Normative Narratives

Economic Outlook: The IMF Weighs in on Fuel Subsidies; BRICS Unveil Plans to Build Their Own Development Bank

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The IMF released a research paper on Wednesday stating a fairly obvious point; that large fuel subsidies put a drain on government budgets, sapping resources that could be used on arguably more important programs:

Developing and industrialized countries should rein in energy subsidies that totaled $1.9 trillion in 2011 to ease budgetary pressures and free resources for public spending in areas like education and health care, International Monetary Fund economists said in a research paper published Wednesday.”

“In 2011, energy subsidies intended to contain energy prices for consumers accounted for 2.5 percent of global gross domestic product, or 8 percent of all government revenue, the fund said.“

“Subsidies have been a counterproductive way to help the poor because they are more beneficial to the rich, who consume more energy, the fund said. The richest 20 percent of households in low- and middle-income countries received six times more in fuel subsidies than the lowest 20 percent, the fund said.

According to its research, 20 countries have pretax energy subsidies that exceed 5 percent of gross domestic product. The top three subsidizers are the United States at $502 billion, China at $279 billion, and Russia at $116 billion.

In advanced economies, like the United States, removing subsidies for fossil fuels could inject revenue into government coffers, the fund said.

“Insufficient energy taxation, including in the largest economy in the world, the United States, is a problem not only for the environment, but many advanced economies are in need of additional resources to support the effort to lower public debt, which is very high now in those economies,” said Carlo Cottarelli, director of the fund’s fiscal affairs department.

Over the longer term, limiting energy subsidies could spur stronger economic growth because it would encourage a more efficient distribution of resources and encourage investment in energy-efficient alternative technologies, Mr. Lipton said.”

While it is fairly obvious that spending money on X takes away money from Y, what is probably not as obvious is how disproportionately fuel subsidies benefit wealthy consumers, but when you think about it makes perfect sense. Also less obvious is how providing fuel subsidies makes it harder for alternative energy sources to compete in the open market. If anything, the  infant renewable industries should be the ones receive subsidies (which they do to a different extent from country to country, and over subsidizing can lead to allegations of “dumping” and strained economic and political relations between countries). But subsidies for renewable are dwarfed by tax breaks for fuel producers.

A study comparing subsidies between “green” and conventional energy from 2002-2008 in the United States highlights this argument well:

“The federal government provided substantially larger subsidies to fossil fuels than to renewables. Subsidies to fossil fuels—a mature, developed industry that has enjoyed government support for many years—totaled approximately $72 billion over the study period, representing a direct cost to taxpayers.

Subsidies for renewable fuels, a relatively young and developing industry, totaled $29 billion over the same period.”

Obama tried to end big oil tax breaks in his first term, unsuccessfully. This is a logical tax loophole to close, as fossil fuel industries are fully matured and oil companies have been reaping billion dollar profit margins for decades. Perhaps as part of fiscal policy and tax reform deals, this issue will again surface in the political debate. Most likely it would take a complete democratic majority in both the executive and legislative branch to pass such legislature which has deep vested interests opposing it.

Ending fossil fuel tax breaks could be synergized with a carbon tax. The combined effect of these two policies could create the market conditions sufficient to wean our dependence of greenhouse gas emitting energy sources. The long run effect would be a more sustainable environmental and fiscal policy.

In other international governance news, the BRICS announced plans to create a development bank meant to challenge institutions such as the IMF and World Bank:

“The leaders of Brazil, Russia, India, China and South Africa, all members of the so-called BRICS Group of developing nations, have agreed to create the bank to focus on infrastructure and development in emerging markets. The countries are also planning to discuss pooling their foreign reserves as a bulwark against currency crises, part of a growing effort by emerging economic powers to build institutions and forums that are alternatives to Western-dominated ones.

“But the alliance faces serious questions about whether the member countries have enough in common and enough shared goals to function effectively as a counterweight to the West.

‘Despite the political rhetoric around partnerships, there is a huge amount of competition between the countries,’ Mr. Verachia [director of the Frontier Advisory Group] said.”

“They have widely divergent economies, disparate foreign policy aims and different forms of government. India, Brazil and South Africa have strong democratic traditions, while Russia and China are autocratic.”

I do not know what to think about this proposed development bank. On one hand, the competition should benefit countries receiving loans, as they will now have a choice for where they will receive development financing. This should result in more favorable loan terms, in addition to diminishing an institutions insistence on imposing potentially damaging “conditionality” alongside loans.

On the other hand, the proposed Bank could end up providing financing for projects that contribute to environmental degradation and human rights abuses. Will Brazil, India and South Africa dominate institutional policy, or will Russia and China?

The IMF, as discussed above, recently suggested curbing fuel subsidies. Two of the largest subsidizers, China and Russia, are members of the BRICS. Russia is the world largest oil producer, while India and China rank among the worlds leading coal producers. Will this development bank serve as a means to undermine the global sustainable development movement, financing dirty energy sources? The Bank’s mandate is to finance energy and infrastructure projects, but it says nothing about what type of energy projects.

China and Russia also have a history of defending governments that perpetuate human rights abuses, handcuffing the international community on the grounds of “national sovereignty” by undermining agreed upon sanctions and vetoing UNSC intervention. The lack of transparency inherent in autocratic regimes means that much of the information coming from these governments has to be closely scrutinized.

The nature of the bank is questionable as well. While investment in energy and infrastructure components of development, they can also perpetuate human rights abuses money goes to help corrupt rulers cement their control. These “enclave economies” are particularly prevalent in Africa, and correlate almost directly with human rights abuses:

“Still, 15 African heads of state were invited to the summit meeting [to unveil the new Bank] in South Africa as observers, a sign of the continent’s increasing importance as an investment destination for all of the BRICS countries.”

It will be up to Brazil, India and South Africa, some of the world’s largest democracies and proponents of renewable energies, to hold Russia and China accountable and act as a counterbalance to their sometimes loose moral and ethical stances on human rights and environmental sustainability.

The proposed bank has the potential to greatly help the developing world raise its standard of living. It also has the potential to perpetuate human rights abuses and undermine regional and global security. How the bank functions remains to be seen, but you can be sure of one thing—the rest of the international community will keep a close eye on its dealings.

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2 thoughts on “Economic Outlook: The IMF Weighs in on Fuel Subsidies; BRICS Unveil Plans to Build Their Own Development Bank

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