO of the Envision Consulting Group and
former minister of state for economic affairs.
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