Equity and Efficiency Considerations of Public Higher Education


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This can take the form of a separate benefit or be merged with existing social benefits e. They allow for consumer choice, the cost to the budget is known with greater certainty than in the case of generalized subsidies, and they can be targeted to the poor. However, their real value may erode quickly during periods of high inflation and they may be prone to corruption. Limiting price subsidies to a subgroup of the population—again, including the poor. If the target group is carefully selected and the scheme is effectively implemented, targeting can produce substantial budgetary savings with minimal social disruption e.

Targeting of Compensation and Consumer-Price Subsidies The following economic objectives should guide the design of a targeting mechanism: Promote efficient targeting. Targeting is subject to two types of errors. If the targeting is too tight, some people in the target group are excluded from the subsidy errors of exclusion ; conversely, if the targeting is too loose, the subsidy is granted to people for whom it is not intended errors of inclusion.

In this context, targeting should provide adequate protection to the poor, while minimizing leakage of benefits to the nonpoor in a cost-effective manner. The disincentive to work stemming from income transfers should be recognized in the design, and the time and cost of travel to claim benefits should not be so high that it discourages participation by the poor although it can be helpful if it limits participation by the well-off. Box 2. Ukraine: Targeting of Housing and Communal Services Subsidy Since May , the government of Ukraine has successfully implemented a targeted income-transfer program to cushion the impact on the poorest segments of the population of the gradual tariff increases to achieve full cost-recovery of housing and communal services.

Target benefits to population groups that are likely to be poor on the basis of socioeconomic and demographic characteristics. These groups could include the elderly, children, or the unemployed categorical targeting , or those residing in specific areas within a country geographical targeting. Categorical and geographical targeting are associated with relatively low administrative and economic costs but tend to suffer from relatively large targeting inefficiencies.

In some countries, including Chile, Colombia, Mexico, and a number of transition economies, categorical targeting has been further developed by using a combination of household indicators that are correlated with poverty but are more easily observed proxy targeting. These indicators may include housing characteristics and location, family structure, occupation, education, gender of household head, and ownership of durable goods.

Using more indicators can improve targeting efficiency and reduce program cost but will raise administrative costs. The benefit payment can be made in-kind through, for example, food-for-work programs e. The obligations for the recipient can also come in the form of the requirement to send children to school e. Alternatively, beneficiaries can receive wage payments for participating in public-works programs e. The monetary or in-kind wage rate must be sufficiently low so that only those workers who are in need are willing to trade their time for the assistance the wage rate should, in general, be below the prevailing wage for unskilled labor.

Such self-targeting also provides an exit incentive: once the economic situation of the participating families or individuals has improved, they will opt out of the programs. Self-targeting also requires less information than other targeting mechanisms. As a result, program and administrative costs can be low. A major drawback is that coverage of the poor may be imperfect because public works and food-for-work programs may not be available in all areas in which the poor live and because of the social stigma associated with such programs e.

Moreover, such programs cannot target the working poor or those who are unable to work e. Ordering Information. T he reform of price subsidies may be necessary not only to improve efficiency, but also to facilitate pro-poor economic growth and release resources for critical social services for the poor.

Economic Issues in the Reform of Price Subsidies. Rural landless workers and small-olders who are net purchasers of food; workers in the urban informal sector. Food-for-work and public works programs; commodity targeting; food transfer programs that build on existing efforts by nongovernmental organizations NGOs ; guaranteed minumum amount for all, equivalent to amount consumed by the poor using coupons.

Well-functioning social protection programs, including pensions, unemployment insurance, and family allowances. Means-tested cash compensation; categorically targeted cash compensation and subsidies; public works programs; guaranteed minimum amount for all, equivalent to amount consumed by the poor using coupons. Pensions with limited coverage of formal sector workers and limited social assistance programs.

Commodity targeting, as well as guaranteed minimum amount, for all, equivalent to amount consumed by the poor using coupons; public works programs. Information on the poor is lacking; governance and administrative capacity is somewhat weak, but there is experience with targeted social protection schemes. Commodity targeting; limiting subsidies to amount consumed by the poor using coupons; public works programs. Box 3. Successful Price-Subsidy Reforms A successful price-subsidy reform should achieve significant budgetary or quasi-fiscal savings within a relatively short period of time, while avoiding social and political disruptions.

Tunisia realized substantial budgetary savings from increased targeting of its generalized system of food-price subsidies, reducing spending from 2. Reform was gradual and involved repeated price adjustments, sensitizing the population to the need for reform, introducing compensatory measures e. Jamaica implemented a food stamp program in to provide staples to pregnant and lactating women, young children, the poor, the elderly, and the handicapped, in lieu of a generalized food-price subsidy.

The cost to the budget fell from about 6 percent of GDP in the late s to around 0. Moreover, the innovative delivery mechanisms such as the distribution of benefits through the health care system allowed for a substantial increase in targeting efficiency. In the real value of the food stamps was only 73 percent of its value in , and the program covered only a small share of the low-income consumption basket. Targeting in Hungary during the early s relied on social assistance offices to target housing allowances to poor households, while raising housing rents to market levels and eliminating interest subsidies.

