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The Debate: Would the Arab World be better off without Energy Subsidies?

Will Stebbins's picture
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The Debate

Governments in the Arab world have long subsidized the price of energy. This gives citizens throughout the region access to cheap petrol and diesel, and electricity supplied at below-market rates. But what has been the real impact of subsidies, and do they justify the huge financial burden they place on national budgets? This is a critical question in the Middle East and North Africa (MENA), as the region represents a disproportionate share of the world’s energy subsidies.

To tackle the question, we brought together Musa Shteiwi, Director of the Center for Strategic Studies at the University of Jordan, and Shanta Devarajan, World Bank MENA Chief Economist, for a debate on costs and benefits.  Please join the debate and let us know your thoughts on the ultimate impact of energy subsidies.

Energy

Shanta Devarajan (SD): I'd like to talk about subsidies, energy subsidies in the MENA region. The MENA region has something like 5% of the world's population, 3% of the world's GDP, and 50% of the world's energy subsidies.  I actually think the worst problem with the energy subsidies is that they discriminate against employment. And the reason is that most energy subsidies benefit energy intensive industries - well it turns out that energy intensive industries are also capital intensive.  You have some of the highest unemployment in the world in MENA,  and I think these two are linked and they are so closely linked that you actually have to turn the debate around energy subsidies from one about budget or about equity to one about jobs.

Musa Shteiwi (MS): Theoretically what you're saying makes a lot of sense. But in reality it's not well established.  I think the subsidies in the region you refer to, you know the 50%, is coming from the oil-producing countries - more than the others. It's across the board, but the heavy subsidies are in the Gulf and Saudi Arabia. Now, two points I want to mention: first, the argument for lifting subsidies today comes in very difficult circumstances for the region, for the countries like Jordan and Yemen, economically and politically. You should understand that in our region the major opposition to lifting the subsidies is actually the high cost of the energy and transportation bill for people. In the sense that, when people say, ‘we don't want to lift the subsidies,’ it’s because it immediately affects them, and it affects the poor as well.

SD: You know subsidies are around 6% of GDP, take 2% of GDP and give it out as cash transfers targeted to the poor so they can afford to pay those higher prices of energy

MS: We have done it in Jordan…the cash for the poor, but the question is: how sustainable is this? It's not only the poor that are suffering from lifting the subsidies, but also the middle class. The middle class - for example, in Jordan, most people go to work using their own cars and this cost is a really substantial part of their salaries. What I'd like to see is projects, investments on the part of the governments in public transport and public utilities that will eventually, in the long run make this issue a non-issue.

SD: You can invest in public transport but if the price of gasoline is cheap, people will not take public transport. Why is it that we already have public transport in many of these countries but people are still driving cars? Why is it that in Cairo you have one of the highest rates of motorization in the world?

MS: One can argue the other way around, if there was good public transportation people would not be driving cars.

SD: Even there I would say: for the governments to be able to afford investments in public transport, they have to stop spending on subsidies. Where will they get the money for….

MS:  I'm not against the idea in principle. I'm against it in the way it's been done. I think investing in public transportation is key for economic development and job creation.

SD: Look around the world - the cities where gasoline is cheapest are the cities with the worst public transport. In most of Europe, the price of gasoline is very high and you have excellent public transport systems.

MS: So that's whether it's the chicken or the egg first -  it's not like that. If it's presented in a package, a package of investments in public utilities, transportation - gradual, I think it's perfect. The other point I want to mention, because of the impact of the Syrian crisis and the Iraqi crisis, and  I'm not talking only about refugees, I'm talking about all the dynamics that have been created -  the cut off of the trade routes and trade relations. In Jordan there has been a crack in the economic structure of the society. That's again, really a burden, that lifting subsidies could have a negative impact on.

Electricity

SD: Lebanon has a huge problem with electricity. Many have service for only one hour a day, or two hours a day, and this is because their utility has been entirely subsidized.  Whenever you subsidize something you create excess demand and then you add the one and a half million Syrian refugees, which makes the situation even worse. Put another way, had Lebanon eliminated the electricity subsidies before the crisis, the cost of the Syrian refugees would be that much less. Lebanon is breaking because of the subsidies.

MS: In Jordan and in Lebanon in particular, we are living in what I would call a disaster situation. And therefore it is not the right time to approach these issues when we have far greater problems such as unemployment. The World Bank has done a great job in creating an emergency fund to help municipalities in Jordan. I think it would be a great idea to have an emergency fund for helping the youth – more thinking outside the box, in a more innovative way.

SD: The answer to the unemployment problem is not a World Bank project, or even a government of Jordan project – it’s to make the private sector in Jordan a dynamic, competitive private sector. What I would love to do is a project to help break down the monopolies, that are standing in the way of a dynamic, competitive private sector - and that's the best we can do for youth unemployment in Jordan.

MS: I agree with you in principle that it's the private sector's responsibility to generate jobs. But I'm not sure - in Jordan it's more than just monopolies.

Jobs

MS: Most of the activity - economic activity - is concentrated in the middle region: Amman, Zarqa, Salt and also Irbid. Therefore, the issue of monopolies, for generating jobs in the south for instance, is not an issue. It's an issue of investment in these areas and training and capacity.

SD: But when you see a depressed region, there are two choices: one is you invest; the other is to have people move to jobs rather than jobs move to people.

MS: Moving from the South to where there are jobs - meaning migrating to Amman, leaving their homes.

SD: What's wrong with that?

MS: We'd have a huge problem.

SD: What's the problem?

MS: The concentration of people in Amman, the added pressure…

SD: Nothing wrong with that.

MS: Oh, it's a huge problem.

SD: No, the problem is because of the subsidies….

MS: Let me finish my argument:  I think it is very important to enable people to live and have jobs where they are - where their roots are.

SD: We shouldn't force people to stay.

MS: We're not forcing them. The opportunities that are created in that region now are very few. Eventually, if they migrate, you aggravate the problem for the region.  It's a huge area, and the people there also need economic activities. Also, in coming to Amman, there’s so much pressure placed on the capital - in terms of everything.

SD: The history of economic development is the history of people moving to jobs. Every country - no country has developed without the people moving from the rural areas to the urban areas. Look at every East Asian country..

MS: Well, Karak is not a rural area; there are urban areas there as well.

SD: …From depressed areas to more lucrative areas.

MS: For us, this will create huge population disparity

SD: No, you have a huge population disparity now.

MS: Well, it will be aggravated

SD: No. It eases it. It equalizes it.

MS:  These people have the right to have jobs where they are and generate an economy off their resources, off their land.

SD: Think about the history of every country that has developed. This is the one universal factor:  people have moved from low productive areas to high productive areas.

MS: There's no doubt about it – but we could have an engine of growth in the south, one of the cities could become an engine of growth.

SD: Thank you very much. I think we can both agree that we want Jordan to succeed.  

MS: Absolutely – it’s been a pleasure.

Comments

Submitted by SAT GOEL on

IN BAHRAIN, it costs 28 fils to produce one Kwh of energy but it is billed at 3 fils. It is almost 10% of the cost in the US. This leads to consumption of almost 10,000 units per person.

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