Removal of Subsidies

[sparklingway]

IFIs and all major donors have always enforced that we removed subsidies from major areas. This has been the understanding of the neo-liberal school of thought and there are definitely well thought reasons behind this policy.

Providing enormous subsidies is not only is a strain on the government but it does not make the consumer realize the actual cost of the commodity. For example, electricity subsidy paid out last year stood at a colossal Rs. 179.526 Billion. Subsidies stood at 1.5% of GDP last year, after being revised from an earlier figure of 0.9% of GDP, the reason being that the proposed removals of subsidies are delayed/canceled owing to public pressure.

A major problem with removing subsidies is the actual perception of their removal. Rather than being portrayed as "removal" of an "assistance", it is always portrayed as an "increase". Will in actuality, it is an increased burden on the consumer's wallet but the perception is that somehow the government has added to the price while in actuality it only removes its assistance. The media's portrayal of removal of subsidies is a very big factor and can be used to eliminate the largely negative public opinion in the wake of the removal of subsidies.

While we can most definitely argue that removal of subsidies on electricity effect the poor and lower income groups adversely, for we do not provide subsidies according to usage rather it is provided uniformly (through GENCOs). This uniform subsidy allocation is itself a very serious problem but the larger question is whether we can continue to dole out subsidies to reduce economic pressure on the consumers. Subsidies, if they exist, should be non-uniform and be given to low income groups but sadly this has never happened and perhaps cannot happen in a largely informal and unreported economy.

If we remove, in due steps, even half of the energy subsidies provided last year, then the 90 Billion thus generated can be used to a much more effective cause. Relief to lower income groups can be provided by social protection under programs such as BISP and food stamps. Food stamps have been largely unsuccessful in the previous two decades, but they were successful in the formative years of our country and work fine across the world as well.

Besides voting in the poll, please do share your views.

 

[Neither Right Nor Wrong]

Well One of the biggest problem with across the board Subsidie ( ie.when price of electricity is reduced by certain percentage for all user.) is the one who uses the maximum amount of electricity, saves the maximum amount of money.

eg If Subsidie on electricity is 10 % , a person using 1200 units will be saving much more than a person using 200 units.
Hence govt ends up giving more Subsidie to the rich than the poor.

If at all Subsidie is to be provided, They should be targeted towards poor. Like taxes the electricity prices should be in different slabs
eg. up to 200 units , Rs 2.5/unit.
200 to 600 unit , Rs 5/unit
600 to 1000 unit , Rs 10 /unit
above 1000 unit Rs 15 /unit

How ever industry should definitely get some subsidy, for cheap energy is one the primary requirement, for an industry to grow.

 

[sparklingway]

Well One of the biggest problem with across the board Subsidie ( ie.when price of electricity is reduced by certain percentage for all user.) is the one who uses the maximum amount of electricity, saves the maximum amount of money.

eg If Subsidie on electricity is 10 % , a person using 1200 units will be saving much more than a person using 200 units.
Hence govt ends up giving more Subsidie to the rich than the poor.

If at all Subsidie is to be provided, They should be targeted towards poor. Like taxes the electricity prices should be in different slabs
eg. up to 200 units , Rs 2.5/unit.
200 to 600 unit , Rs 5/unit
600 to 1000 unit , Rs 10 /unit
above 1000 unit Rs 15 /unit

How ever industry should definitely get some subsidy, for cheap energy is one the primary requirement, for an industry to grow.

As I said, this is the very basic understanding behind subsidy allocation but its actual implementation is very difficult.