The price-subsidy reforms in Jordan and Ukraine were successful in that they achieved reductions in government outlays while providing protection to vulnerable groups. Sustainability of the reform has been a problem in Jordan, however, while progress in Ukraine toward achieving full-cost recovery for communal and housing costs has been slow.

Based on the above discussion, policymakers should do the following to the extent information is available: 10 Both the direct and indirect effects of changes in the price of subsidized items must be considered by following these steps: 11 Assess the direct impact of a reduction in subsidies on real household incomes. A pragmatic approach to estimating this impact is provided in Appendix 3. Such estimation requires information on the share of subsidized spending in total household expenditure.

These data can usually be obtained from household surveys, but are often available only with a substantial lag or with less detail than desired for these purposes see Deaton, For example, in Poland in , an increase in household tariffs for heating, electricity, and natural gas to market levels an increase of about 80 percent would have resulted in an immediate 5.

In Indonesia, in the aftermath of the —98 financial crisis, food price increases had an immediate and significant impact on the level of real consumption of low-income households. This was attributable to the high share of food over 70 percent in total expenditures of low-income households and the high increase over 75 percent in food prices during Gupta and others, Not all poor households lose from price-subsidy reform.

For example, households that produce more food than they consume may gain from the liberalization of food prices. Those employed in the traded-goods sector may also benefit from the elimination of implicit exchange rate subsidies. If possible, assess second-round effects. Increases in subsidized commodity prices may trigger price increases in other items, such as locally produced foods e.

Reducing the subsidies on energy products will increase the production cost of a broad range of items. Although such effects on the production cost of nonsubsidized items are typically difficult to assess ex ante, an initial, tentative estimate can be made by using the input share of subsidized items in the production of other major goods and services consumed by households.

Data on such input shares can be obtained from social accounting matrices e. The impact of price-subsidy reform on real household income particularly of the poor should be monitored. With the support of the World Bank, units have been established in a few countries to continuously monitor social outcomes during the implementation of reforms e. Political Considerations.

These considerations include see also Box 1 : Popularity of the government. It is easier for a popular government to implement difficult policy reforms. For example, the election of a new government with strong public support can provide an opportunity for rapid reform. Furthermore, an economic crisis may temporarily engender greater support for actions that would be otherwise unpopular. For example, in Peru, President Fujimori continued to enjoy approval ratings of 64 percent in and 69 percent in mid despite sharp reductions in price subsidies without accompanying compensatory measures.

Graham attributes this to the extreme economic shock that preceded reforms and to the on-going civil strife. In some instances, a reduction in the international price of imported subsidized items has provided a window of opportunity for governments to implement reforms e. When such opportunities arise, a government intent on reform should act quickly. Indeed, implementing reforms rapidly may even bring political benefits. In the same vein, evidence from the Russian Federation suggests that in regions that have implemented radical reforms, support for reformist parties is stronger Warner, Governments that lack political and economic credibility may face insurmountable obstacles in the implementation of price-subsidy reform e.

The level of political organization of the middle class. In many cases, protests against price-subsidy reforms are fueled, and sometimes led, by the urban middle class civil servants, teachers, university students, and affiliated labor organizations. These groups may protest because they would lose the benefit from existing, poorly targeted subsidies without a compensating reduction in their tax burden Hausmann, , and Nelson and others, Over time, subsidies can become entrenched as entitlements for current and future generations, which intensifies resistance against reform Samuelson, To assess the political risks associated with price-subsidy reform, policymakers should, to the extent feasible: Identify the winners and losers from price-subsidy and other economic reforms.

Furthermore, the characteristics of the winners and losers need to be identified. For example, urban dwellers tend to be hit the hardest by food price increases, while rural consumers are less affected because they grow more of their own food. Some ethnic groups can be poorer than others; opposition against price-subsidy reform was strong among the poor indigenous population in Ecuador in — Box 4.

Subsidy Reform and Civil Unrest The following examples illustrate the risk of political disruption where rapid reform was attempted without credible social protection mechanisms and governments were unpopular: In Jordan , in April , an attempt to raise fuel prices resulted in riots that brought down the unpopular prime minister. Speed Large budgetary savings from price-subsidy reform are difficult to achieve in the short run. Most countries have adopted a gradual approach.

When reform is gradual , the government can reduce the likelihood of policy reversal and inadequate progress by adopting and making public a detailed timetable of reform measures. Rapid reform is feasible only when governments are politically strong and the social disruption from reform is assessed to be small.

Reform can also be more rapid under favorable exogenous circumstances , such as low prices for imported staples. Social protection mechanisms Mechanisms for protecting the poor should be established before the reform of generalized price subsidies is initiated and prices of subsidized items change. Compensation schemes that protect households from real income losses should be temporary , to be replaced with permanent social policy instruments Using income for targeting benefits in developing countries and transition economies is often not a practical option in the short term.

