Harm the poor, the economy and the environment.
The high price of oil is taking a serious toll on Asia,
in more ways than you might think. Inflation is already ticking up, from Mumbai
to Manila. Interest rates are beginning to follow. Increased energy costs, the
United Nations reckons, will shave a percentage point off the economic growth
this year. The Asian Development Bank has just cut its growth forecasts for next year too. In
some cases, the prognosis is truly dire: prices of $50 a barrel, if sustained
throughout next year, will slash four percentage points off Thailand's growth
rate, according to the bank's projections. Yet many Asian governments, including
Thailand's, are making a bad situation worse by subsidising fuel prices.
The economies of Asia, like those of most developing
countries, are oil-intensive. In other words, Asians consume more oil per unit
of output than Europeans or even gas-guzzling Americans. Thailand and China, for
example, use more than twice the rich-country average, while India burns
through almost three times as much, according to the International Energy
Agency. So they naturally suffer more when the oil price rises.
reason Asian countries get through so much oil is that many of them subsidise it
in one way or another. Since the beginning of the year, the Thai government has
fixed the retail price of diesel at below market rates, at its own expense.
Indonesia has long done the same for all types of petrol. In August, the Indian
government cut excise and import taxes on oil, to add to the direct subsidies it
already pays on liquefied petroleum gas (LPG) and kerosene. Malaysia, too, keeps petrol prices low through direct subsidies and tax region's
breaks. The government of China sets discounted prices, but leaves it to
refiners and distributors, which are
largely stateowned, to absorb the
to say, all this costs a fortune. The Indonesian government originally planned
to spend 14 trillion rupiah ($1.5 billion) on fuel subsidies this year. But as
the oil price has risen the bill has more than quadrupled, to 63 trillion rupiah. That is almost as much as Indonesia's
total budget for development. In Malaysia, fuel subsidies and forgone taxes
account for roughly half this year's budget deficit of 20
billion ringgit ($5.3 billion). Rating agencies have been muttering about the
government's persistent deficits, yet it left the fuel subsidy intact in next
year's budget too. India, another compulsive borrower, is spending $1.4 billion
this year to subsidise kerosene and LPG alone. The government is also forgoing
$540m in tax revenues on various fuels, while state-owned refiners and
distributors must also have absorbed considerable costs that do not feature on
the government's balance sheet.
Taxpayers, of course, will eventually foot all these
bills. Meanwhile, growing public debt puts upward pressure on interest rates and
reduces the capital available to more productive borrowers. In the long run,
that could cause far more damage than high oil prices.
To make matters worse, artificially low prices
encourage waste, along with all the concomitant costs in terms of pollution,
traffic congestion and misallocated capital. Thaksin Shinawatra, Thailand's
prime minister, claims he is determined to reduce his country's energy bills. To
save electricity, he has asked shops to close early and that big buildings
should switch off their floodlights. Yet since January, he has capped the price
of diesel - on which most Thai vehicles run - at about three-quarters of the
market rate. Motorists, naturally enough, are buying more. Thailand's oil
imports have duly surged in volume, as well as just price.
Higher import bills, in turn, have sent Thailand's
trade balance into the red. That has depressed the baht, making imported fuel
more expensive still, and feeding the inflation the subsidies are supposed to
curb. Most Asian nations import at least some of their oil; of all the countries
mentioned, only Malaysia is a net exporter. Indeed, Asia as a whole (excluding
the Middle East, but including Central Asia) produces only 11% of the world's
oil, but consumes about 21%. Oil alone accounts for almost a third of India's
imports, for example. Admittedly, a healthy balance of payments and huge foreign
exchange reserves will allow most Asian countries to finance expensive oil
imports for a long time to come. But there is no sense in increasing the
Furthermore, most oil subsidies do not go to the people
in whose name they are paid: the poor. Cheap petrol, for example, benefits most
those who drive the biggest, most inefficient cars, namely the rich. The poorest
have no motor vehicles at all. Indonesia effectively subsidises its richer
neighbours, thanks to a roaring trade in smuggled petrol. Singapore does not
allow locally registered vehicles to leave the country with less than
three-quarters of a tank of gas, to prevent them from taking undue advantage of
the subsidised stuff across the border in Malaysia. Even targeted subsidies can
end up in the wrong hands. Many countries subsidise kerosene, since the poor
often cook with it. But so do lots of well-to-do restaurateurs.
The biggest beneficiaries of oil subsidies are the
politicians who use them as a crude vote-buying technique. Mr. Thaksin has
declared that diesel subsidies will remain in place until February, which also
happens to be the month by which an election must be held. The previous Indian
government did not allow any fuel price rises for five months prior to elections
in April. The outgoing Indonesian government, too, put off planned price hikes
this year. How unlucky, then, that a record year for oil prices also happened to
be a record year for elections in Asia.
Reprinted from the Economist 2nd October 2004
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