Firstly, because the higher income groups yield excessive political power in Pakistan. People everywhere, and on this forum as well, will blame the politicians (who themselves represent the bourgeois) but fail to (or willingly fail to) identify the pressure groups e.g the recent pressure from stock barons to eliminate Capital Gains Tax on stocks purchased before the end of the last FY. Our economic barons, the bourgeois and even the upper middle class (the major contributor to this forum) will cry foul. The elites are generally the same across the world but the upper middle class in Pakistan is apathetic and far more exploitative than counterparts across the world. These groups do not actively participate in politics but provide the media voice that has become one of the five pillars of the state. Such a move will never be supported by the media, much like income support policies have never been supported. (I know my last arguments might be unacceptable to some, but frankly I tried to water down my argument here for my accusations are far bigger)

Secondly, it is fairly common even now for people get multiple electric connections (and hence meters) installed in their premises. I myself once reported a very "honest and upright" friend of my fathers to IESCO for having had five different meters installed at his home (and he didn't have any subletted floors). Four meters result in all bills having consumption in the minimum tier of consumption with the lowest charges. For the "upright and honest" person whose electricity consumption is clearly above the 95th percentile, this results in huge savings. Similar corruption amongst the middle class could be seen in the previous year during the sugar crisis when I myself witnessed a so-called-friend whose father runs a bunch of departmental stores bribing the Utility Stores Manager to sell him nearly all the stock of the subsidized sugar to him. The family earned "hard earned" profit from their antics. My arguments had no effect on the morally-dead conscience that could justify such barbarism.

My points being, such proposals are rosy on paper but thorny in practice. The only long term solution can be elimination of subsidies, especially on energy. The consumer has to realize the actual cost of the subsidies and the state is in no position to support such massive assistance. Removing electricity and petroleum subsidies would result in more than 200 Billion being available to the Federal Government and this isn't some small amount and can be utilized fairly well in other sectors.

 

[Neither Right Nor Wrong]

As I said, this is the very basic understanding behind subsidy allocation but its actual implementation is very difficult.

Firstly, because the higher income groups yield excessive political power in Pakistan. People everywhere, and on this forum as well, will blame the politicians (who themselves represent the bourgeois) but fail to (or willingly fail to) identify the pressure groups e.g the recent pressure from stock barons to eliminate Capital Gains Tax on stocks purchased before the end of the last FY. Our economic barons, the bourgeois and even the upper middle class (the major contributor to this forum) will cry foul. The elites are generally the same across the world but the upper middle class in Pakistan is apathetic and far more exploitative than counterparts across the world. These groups do not actively participate in politics but provide the media voice that has become one of the five pillars of the state. Such a move will never be supported by the media, much like income support policies have never been supported. (I know my last arguments might be unacceptable to some, but frankly I tried to water down my argument here for my accusations are far bigger)

I guess, you have a point there ,the ppl who are in power are the ones who enjoy most subsidies and pay the least taxes. Hence they might be averse to such measures, unless forced by some external forces like the IMF.
As you mentioned BISP in your last post, I feel these programs should be short term.

In hard times when economy is slow and inflation is high and unemployment rate is high ,then these prog. help the ppl with enough monetary support to survive these tough times. But should removed as soon as the economy picks up as it is happening US.

And the money saved should used for creating jobs.

or like the saying goes:
"Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for the rest of his life."

Secondly, it is fairly common even now for people get multiple electric connections (and hence meters) installed in their premises. I myself once reported a very "honest and upright" friend of my fathers to IESCO for having had five different meters installed at his home (and he didn't have any subletted floors). Four meters result in all bills having consumption in the minimum tier of consumption with the lowest charges. For the "upright and honest" person whose electricity consumption is clearly above the 95th percentile, this results in huge savings. Similar corruption amongst the middle class could be seen in the previous year during the sugar crisis when I myself witnessed a so-called-friend whose father runs a bunch of department stores bribing the Utility Stores Manager to sell him nearly all the stock of the subsidized sugar to him. The family earned "hard earned" profit from their antics. My arguments had no effect on the morally-dead conscience that could justify such barbarism.

It is said "every country gets the government it deserves" It very much holds in South Asia's case ..we ppl are corrupt to our cores, hence can't blame our ruling classes, for what they are.