Targeting benefits to households with specific characteristics can be relatively efficient in certain cases. The choice among targeting options can be severely constrained by lack of data on the poor and by weak governance and admin- istrative capacity. Self-targeting may remain the only feasible option. A generalized subsidy limited to, or below, the amount consumed by the poor protects both the poor households as well as politically vocal groups, while generating budgetary savings. Political disruption The risk of political disruption is highest when rapid reform is attempted without credible social protection mechanisms, and the government is unpopular.

Governments should be encouraged to adopt the stakeholder approach to reform , thus avoiding an undue burden on any single group, and initiate mass information campaigns for explaining to the public the benefits of price-subsidy reform and the working of social safety nets. Appendix 1: List of Examined Countries Government spending on subsidies averaged 1. On the other hand, in developing countries, spending on subsidies averaged 0.

Consumer price subsidies often are associated with overconsumption or underprovision of the subsidized item, and producer subsidies with excess production. The welfare cost of such price distortions i. In addition, price subsidies have been associated with smuggling e. In some cases, subsidizing of inappropriate commodities has led the poor to consume a less nutritious diet e. In the European Union, estimates for —95 suggest a net income loss of between 0. The methods used to finance subsidies —higher taxation or higher deficit financing— further worsen resource misallocations.

The capture of benefits of subsidies by middle- and upper-income households raises issues of equity and fairness. Moreover, price controls—used frequently to implement price subsidies—often result in black markets that limit the access of the poor to scarce items. Subsidies for certain activities —agriculture, energy consumption, and timber exploitation— can contribute to environmental degradation. For example, subsidies for certain activities, including cattle raising, under the Polamazonia Program in Brazil in the s adversely impacted the environment in the Amazon Davis, Estimate the loss of real household income as the arithmetic mean of the relative price change, using the shares of the consumption items in household expenditures as weights.

This amounts to the following: where RL denotes the impact on real household income in percent, wi is the share of item in household expenditures, Pi 1 is the new in most cases, higher price of item i, and Pi 0 the price before the reform of price subsidies. Alternatively, estimate the real loss of household income as the geometric mean of the relative price change, using the shares of the consumption items in household expenditures as weights.

This can be calculated as follows: Using the same example as before, the estimated loss of poor households from a rise in the price of rice by 50 percent can be calculated at 13 percent, and for nonpoor households, 4 percent. Index Guide to Concepts and Issues Administrative capacity, 7, 14, 16, 23, 25, Box 1, and Table 1. Available financing, 7 and Benefit incidence and equity, 19—20, 28, 31—32, 35, and Cash transfers, 8—11, 15—16, 29, and Boxes 3—4.

Delivery mechanism, 15, and Box 3. Exogenous factors, 29, 33, and Box 1. Efficiency of compensation mechanisms, 12—13 and Fiscal savings, 1—2, 5—7, 26, 33, and Boxes 1—3. Mass information campaigns, 32, and Middle class and other nonpoor groups, 7, 28—29, and Political disruption, 28—32, and Box 4. Political support for price-subsidy reform, 6—7, 28—32, and Boxes 1 and 4. Price-subsidy reform in the longer term, 9, 32, and Rationale for price-subsidy reform, 1, 4, 18, 20, and Reversal of price-subsidy reform, 6—7, 33, and Box 1. Social impact and disruption, 2, 4—5, 20—21, and Boxes 1 and 3.

Speed of price-subsidy reform, 5—7, 33, and Box 1. Stakeholder approach, 32, 35, and Box 4. Subsidies by type, Consumer, 8, 22, 36—37, and Subsidies and environment, 27 and On the other hand, in a number of transition economies, enterprises provide in-kind subsidies to their workers e. Enterprise reform can deprive households of such in-kind benefits, and this fact should be reflected in the design of safety nets.

Assess governance and administrative capacity. In many countries, weak governance and administrative capacity hamper the targeting and delivery of benefits.


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Weak governance can divert and waste resources allocated for price subsidies. Weak administrative capacity reflects the lack of cost-effective mechanisms to channel income transfers or targeted price subsidies to the designated population groups, and can be rooted in such factors as insufficient information on the poor and lack of equipment. Even where administrative capacity exists, targeting and delivery can be difficult. Determining eligibility on the basis of income may lead to mistargeting benefits if the administrative capacity is weak.

Furthermore, incomes change over time and frequent updates of income data are costly Van de Walle, Take account of available financing. The reform of explicit subsidies is usually undertaken to achieve, inter alia, budgetary savings. Depending on the size of required fiscal adjustment, part of those savings can be used for targeted programs. On occasion, access to foreign funds and commodity assistance may provide additional resources for compensatory measures.

Assess the impact on the environment. Price-subsidy reform is usually, but not always, beneficial for the environment Gupta, Miranda, and Parry, Input subsidies for pesticides, fertilizers, and irrigation can be harmful for the environment. They also provide incentives for land clearance, which can lead to soil erosion.

Subsidies for energy may contribute to global warming, acid rain, and respiratory and other health problems. On the other hand, subsidies for kerosene have been defended because they tend to benefit the poor and they can reduce reliance on firewood and protect forests. When reform targets benefits to truly needy families, less needy families will suffer.

