Energy subsidies are bigger than aid in more than half of poor countries... but we spend very little trying to reduce them.

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Which of the following do you think is the most important need in developing countries?

  1. Free health services for all to reduce child and maternal mortality

  2. Universal and decent quality education to provide children with the skills for productive jobs

  3. Cheap petrol and electricity

Unless you are Scrooge, you are more likely to have chosen one of the first two on this list. Yet my new WIDER Working Paper (https://www.wider.unu.edu/publication/energy-subsidies-international-aid-and-politics-reform) shows that many developing countries spend far more on the third option that they do on the first two.

Subsidizing fossil fuels and electricity is commonplace throughout the world. Globally, energy subsidies amount to between US$300-500 billion each year--several times the value of all aid. And there is now abundant evidence of the damage that such subsidies cause. Cheap fossil fuel encourages over-consumption which generates air pollution (http://www.healthoverfossilfuels.org/publications/) and contributes to global warming, not to mention the additional congestion and accidents as well as the foregone revenue from subsidising rather than taxing fuel. When these 'externalities' are taken into account, the IMF estimates (https://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf) that energy subsidies amount to US$5.3 trillion--around 6% of global GDP.

Most fuel subsidies go to the rich

Moreover, most of these subsidies go to the rich. By their nature, energy subsidies go mostly to the people that consume most energy--people with cars and motorbikes, not those who walk; people that are connected to the grid, not those with no light. A paper by Coady, Flamini and Sears (2015) (https://www.imf.org/external/pubs/ft/wp/2015/wp15250.pdf) shows that the top 20% of households get six times the benefit from subsidies as the bottom 20%--energy subsidies are one of the worst ways of helping the poor.

Many poor countries have huge fuel subsidies

However, what is less well appreciated is that many poor countries also have very large energy subsidies. While the absolute size of subsidies is largest in countries such as the United States, Russia and Saudi Arabia, many poor countries have huge subsidies relative to the size of their own economies. For 2015, the IMF estimated that, even without measuring the damaging externalities, energy subsidies would be more than 10% of GDP in countries such as Turkmenistan, Venezuela and Iran.

But these countries are only...

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