 

[sparklingway]

Subsidies vs infrastructure
By Farooq Tirmizi

June 21, 2010

KARACHI: For the first time in decades, the government of Pakistan has presented a finance bill to the National Assembly that minimises the amount of populist measures. Needless to say, the government has taken a lot of grief for failing to provide “relief” to the masses. Yet there is a contention to be made the government’s current approach to development expenditures is a far more constructive one and will provide far more “relief” to the people of Pakistan in the long run.

Owing largely to the conditions placed on the government by the International Monetary Fund, the finance ministry eliminated many subsidies and announced its intention to reduce others. Crucially, it announced almost no new subsidies, much to the chagrin of the heads of trade associations and journalistic commentators. In fairness, the government did not make the case for its policies effectively, neither in the budget speech nor in any subsequent communications. It is a case worth making.

As has been stated previously on these pages, subsidies do nothing to help people improve the quality of their lives and keeps them perennially dependent on the government for support. Infrastructure development, on the other hand, builds things such as roads, railways, schools and bridges that connect people and make commerce possible. This last point is especially pertinent and deserves to be highlighted. The lack of infrastructure creates bottlenecks and costs the economy in terms of lost opportunities and an increased cost of doing business.

The cost of subsidies

Subsidies are politically popular, often being used by politicians as a thinly disguised, legal form of bribing the electorate. So well known is this fact that even a military regime, such as that of Gen Musharraf, used this technique to try to buy off the electorate before the 2008 election. Unfortunately, they did so largely by monetising the national debt, economists’ jargon for saying that they simply printed money to pay their bills, setting off a domino chain of economic disasters.

Printing money causes the money supply to increase without a commensurate increase in demand. This caused inflation to spike sharply, reaching an all-time high of 25.8% in August 2008. The sharp spike in inflation caused interest rates to follow suit. Given the fact that most debt in Pakistan is negotiated at variable rates, most borrowers faced a massive rise in their financing costs, causing many of them to default. This, in turn, caused banks to face huge losses on their loan portfolios and for a few dark weeks in late 2008, even the largest banks refused to lend money to each other on the interbank market. With credit drying up, the economy virtually ground to a halt.

So what does this have to do with subsidies? The government simply does not have enough money to pay for its bills. Faced with a trade-off between subsidies and spending on infrastructure, the government would be far better off choosing to spend on infrastructure. Even if the government ended up creating the same inflationary pressures as a result of its infrastructure spending, at least it is creating the capacity for further economic growth in the country in the process.

Power & transportation: the necessary expense

That spending money on infrastructure is a good thing is a self-evident fact. What is somewhat less clear is that it helps far more that any subsidy ever could. This is best illustrated with an example.

At a nominal GDP of about $180 billion, Pakistan is the 46th largest economy in the world, according to the World Bank. The country has the sixth largest population in the world and has an internal market large enough to justify large investments. For example, according to the Small & Medium Enterprise Development Authority (SMEDA), the retail and wholesale segment of the Pakistani economy is a $36 billion market. So why are there no large national retail or wholesale chains?

The two biggest reasons are the lack of a transportation infrastructure and a reliable power supply. For example, Engro Foods – the food products subsidiary of the Engro Corporation – has created a large, nationwide, integrated supply chain to manage the logistics of its raw materials supply. Yet the transportation infrastructure of the rural areas of the country is so poor that the cost of its logistics takes up close to 18 per cent of its revenues, according to people familiar with the matter. This is one of the major reasons why, despite having close to Rs15 billion in revenues, the company still made a loss of over Rs400 million.

Most companies report similar problems when it comes to creating a national supply chain. And the national economy suffers for it. Sticking with the example of the dairy industry, over 40 per cent of the milk produced in Pakistan is wasted, according to the Punjab government. Only about 30 per cent is sold at all and less than 3 per cent is packaged. Given the fact that milk packaging companies pay more than the ordinary milk shop, if the economy moved to a much larger percentage of packaged milk, the consequences for the agricultural workforce would be immeasurably positive.