The latter families may be part of politically powerful groups. If governments perceive the risk of political fallout—including apprehension about violent protest—as too large, they may be deterred from implementing reforms. As noted above, political considerations influence the speed of reform. These considerations include see also Box 1 :.

In general, violent reactions to price-subsidy reform are the exception rather than the norm, and often are not triggered by the reform alone Box 4. Subsidy reductions that have touched off civil unrest are those for staple foods, such as bread Egypt, Jordan, and Morocco , maize Zambia and Zimbabwe , and petroleum products Ecuador, Indonesia, Nigeria, and Venezuela.

To assess the political risks associated with price-subsidy reform, policymakers should, to the extent feasible:. The following examples illustrate the risk of political disruption where rapid reform was attempted without credible social protection mechanisms and governments were unpopular:. In Jordan , in April , an attempt to raise fuel prices resulted in riots that brought down the unpopular prime minister. In August , Jordanians again took to the streets in response to a percent increase in the price of bread and associated price increases for other items see Footnote 1 in main text.

Observers noted that the unrest was also rooted in the absence of economic opportunities GDP per capita fell by 2. In Zimbabwe , in , riots erupted in the wake of a currency devaluation when the poor and the middle class faced higher prices for a wide range of items. Higher-income groups were perceived to be benefiting through large wage adjustments amid accusations of widespread and growing corruption. In early , the government pegged the Zimbabwean dollar at a fixed rate against the U.

In Zambia , in , the government faced public protest and a coup attempt when it announced an increase in the price of maize meal without an explanation. The subsequent government, after great efforts to explain its reform program to the public, freed the price of maize, resulting in its quadrupling, virtually without public protest Graham, Indonesians took to the streets in May to protest energy price increases proposed by the Suharto regime.

In March , there were renewed protests against a proposed hike in fuel prices and the price increase has been postponed until a compensatory scheme for the poor households can be put in place. The current government, elected in , has been actively campaigning to explain why subsidy cuts are needed to support economic recovery and to finance the expansion of social programs. In Ecuador , in September , the government increased prices of cooking gas, gasoline, and diesel.

To compensate poor households, the government introduced a cash-transfer program targeted to poor women with dependent children, senior citizens, and the disabled. Despite the success in reaching 1. Subsidies for fuels reemerged in as import costs increased and the exchange rate continued to depreciate.

In Nigeria , in June , the government increased the price of gasoline by 50 percent. This price increase followed an effective doubling of civil service wages and a major adjustment of the minimum wage in May. However, in reaction to protests by organized labor and students in the major cities, the government agreed to a reduced price increase of 10 percent, while apologizing for not consulting various stakeholders more widely. Observers have linked the protests to an IMF-supported program and the absence of social safety nets in an environment of widespread poverty.

Even if price-subsidy reform is associated with considerable risk of political disruption, certain policies can ameliorate those risks:. Present the cost of subsidies in concrete terms. In Egypt, for example, the budgetary burden of subsidies was illustrated by comparing outlays with the revenues from the Suez Canal.

In Tunisia, the cost of subsidies was cast in terms of those of other public services, such as provision of hospitals Razmara and others, Explain to the public how the reform package affects real household incomes. If targeted subsidies are introduced, the public should be informed about eligibility criteria and the steps they need to follow to obtain benefits.

In Jamaica, procedures for obtaining food stamps were explained through a media campaign involving radio, television, posting of handbills, public address systems, and a series of newspaper inserts. Similarly, in Ecuador in , the rapid introduction of a cash compensation program in lieu of generalized subsidies for cooking gas was aided by a comprehensive publicity campaign. Appendix 2 : The Nature of Price Subsidies. A price subsidy reduces the consumer price of a good or service below what it would be in the absence of the subsidy consumer subsidy or increases the price received by a producer above its market level producer subsidy.

In practice, consumer subsidies are often implemented with price controls, resulting in shortages of the subsidized item. Producer subsidies, on the other hand, are often administered through producer support prices. When support prices are set too high, there is an oversupply of the subsidized item. In the case of a consumer subsidy, a public agency can make direct payments to producers to compensate them for charging lower prices for their output. Alternatively, the government can directly provide goods and services free of charge or at below-market prices through a public distribution system.

Implicit price subsidies are not easily identifiable in the government budget, but can show up as 1 losses of the banking system e. All these subsidies affect the government budget, although some tax expenditures, equity participation, and net lending more directly than others. A price-subsidy policy can be helpful in pursuing social and economic goals. Price subsidies can be designed to correct market imperfections. For example, the provision of basic education and childhood immunizations free of charge or at reduced tariffs can promote broad-based human and economic development.

Subsidies can also be used to address domestic market imperfections in domestic factor and product markets of traded goods. In that case, a subsidy policy is preferable to imposing tariffs Bhagwati and Ramaswami, Other price subsidies, such as for basic commodities, can provide food security and improve the well-being of the lowest-income individuals and households in a society. Transitory subsidies may be the only means of cushioning against sharp losses of purchasing power e. In practice, price subsidies have also been motivated by other goals, including providing subsidies to nonpoor special interest groups e.

