In praise of a global sacrifice

From India to Indonesia, more leaders are reducing fuel subsidies, and not only for economic reasons. Doing so also helps reduce inequality, curb carbon pollution, and free up money to directly aid the poor.

The Monitor's View

Cue the applause. In recent months, quite a number of nations from Tunisia to Indonesia have made a great sacrifice never thought possible. They slashed government subsidies for fossil fuels. And they often did so by stating reasons other than pure economics.

In Malaysia, which raised fuel prices in October, Prime Minister Datuk Seri Najib Tun Razak framed his decision in Islamic terms: “If we are willing to sacrifice with sincerity without expecting any return, In sha’Allah [God willing] we will be amply rewarded,” he said.

In Egypt, where gasoline prices were raised 78 percent in July, President Abdel-Fattah al-Sisi urged citizens to accept the sacrifice in the same spirit as during the 1973 war with Israel: “to retrieve [national] dignity.”

In Indonesia, newly elected President Joko “Jokowi” Widodo hiked gasoline and diesel prices by a third last week. He said the subsidies were a waste of money – because they rarely benefit the poor – and would be better spent on roads, education, and health.

Why this wave of reductions in energy subsidies in 2014? For one, a four-year low in oil prices can help ease the blow to consumers of reduced support for fuel. In democratic countries, such as in Brazil, candidates are more willing to campaign on a promise to reduce the subsidies despite the potential for a political backlash. In addition, the International Monetary Fund (IMF) and other world financial bodies are pushing for this reform as essential to curb the market distortion of subsidies, reduce government deficits, and aid in the fight against carbon pollution.

As IMF chief Christine Lagarde has said: “Energy subsidies are enormous in scale, and they help the people who need them least. Taking action on this issue alone would be good for the budget, good for the economy, and good for the planet.”

The numbers are on the side of reformers. The IMF estimates nearly $2 trillion is spent to subsidize hydrocarbons, even in rich nations such as the United States. In a few countries, as much as 10 percent of economic output goes to redistribute money for lower fuel prices. A recent paper by the Council on Foreign Relations refers to this cost as a “global scourge” that diverts money away from better ways to raise living standards. Such subsidies help the well-off in a country six times more than they do the poor, mainly because the middle-class can afford to own vehicles.

A global consensus may be finally forming to cut back these subsidies. Up to now, taking such decisions has been difficult. Riots broke out recently in Nigeria and Sudan, for example, when governments there reduced energy supports.

By contrast, India’s new prime minister, Narendra Modi, announced in October he would end diesel subsidies and raise natural-gas prices. The world’s second-most populous nation largely took the move in stride. The world should applause such sacrifices. They reflect a maturity of governance and a rising understanding of global needs.