Simulating the Distributional Impacts of a Subsidy-Reducing Reform

The government of Tunisia has announced its intention to remove all subsidies associated with gasoline, diesel, and LPG, and to increase the prices of each tranche of electricity for residential consumers (Jomaa 2014). As of this writing, however, the specific and detailed proposal on the timing, sequence, and compensatory measures was still being discussed internally. Nevertheless, any reform proposal raises the question of what the expected poverty and distributional effects of such changes might be. This section reports the estimated effects of the simulated subsidy reform, but first explains the methodology to estimate those effects. The discussion then turns to the additional distributional effects of expanding cash transfers using the fiscal savings generated by the subsidy reform.

A Methodological Note on Simulations

Given the preliminary stage of the policy discussion, the estimations consider two effects. One is the direct effect of price increases following the partial or full removal of subsidies. Direct effects have unequivocal impacts on individual and household budgets proportional to the increase in prices. No immediate changes in consumption are assumed, which is consistent with limited substitutability among energy sources in the short run (due to both technical and financial reasons and, presumably, individual preferences). Everyone consumes as before, but at higher prices. This result implies that individuals and households will have fewer resources to purchase other goods and services. For poorer households, these goods and services may include the necessary minimum consumption basket reflected in the poverty line. Changes in prices are therefore equivalent to a proportional increase in the poverty line faced by the household (weighted by its relative composition in the basic consumption basket). The second effect considered is the indirect impact: the changes on prices of goods that result from energy price changes. The indirect effect captures the change in relative prices for the rest of the economy and therefore on the prices of the other components of the consumption basket. Price changes across sectors are estimated by applying the price changes of energy to final products that use energy as an intermediary input. Using the a 2010 I/O table for Tunisia, constructed by the INS (Institut National de la Statistique), a simple approximation of such economy-wide changes following energy price subsidies can be calculated.[1]

The analysis draws from the distribution of consumption and spending reported in the 2010 Household Budget and Expenditure Survey, the most recent survey. The 2010 structures of consumption and spending are then updated to January 2014 using growth rates, population growth, and the CPI. It is on those distributions that simulations of a hypothetical reform in 2014 are conducted. In other words, the distributive effects of the 2014 reform are applied to the households—and their consumption patterns—existing in 2014. Therefore, the analysis assumes that consumption patterns and their drivers, such as preferences, in 2010 are a good proxy for 2014 consumption patterns. Finally, poverty status is defined in this exercise around the official poverty lines established by the INS (Institut National de la Statistique), BAD (Banque Africaine de Developpement), and the World Bank (2012) as the monetized cost of a food basket that ensures minimum caloric needs, further adjusted by nonfood needs.[2]

  • [1] Due to limits on space, the full set of results is not presented here, but is available from theauthors upon request.
  • [2] The monetary cost of the food basket defines the extreme poverty line. This line is also adjustedby differences in cost of living for cities (grandes villes), medium-sized towns (petites communes),and rural areas (zones non-communales). The extreme poverty line based on food needs is furtheradjusted by adding the average spending of extreme poor households on nonfood items to come upwith a “low” poverty line and by adding the average spending of nonextreme poor households onnonfood items for setting the “high” poverty line. This exercise uses the upper poverty lines. INS,BAD, and World Bank (2012) provides a detailed description of the construction of the totalconsumption aggregate.
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