Even when price subsidies achieve their intended objectives, their economic and social benefits have to be weighed against their costs:. This appendix provides two competing pragmatic approaches to estimating the impact of price-subsidy reform on households in the short term. This estimate of the loss of real household income can be illustrated with an example. Suppose the price of subsidized rice rises by 50 percent, and that the weight of rice in the expenditures of poor households averages 30 percent, and that of nonpoor households, 10 percent.

For nonpoor households, the corresponding loss in real income is smaller—5 percent, on average. This estimate provides an upper boundary on the increase in living costs. If households respond to changes in relative prices by shifting away from the item for which the price has increased, the actual loss will be smaller. The loss will be close to the above estimate if the subsidized item is a basic commodity for which no ready substitutes are available.

If there is a perfect substitute, households will react to even a small change in the price of the subsidized item by shifting completely out of that item and into the substitute, suffering no loss in real income. The procedure below recognizes the likelihood of a consumer response. Using the same example as before, the estimated loss of poor households from a rise in the price of rice by 50 percent can be calculated at 13 percent, and for nonpoor households, 4 percent.

These estimates reflect the case when households are responsive—but not infinitely so—to changes in relative prices. Which estimate of real-income loss is more appropriate? The above approaches provide a reasonable range within which the correct answer is likely to fall. Which point in this range is most relevant for estimating the desirable level of compensation for price-subsidy reform depends on many factors, including whether the subsidized item is a basic commodity and some substitution possibilities exist.

To be more precise, which estimate is more accurate depends on the size of the income effect of the price change versus the substitution effect. What is reassuring, however, is that the difference between the two estimates is typically small for poor households. In the above example, the estimates differ by only two percentage points. Social safety nets and social compensation instruments, 5, 7—10, 15—16, 23, 25—26, 32, 34, Boxes 1—4, and Table 1. Consumer, 8, 22, 36—37, and Explicit, 7, 18, 26, 37, and Food, 9, 15, 29—32, 39, Boxes 1 and 3, and Table 1.

Implicit, 7, 18, 38, and In-kind, 15 and Petroleum product, 30, 32, 41, and Boxes 1 and 4. Producer, 10, 18, 36—37, and Indirect targeting, 15, 34, and Table 1. Means testing, 13—15, 25, 34, Box 2, and Table 1. Self-targeting, 15, 34, and Table 1. Vouchers and food stamps, 15, 32, Box 3, and Table 1. These subsidies took two forms: 1 coupons distributed to all households for buying rice, sugar, and milk; and 2 wheat price controls, which provided an implicit subsidy for bread.

In , the government also began issuing coupons for bread, but the price of bread remained extremely low, leading to wasteful consumption bread was used for animal feed and smuggling. In , the price of wheat was increased and the government replaced coupons with a cash transfer for bread. This also led to an increase in prices of other foods like poultry and dairy products, which provoked food riots.

In , the fall in international wheat prices offered the opportunity to align the domestic price with its international level and integrate cash transfers into the targeted social assistance programs administered by the National Aid Fund. But the authorities set the domestic price of bread somewhat below its production cost, and a small subsidy reappeared. The domestic price of wheat continues to be controlled, and the bread subsidies may rise if wheat import prices increase.

This policy is tantamount to a cash compensation targeted to workers in the public sector and recipients of social security benefits. These wide differences in administrative cost are not reflected in the targeting efficiency; for all programs for which data were available, the share of benefits accruing to the poorest 40 percent was within or near the 70 percent to 75 percent range. This result can be attributed to the small share of screening cost of participants in the overall administrative cost of subsidy programs and disparity in the availability of existing mechanisms to channel benefits.

Several studies have shown that the targeting of social safety nets tends to become more efficient over time; see Hammer, Nabi, and Cercone and Lanjouw and Ravallion The drawbacks of these programs are imperfect coverage of the poor and high administrative costs. On the other hand, they are not associated with labor market disincentive effects, and are subject to minimal leakage.

Moving to a better, Pareto-efficient equilibrium, requires a package of policies that yields benefits over the medium term for all groups. Ravallion and Lokshin examine support for government redistribution in the Russian Federation in They find that support for redistribution not only depends on whether the population is poor or well-off, but also on whether it expects to suffer an income loss or gain. Subsidies that are administered by extrabudgetary funds such as agricultural subsidies in a number of countries are sometimes not consolidated with the budget.

Thus, the SNA data on subsidies exclude payments to consumers, such as food stamps, which are recorded under transfers, as well as implicit subsidies. This behavior is consistent with preferences that can be described by a monotonic transformation of a Cobb Douglas function, which has unitary compensated own-price and cross-price elasticities. Preferences of this type also underlie calculation of the Consumer Price Index in a number of countries, including many components of the CPI for the United States. Speed of Price-Subsidy Reform 5.

They are: Fiscal considerations. A high share of explicit subsidies in spending implies a greater potential for rapid budgetary savings. However, as noted above, the budgetary savings will be offset in part—at least in the short run—by compensation for the poor. Elimination of implicit subsidies, on the other hand, will not generally yield budgetary savings, although the revenues of public-sector agencies could increase.

