Thanks for a very interesting discussion. I would like to call your attention to the fact that the policy of removing subsidies and replacing them with targeted safety nets to the poor is being discussed in 100 world countries – so this debate is very relevant.
This policy is nothing new. Williamson’s description of the Washington Consensus in earlier decades was based, among other, on fiscal discipline/expenditure cuts and redirecting public expenditures such as subsidies (except defense) to support economic growth with some targeted pro-poor expenditures. This was also very well described by Richard Jolly, Andrea Cornia and Frances Stewart in their “Adjustment with a human face” (which inspired this e-discussion).
Today, decades later, the same prescriptions are applied again. An analysis of austerity measures worldwide reviewing 314 IMF country reports from 2010 to 2013 (http://policydialogue.org/files/publications/Age_of_Austerity_Ortiz_and_Cummins.pdf) indicates that governments are considering the following adjustment strategies: (i) elimination or reduction of subsidies, including on fuel, agriculture and food products (in 100 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 98 countries); (iii) rationalizing and further targeting of safety nets (in 80 countries); (iv) pension reform (in 86 countries); (v) healthcare reform (in 37 countries); and (vi) labor flexibilization (in 32 countries). Many governments are also considering revenue-side measures that can adversely impact vulnerable populations, mainly through introducing or broadening consumption taxes, such as VAT, on basic products that are disproportionately consumed by poor households (in 94 countries). Contrary to public perception, austerity measures are not limited to Europe; in fact, many of the principal adjustment measures feature most prominently in developing countries.
The removal of subsidies, supported by IMF official policies, has been generally welcomed by social protection practitioners – it has provided a source of fiscal space to provide social protection, either targeted (Cockburn, Hague) or universal (Standing). Others are more cautious (Kidd, Ghosh, Fajth), for different reasons.
Lawson (Oxfam) called our attention to fuel riots. Many social protection practitioners understand food riots, but tend to dismiss fuel riots as less important. Wrong. A recent analysis of world protests 2006-2013 (http://policydialogue.org/files/publications/World_Protests_2006-2013-Final.pdf) reveals that fuel and energy riots have been as prevalent as food riots, and should not be underestimated. The removal of fuel subsidies—a main element of fiscal austerity in developing countries—and unaffordable energy prices have sparked protests in many countries (eg. Algeria, Cameroon, Chile, India, Indonesia, Kyrgyztan, Mexico, Mozambique, Nicaragua, Niger, Nigeria, Peru, Sudan, Uganda). For example, in Nigeria, where the majority of the population lives on less than $2 per day, cheap petrol is viewed by many as the only tangible benefit they receive from the state, hence the massive protests since 2012 when Minister of Finance Okonjo Iweala removed a fuel subsidy that kept food and transportation costs low.
A few takeaways from this discussion:
1. Policy reforms are complex, we should avoid “one-size-fits-all” agendas, the net welfare effect of any reform must be properly understood prior to engage in any policy advise. Clearly we are to avoid regressive fuel subsidies that may only benefit wealthy corporations, but we should be very careful about the renewed Washington Consensus advise of dismantling subsidies anywhere and replacing them by targeted safety nets to the poor.
2. Designing a meagre safety net to the poorest is an insufficient compensation mechanism if other non-wealthy households were also benefitting from subsidies. Recent studies, including by the IMF, point how income inequality is a gross obstacle to development. As global recovery remains fragile, many developing countries are trying to develop their internal markets to encourage national demand. A safety net to the poorest is very insufficient to these objectives.
3. Hence the debate on universalism vs targeting. While many practitioners (understandably) are compelled to alleviate hardship to the poor and thus focusing on minimal targeted interventions, we should aim for more. Yes, the fight for social justice starts by combatting the worst forms of poverty and neglect, but it does not end there – remember human rights are universal, a reason why UNICEF, ILO, WHO, UNRISD, and many other UN organizations defend universalism – including recently the World Bank (http://www.worldbank.org/en/topic/health/publication/universal-health-coverage-study-series ) . The drive for social justice is also about fighting abuse and creating equitable societies, which should make us question where are the public savings from subsidy reforms going, and how could they best used to reduce inequalities, promote inclusive development and prosperity for all. The huge savings from the removal of subsidies should allow us to be more ambitious in our development thinking, and consider adequate universal social protection systems and other necessary policies that work for all citizens – instead for a few.
Director Social Protection
International Labour Organization
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