Only the local market can give true “value addition”

Owing to the distribution problems highlighted above, most manufacturers in Pakistan tend to discount the possibilities of selling to the local market. While the market for food may be worth $36 billion, not all of it is easily accessible, and given the lack of cold storage chains and the perishable nature of foods, most of its not serviceable by anything other than the smallest of localised corner stores.

Because firms cannot explore the local market, they are confined to seeking volumes in the export market. Yet the global market is far harder to penetrate without localised knowledge. This is why most textile manufacturers are restricted to manufacturing products for foreign brands. Most of the retail margins are captured by the owner of the brand name, not the owner of the manufacturing facility. And it is far easier to develop a brand locally and then export it rather than creating a global brand from scratch.

If the government is serious about promoting Pakistani industry and exports, it should do so by developing the infrastructure for a local market. If it must do so by ignoring subsidies, then so be it. In the long run, that will be the best form of “relief” to the people of Pakistan.

Published in The Express Tribune, June 21st, 2010.

 

[keeninterest]

this is an argument which finds a resonance in india as well and so it tempts me to do a write up on this.

why is it that when the subsidies target the poor and lower middle income groups of a society or more specifically the marginalized section of the society that we shout, "oh the subsidies are a burden on the fiscal makeup of a country". why do we not come up with the same arguments when the industry gets huge dole outs by way of stimulus or no tax on their profits for a certain period or very low tax rates or when their loans get written off as bad debts etc and calculate the impact as a % of the gdp. it is quite clear such a thing does not happen because the media is as much a part of the industry and they deflect the real issue and focus on a segment of a society which has no real voice and no one is interested in them beyond a mere lip service so such a group becomes an easy bashing boy.

then our ever smart politicans and economists alike start to come up with new definitions of poverty line. some one will define it as earning of an individual/house hold below 2 dollar a day and now making a mockery of the whole thing they have come up with an argument of a mere 1.2dollars a day and so one finds drastic cut down in the official stated poverty figures of countries like india and pakistan as a result of which the populance starts to believe the government of the day have done a very good job not realizing the spin doctors have done a fine job with their cosmetic surgery, its as if the poor in the society really do not matter any more, the question i have is how much of a difference does it make if some one earns 2dollars or 1.25dollars and sadly the answer is, harly any but when it is 2dollar then the poverty rate is going to reflect the majority of our population which means the government is obliged to feed that many more mouths, but then since these people have hardly any vocal voice so it hardly matters whether the measure is 2 or 1.25. if we were to take 2dollars as a measure the povert rates in india and pakistan would be hovering around 70-80% (slightly better for pakistan) but are their any takers for it?

before getting into the details one needs to look at the social security measures inisited with in a country, those targeted towards the marginalized section, its implementaion and its impact, and as the case would be, it would be dismial then why root out the little subsidies that happen the implementation of which is again dismail to say the least.

we talk about subsidies and criticize them but when the times are bad as was the case in pakistan, has someone ever wondered the impact of huge inflation on the fence sitters on the dividing line of poverty line? each year millions more cross that line south wards as a result of high inflation rate but has the government ever recognized such facts, have they ever issued revised figures? hardly ever, imagine a recent data stating that majority of pakistani house holds spend 70% of their earnings on food, and our countries are busy talking about povery rates in early 20s and how pleasing is that?

and there is so much more, seriously!

a better discussion would be if it were to be centered around the implmentation aspect and how to better it and try and find ways to benefit the underprevldged that form the most of our populace, or is it really scary if genuine 70-80% of our population has to be taken care off, which is a rate so high only due to our many misgivings of the past six decades. And if at all removal of subsidies has to discussed keep it limited to the middle and higher income groups of the society and let the little benefits that flow to the marginalized be the way they are or else the jihadis in pakistan and the maosist in india have a million reasons to take over the state.

dont take away the subsidies but find a way of better implementation.

 

[mjnaushad]

A lot of money can be saved if we eliminate subsidies. And that money can be use in other projects like power and roads etc which will help us in the long term. I say subsidy should be given in a way that only poor benefit from it. A man in one room house should get subsidy on electricity but a man living in a mansion should be exempt from it.