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Consequently, the speed of reform of implicit subsidies should reflect the availability of resources, including from external sources. One way to generate resources for targeted compensatory programs is to charge market prices for donor-provided commodities. This policy would also avoid disincentives for domestic production. Availability of social protection instruments and administrative capacity. Compensating the poor for the elimination of subsidies requires not only resources, but also a system to deliver compensation to those who need it.

Price-subsidy reform can be rapid when countries already have social protection instruments that can be adapted to the needs of the poor during reform see Section 3. If new social safety net instruments need to be established, the administrative capacity to design and implement adequate and well-targeted social protection will affect the speed of reform. Availability of information on the socioeconomic and demographic characteristics of the poor will also influence the speed. Willingness of governments to act on a technically sound reform package. Political considerations have an impact on whether reforms are implemented in a timely manner.

In part, they are determined by the popularity of the government and by the level of organization of the middle class see Section 4 for more details. But, even under favorable conditions, governments may opt for a slower pace of reform in order to assess and react to unintended consequences, including any adverse political repercussions, and adjust the timing and speed of reforms accordingly.

As noted above, however, this runs the risk of reform reversal. Box 1. In Zambia , in , the government faced public protest and a coup attempt when it announced an increase in the price of maize meal without an explanation. The subsequent government, after great efforts to explain its reform program to the public, freed the price of maize, resulting in its quadrupling, virtually without public protest Graham, Indonesians took to the streets in May to protest energy price increases proposed by the Suharto regime.

In March , there were renewed protests against a proposed hike in fuel prices and the price increase has been postponed until a compensatory scheme for the poor households can be put in place.

The current government, elected in , has been actively campaigning to explain why subsidy cuts are needed to support economic recovery and to finance the expansion of social programs. In Ecuador , in September , the government increased prices of cooking gas, gasoline, and diesel. To compensate poor households, the government introduced a cash-transfer program targeted to poor women with dependent children, senior citizens, and the disabled.

Despite the success in reaching 1. Subsidies for fuels reemerged in as import costs increased and the exchange rate continued to depreciate. In Nigeria , in June , the government increased the price of gasoline by 50 percent. This price increase followed an effective doubling of civil service wages and a major adjustment of the minimum wage in May. However, in reaction to protests by organized labor and students in the major cities, the government agreed to a reduced price increase of 10 percent, while apologizing for not consulting various stakeholders more widely. Observers have linked the protests to an IMF-supported program and the absence of social safety nets in an environment of widespread poverty.

Even if price-subsidy reform is associated with considerable risk of political disruption, certain policies can ameliorate those risks:. Present the cost of subsidies in concrete terms. In Egypt, for example, the budgetary burden of subsidies was illustrated by comparing outlays with the revenues from the Suez Canal.

In Tunisia, the cost of subsidies was cast in terms of those of other public services, such as provision of hospitals Razmara and others, Explain to the public how the reform package affects real household incomes. If targeted subsidies are introduced, the public should be informed about eligibility criteria and the steps they need to follow to obtain benefits.

In Jamaica, procedures for obtaining food stamps were explained through a media campaign involving radio, television, posting of handbills, public address systems, and a series of newspaper inserts. Similarly, in Ecuador in , the rapid introduction of a cash compensation program in lieu of generalized subsidies for cooking gas was aided by a comprehensive publicity campaign.

Appendix 2 : The Nature of Price Subsidies. A price subsidy reduces the consumer price of a good or service below what it would be in the absence of the subsidy consumer subsidy or increases the price received by a producer above its market level producer subsidy. In practice, consumer subsidies are often implemented with price controls, resulting in shortages of the subsidized item. Producer subsidies, on the other hand, are often administered through producer support prices.

When support prices are set too high, there is an oversupply of the subsidized item. In the case of a consumer subsidy, a public agency can make direct payments to producers to compensate them for charging lower prices for their output. Alternatively, the government can directly provide goods and services free of charge or at below-market prices through a public distribution system.

Implicit price subsidies are not easily identifiable in the government budget, but can show up as 1 losses of the banking system e. All these subsidies affect the government budget, although some tax expenditures, equity participation, and net lending more directly than others. A price-subsidy policy can be helpful in pursuing social and economic goals.

Price subsidies can be designed to correct market imperfections. For example, the provision of basic education and childhood immunizations free of charge or at reduced tariffs can promote broad-based human and economic development. Subsidies can also be used to address domestic market imperfections in domestic factor and product markets of traded goods.

In that case, a subsidy policy is preferable to imposing tariffs Bhagwati and Ramaswami, Other price subsidies, such as for basic commodities, can provide food security and improve the well-being of the lowest-income individuals and households in a society. Transitory subsidies may be the only means of cushioning against sharp losses of purchasing power e. In practice, price subsidies have also been motivated by other goals, including providing subsidies to nonpoor special interest groups e.

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Even when price subsidies achieve their intended objectives, their economic and social benefits have to be weighed against their costs:. This appendix provides two competing pragmatic approaches to estimating the impact of price-subsidy reform on households in the short term. This estimate of the loss of real household income can be illustrated with an example. Suppose the price of subsidized rice rises by 50 percent, and that the weight of rice in the expenditures of poor households averages 30 percent, and that of nonpoor households, 10 percent.


