Energy subsidies, public investment and endogenous growth

Abstract

This paper deals with impacts of fossil fuel subsidy reform on economic growth, focusing mostly on the countries of the Middle East and East Africa (MENA) region. We first develop a theoretical growth model, and use it to demonstrate that a country can achieve higher levels of economic growth if the government reduces its energy subsidies. Our empirical work confirms the main results from the theoretical model. That is, a country that initially subsidizes its fossil fuels, and then eliminates or reduces these subsidies, will as a result experience higher economic GDP per capita growth, higher employment, and greater levels of labor force participation, especially among the youth. These effects are strongest in countries where fuel subsidies are generally high, such as those in the MENA Region. We here predict that for a given level of subsidy, a 20 cents average increase in the gasoline and diesel price per liter can increase the GDP per capita growth rate by about 0.46 percent and 0.24 percent, respectively. In the MENA countries, savings in subsidies seem to be earmarked by the region's governments to health expenditures, education expenditures and public investment in infrastructure. These channels appear to be strong contributing factors to higher long-run growth when fuel subsidies are reduced.

Price Controls: Good Intentions, Bad Outcomes

“…Empirical evidence suggests that market-oriented structural reforms, including the reduction of price controls and their related subsidies, are strongly associated with improved firm-level productivity in EMDEs (Kouame and Tapsoba 2018). Conversely, in the case of petroleum products in the Middle East and North Africa, high subsidies that underpin price controls appear to be associated with lower per capita output growth (Mundaca 2017).…”

“…Replacing price controls with expanded and better-targeted social safety nets, coupled with structural reforms, can be both pro-poor and pro-growth. Indeed, policies to lower subsidies that underpin price controls appear to be associated with higher per capita output growth, in part because savings generated by lower subsidies can fund productivity-enhancing education and infrastructure (Mundaca 2017). The removal of price controls needs to be coupled with targeted support for those segments of the population that might be adversely affected.…”

The impact of innovative technologies on consumers in the power supply market

“…Based on the international experience [2][3][4][5][6][7][8][9][10] and synthesis of different instruments the extrapolation modelling of electrical energy generation and selling with the help of innovative technologies was done. The analysis of the current technologies and best practices allowed to find the optimal way to implement innovative technologies in the power supply market in Russian Federation.…”

Investigating a Hampered NRE Utilization in Kaltim’s Energy System: Is there an Energy Policy with a Syndrome of the Energy-abundant Area?

“…In that situation, subsidy removal is better and positively impacts the economy (Mundaca, 2017). However, subsidy removal should be carefully conducted and accompanied by supporting policies, especially in developing countries, as the removal could trigger the increase of basicnecessities' prices (Hassani et al, 2018).…”