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Abstract
Over the last decade, pressure to reduce subsidies for energy (especially fossil fuels) in developing countries has mounted, but reform is politically controversial. The debate on reform is dominated by a liberal narrative that employs an understanding of energy subsidies as political rent, based on public choice theory. Here, it is argued that this approach takes too static and limited a view of rent, and that engagement with theories of the state in the development process suggests a more dynamic view. The degree of centralisation of political power is also argued to be a key factor in the use and reform of subsidy. This application of the framework is then illustrated in the case of Indonesia. Finally, implications for reform strategies are drawn out.
Acknowledgements
I am grateful to Jonathan Stern, Caroline Kuzemko and Colin Hay for comments, and to participants at a seminar at the Institute of Development Studies in February 2013 for useful feedback.
Notes on contributor
Matthew Lockwood is a senior research fellow in the Energy Policy Group at the University of Exeter. He was previously Head of Climate Change at the Institute of Development Studies at the University of Sussex.
Notes
1 Paradoxically it is also emerging economies which are receiving the largest proportions of official and private finance for renewable energy in the developing world (Whitley Citation2013a).
2 These figures are partly based on the ‘price-gap’ methodology, in which domestic retail prices of energy products (for example, petrol, diesel, kerosene and cooking gas) are compared with a ‘reference’ price, essentially the internationally traded price of the product or underlying fuel, adjusted for tax, transport costs, refining where appropriate and so on (Whitley Citation2013a). However, from the perspective of economic theory, rent is the difference between price and the intra-marginal costs of production (Allsop and Stern Citation2012: 14–15). For net energy importers, for whom costs are the price paid for energy, subsidy is indeed appropriately measured by the price-gap methodology. But for net exporters, the appropriate measure of subsidy is the difference between the long-run marginal cost of production and the domestic selling price. The difference between the domestic selling price and the international price is not a direct measure of subsidy, but rather a measure of the opportunity cost in terms of revenue foregone. For low-cost producers, such as Saudi Arabia, the marginal cost of production will be well below the world price. It is even possible that in very low-cost producers (e.g. Qatar for natural gas), even if energy is available domestically very cheaply it is not subsidised, on this definition. Not surprisingly, the Organization of the Petroleum Exporting Countries argues for the cost of production approach to calculating subsidy (Spitzy Citation2012).
3 For details see http://www.oecd.org/site/tadffss/
6 http://www.avaaz.org/en/end_black_subsidies_a/ Avaaz's Campaign Director is Alex Wilks, previously director of the Bretton Woods Project, which is a leading critic of the Washington-based IFIs.
9 The problem of credibly committing to alternative forms of transfer that involve discretion is evident in countries like Nigeria where corruption is more extreme, not least within the oil industry itself (Commander Citation2012), and partly explains why many Nigerian demonstrators opposing petrol subsidy removal in January 2012 held placards saying: ‘Remove corruption, not subsidy’.