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  • For nonpoor households, the corresponding loss in real income is smaller—5 percent, on average. This estimate provides an upper boundary on the increase in living costs. If households respond to changes in relative prices by shifting away from the item for which the price has increased, the actual loss will be smaller.

    The loss will be close to the above estimate if the subsidized item is a basic commodity for which no ready substitutes are available. If there is a perfect substitute, households will react to even a small change in the price of the subsidized item by shifting completely out of that item and into the substitute, suffering no loss in real income. The procedure below recognizes the likelihood of a consumer response.

    Using the same example as before, the estimated loss of poor households from a rise in the price of rice by 50 percent can be calculated at 13 percent, and for nonpoor households, 4 percent. These estimates reflect the case when households are responsive—but not infinitely so—to changes in relative prices. Which estimate of real-income loss is more appropriate? The above approaches provide a reasonable range within which the correct answer is likely to fall. Which point in this range is most relevant for estimating the desirable level of compensation for price-subsidy reform depends on many factors, including whether the subsidized item is a basic commodity and some substitution possibilities exist.

    To be more precise, which estimate is more accurate depends on the size of the income effect of the price change versus the substitution effect. What is reassuring, however, is that the difference between the two estimates is typically small for poor households. In the above example, the estimates differ by only two percentage points. Social safety nets and social compensation instruments, 5, 7—10, 15—16, 23, 25—26, 32, 34, Boxes 1—4, and Table 1.

    Consumer, 8, 22, 36—37, and Explicit, 7, 18, 26, 37, and Food, 9, 15, 29—32, 39, Boxes 1 and 3, and Table 1.

    Equity and Efficiency in the Reform of Price Subsidies - A Guide for Policymakers

    Implicit, 7, 18, 38, and In-kind, 15 and Petroleum product, 30, 32, 41, and Boxes 1 and 4. Producer, 10, 18, 36—37, and Indirect targeting, 15, 34, and Table 1. Means testing, 13—15, 25, 34, Box 2, and Table 1. Self-targeting, 15, 34, and Table 1. Vouchers and food stamps, 15, 32, Box 3, and Table 1.

    These subsidies took two forms: 1 coupons distributed to all households for buying rice, sugar, and milk; and 2 wheat price controls, which provided an implicit subsidy for bread. In , the government also began issuing coupons for bread, but the price of bread remained extremely low, leading to wasteful consumption bread was used for animal feed and smuggling.

    In , the price of wheat was increased and the government replaced coupons with a cash transfer for bread. This also led to an increase in prices of other foods like poultry and dairy products, which provoked food riots. In , the fall in international wheat prices offered the opportunity to align the domestic price with its international level and integrate cash transfers into the targeted social assistance programs administered by the National Aid Fund. But the authorities set the domestic price of bread somewhat below its production cost, and a small subsidy reappeared.

    The domestic price of wheat continues to be controlled, and the bread subsidies may rise if wheat import prices increase. This policy is tantamount to a cash compensation targeted to workers in the public sector and recipients of social security benefits. These wide differences in administrative cost are not reflected in the targeting efficiency; for all programs for which data were available, the share of benefits accruing to the poorest 40 percent was within or near the 70 percent to 75 percent range.

    This result can be attributed to the small share of screening cost of participants in the overall administrative cost of subsidy programs and disparity in the availability of existing mechanisms to channel benefits. Several studies have shown that the targeting of social safety nets tends to become more efficient over time; see Hammer, Nabi, and Cercone and Lanjouw and Ravallion The drawbacks of these programs are imperfect coverage of the poor and high administrative costs. On the other hand, they are not associated with labor market disincentive effects, and are subject to minimal leakage.

    Moving to a better, Pareto-efficient equilibrium, requires a package of policies that yields benefits over the medium term for all groups. Ravallion and Lokshin examine support for government redistribution in the Russian Federation in They find that support for redistribution not only depends on whether the population is poor or well-off, but also on whether it expects to suffer an income loss or gain. Subsidies that are administered by extrabudgetary funds such as agricultural subsidies in a number of countries are sometimes not consolidated with the budget.

    Thus, the SNA data on subsidies exclude payments to consumers, such as food stamps, which are recorded under transfers, as well as implicit subsidies. This behavior is consistent with preferences that can be described by a monotonic transformation of a Cobb Douglas function, which has unitary compensated own-price and cross-price elasticities. Preferences of this type also underlie calculation of the Consumer Price Index in a number of countries, including many components of the CPI for the United States. Speed of Price-Subsidy Reform 5. They are: Fiscal considerations.

    A high share of explicit subsidies in spending implies a greater potential for rapid budgetary savings. However, as noted above, the budgetary savings will be offset in part—at least in the short run—by compensation for the poor. Elimination of implicit subsidies, on the other hand, will not generally yield budgetary savings, although the revenues of public-sector agencies could increase. Consequently, the speed of reform of implicit subsidies should reflect the availability of resources, including from external sources.

