Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it

Carlo CottarelliBy Carlo Cottarelli

(Versions in Español中文, Français, 日本語, and Русский)

Let’s face it. Everybody loves cheap energy. Almost all human activities require energy consumption and, if something is so basic, it seems pretty obvious that it should not be denied to anyone and government should make it as cheap as possible to both households and companies, including through subsidies. This can help households avoid paying exorbitant energy bills at the end of the month, something that the poor may not be able to afford even for basic needs like heating and cooking.

Companies may also need energy subsidies to help them stay competitive. Energy subsidies appear even more appropriate, and even the obvious thing to do, in countries that have a large supply of energy, like oil producers. After all, this natural wealth in the form of energy belongs to the people; why shouldn’t it be cheap?

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Support the People, Not Energy in the Middle East and North Africa

Masood AhmedBy Masood Ahmed

(Versions in عربي, 中文, Français, 日本語Русский, and Español)

Of all the regions in the world, the Middle East and North Africa region stands out as the one that relies the most on generalized energy subsidies. In energy-rich countries, governments provide subsidies to their populations as a way of sharing the natural resource wealth. In the region’s energy-importing countries, governments use subsidies to offer people some relief from high commodity prices, especially since social safety nets are often weak.

The question is: does this well-intended social protection policy represent the most efficient way to channel aid to the most vulnerable? The answer is no!

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Moving Beyond Crisis Management in the West Bank and Gaza

By Oussama Kanaan, Udo Kock, and Mariusz Sumlinski

(Versions in  عربي)

It was an early spring morning in East Jerusalem in 2011, and we were wrapping up our two-week mission with a presentation to donor representatives on the Palestinian economy’s health. Our audience appeared encouraged by our assessment of performance over the previous three years (2008–10): the economy had been recovering strongly, supported by generous aid and an easing of Israeli restrictions on movement and trade.

And the Palestinian Authority had made impressive progress in institution-building, which alongside prudent fiscal management, had enhanced public-sector efficiency, reduced wasteful expenditure, and enabled a reduction in its recurrent budget deficit from US$1.7 billion in 2008 to US$1.1 billion in 2010.

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Middle East and North Africa Face Historic Crossroads

By David Lipton

(Version in عربي)

Almost two years since the Arab Awakening started, the future of the Middle East and North Africa is in a flux, with fledgling democracies struggling to find their way and renewed outbreaks of violence adding to the challenges the region is facing. Some are starting to worry aloud that the revolutionary path may hit a dead end.

To me, a useful way to think about the present situation is that the region could end up taking any one of three alternative paths, as far as its economic future is concerned. We could witness either:

  • Economic deterioration, if squabbling over political power prevents stabilization, let alone reform;
  • Stabilization through a reassertion of vested business interests that would offer a respite from eroding economic conditions, but condemn the region to a return to economic stagnation or at best tepid growth;
  • Or we could see a new economy emerge, as newly elected governments gradually find a way to end economic disruptions and undertake reforms that open the way to greater economic opportunity for their people.

While the first two paths would be undesirable, they could come to pass. Needless to say, the third path of transformation would be best.

No doubt the Arab countries in transition will chart their own paths. But I strongly believe that the international community also has a role in helping them avoid the unfavorable outcomes. Let me share some thoughts on how we can provide support.

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Financial Support for Arab Countries in Transition

By Masood Ahmed

(Version in عربي)

The Arab Spring has injected new optimism into the Middle East and North Africa and, if managed well, the historic transitions that are under way will lead to a more prosperous future for the people of the region.

At the same time, the past year and a half has been difficult for the Arab countries in transition. They are facing economic strains as they manage political change and urgent social demands. It is a period when hard choices must be made, and it does not help that this is happening at a time of great turmoil in the global economy.

Close engagement

Throughout this difficult period, the IMF has remained closely engaged. We are advising countries on how to manage shocks to maintain economic stability, ensure that vulnerable households are protected during the transition, and lay the basis for job-creating growth.

We are also providing technical assistance to help build capacity and stronger institutions. In Egypt, for example, on tax reform to improve tax equity; in Libya to better manage its wealth through improved public financial management; and in Tunisia on measures to strengthen the financial sector.

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Without Better Data, Middle East Policymakers Risk Getting Lost

By Nemat Shafik

(Version in عربي)

Recently I went orienteering with my children as part of a school trip.  Orienteering is a sport whereby you have to find your way to various checkpoints through unknown terrain with only a compass and a topographical map.

Wandering through the woods with six 9-year-olds was a good lesson in the value of good directions and data to find your way when you are in unchartered territory.

Likewise, making policy decisions without adequate and timely data would also result in getting lost, wasting time and money, and making policy mistakes with obvious negative consequences for growth and development.

The Middle East and North Africa (MENA) region suffers significant shortcoming in data, which are particularly problematic at a time economic transition (see table below).  There are important data gaps, poor data quality and in many cases, internationally agreed standards of statistical methodologies, compilation periodicity and timeliness, and data dissemination practices are not followed.  I emphasized these issues during my participation at the ArabStat Conference in Morocco this month.

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Why the Arab World Needs an Economic Spring

By Nemat Shafik

(Version in عربي)

What strikes you on a trip to the Middle East is that everyone is talking politics—all of the time. That had been the case in countries like Lebanon where it is a national pastime, but it is a new phenomenon in countries across North Africa and the Gulf.

Constitutions are being rewritten, political parties and youth groups are vibrant, and everyone has an opinion on current events. The older generation seems worried by the uncertainty associated with change. The young generation continues to be energized.

Need for an economic rethink

But, what I noticed during a week of travel through the region is that almost no one is talking economics, and that is a worry. Because while 2011 was a year of major transitions in the political domain, almost every economic indicator in the non-oil countries went in the wrong direction. Growth halved, unemployment rose, reserves came under pressure and deficits ballooned as governments responded to social pressures by increasing spending on wages and generalized subsidies.

New governments across the region are keen to respond to the demand for jobs and justice that brought them to power but are quickly faced with the hard reality of limited resources and powerful vested interests.

So, just as the “Arab Spring” opened a debate about politics in the Middle East, we now need an “Economic Spring” on how to rethink the region’s economic future.

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