    One way to generate resources for targeted compensatory programs is to charge market prices for donor-provided commodities. This policy would also avoid disincentives for domestic production. Availability of social protection instruments and administrative capacity. Compensating the poor for the elimination of subsidies requires not only resources, but also a system to deliver compensation to those who need it. Price-subsidy reform can be rapid when countries already have social protection instruments that can be adapted to the needs of the poor during reform see Section 3.

    If new social safety net instruments need to be established, the administrative capacity to design and implement adequate and well-targeted social protection will affect the speed of reform. Availability of information on the socioeconomic and demographic characteristics of the poor will also influence the speed.

    Willingness of governments to act on a technically sound reform package. Political considerations have an impact on whether reforms are implemented in a timely manner. In part, they are determined by the popularity of the government and by the level of organization of the middle class see Section 4 for more details. But, even under favorable conditions, governments may opt for a slower pace of reform in order to assess and react to unintended consequences, including any adverse political repercussions, and adjust the timing and speed of reforms accordingly.

    As noted above, however, this runs the risk of reform reversal. Box 1.

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    Speed of Subsidy Reform: Country Experience An examination of 23 countries that underwent price-subsidy reform and for which data are available see Appendix 1 indicates that most countries did not rapidly reform generalized subsidies. The speed of reform in the countries studied was affected by: Administrative capacity and availability of social protection instruments. Many countries adopted a gradual approach to subsidy reform so as to adapt existing social protection instruments or to establish a social safety net e.

    In the case of Indonesia, a system of generalized subsidies on food items and petroleum products was introduced in as the country lacked an effective social safety net. In late , when the budgetary cost of subsidies ballooned to 4. The reduction in the subsidy on petroleum products was delayed because of disagreement between parliament and government on the mechanism for delivering protection to the poor.

    In the short term, fiscal arrangements between the federal and subnational governments can complicate the implementation of price-subsidy reform. In the Russian Federation — , the federal government has established the standard for cost recovery for housing and communal services provided by subnational governments. However, it is up to the subnational governments to apply this standard; they can choose to squeeze other more productive programs or accumulate arrears instead. Lack of political support. Even when countries have had the institutional and administrative capacity to protect the poor, the lack of political support has stalled or reversed reform efforts in some cases.

    For instance, in Ukraine, the objective of achieving full cost-recovery of housing and communal services is delayed, despite the availability of a well- functioning means-tested program targeted to the poor see Box 2. A change in government led to the reversal of reforms in Sri Lanka and Mauritius , although targeted income-support programs in lieu of generalized price subsidies had been established. Temporary Mechanisms to Protect the Poor 8. Poor households can be temporarily protected from the effects of reforming implicit and explicit price-subsidies by: Providing cash compensation to all or selected consumers—perforce including the poor—in lieu of the subsidy.

    This can take the form of a separate benefit or be merged with existing social benefits e. They allow for consumer choice, the cost to the budget is known with greater certainty than in the case of generalized subsidies, and they can be targeted to the poor. However, their real value may erode quickly during periods of high inflation and they may be prone to corruption.

    [Social and population policy. Considerations on efficiency and equity].

    Limiting price subsidies to a subgroup of the population—again, including the poor. If the target group is carefully selected and the scheme is effectively implemented, targeting can produce substantial budgetary savings with minimal social disruption e. Targeting of Compensation and Consumer-Price Subsidies The following economic objectives should guide the design of a targeting mechanism: Promote efficient targeting.

    Targeting is subject to two types of errors. If the targeting is too tight, some people in the target group are excluded from the subsidy errors of exclusion ; conversely, if the targeting is too loose, the subsidy is granted to people for whom it is not intended errors of inclusion.

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    In this context, targeting should provide adequate protection to the poor, while minimizing leakage of benefits to the nonpoor in a cost-effective manner. The disincentive to work stemming from income transfers should be recognized in the design, and the time and cost of travel to claim benefits should not be so high that it discourages participation by the poor although it can be helpful if it limits participation by the well-off. Box 2. Ukraine: Targeting of Housing and Communal Services Subsidy Since May , the government of Ukraine has successfully implemented a targeted income-transfer program to cushion the impact on the poorest segments of the population of the gradual tariff increases to achieve full cost-recovery of housing and communal services.

    Target benefits to population groups that are likely to be poor on the basis of socioeconomic and demographic characteristics. These groups could include the elderly, children, or the unemployed categorical targeting , or those residing in specific areas within a country geographical targeting. Categorical and geographical targeting are associated with relatively low administrative and economic costs but tend to suffer from relatively large targeting inefficiencies. In some countries, including Chile, Colombia, Mexico, and a number of transition economies, categorical targeting has been further developed by using a combination of household indicators that are correlated with poverty but are more easily observed proxy targeting.

    These indicators may include housing characteristics and location, family structure, occupation, education, gender of household head, and ownership of durable goods. Using more indicators can improve targeting efficiency and reduce program cost but will raise administrative costs.

    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education
    Equity and Efficiency Considerations of Public Higher Education Equity and Efficiency Considerations of Public Higher Education

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