The Political Economy of Reforms
The simulations indicate that the current subsidy system provides valuable assistance to the poor, but at the same time are prorich and inefficient. Eliminating subsidies and compensating the poor and vulnerable with a direct cash transfer would be a more effective form of social protection. Subsidy reform, however, is a politically sensitive issue. A major reform of the bread subsidy in 1996 involving the complete elimination of the price support and its replacement by a cash transfer was rapidly overturned following widespread social unrest and what came to be known as “food riots.” Thus, even as the government is burdened by high subsidy costs, its reform efforts are hampered by political economy considerations.
The opposition to subsidy reform appears particularly strong in Jordan and Egypt, especially when compared with Lebanon and Tunisia (Fig. 7.5). Data from the MENA SPEAKS (Social Protection Evaluations of Attitudes, Knowledge, and Support) survey, indicate that about 56% of Jordanians were opposed to subsidy reform on any consumer item, be it electricity, food, petroleum products, or water (Silva et al. 2013). In all countries, the (self-identified) lower-middle-income group is slightly less likely to oppose subsidy reform than the upper-middle and wealthy group, and in three of four countries the lower-middle-income group is slightly more willing to consider subsidy reform than the self-identified poor.
However, of those willing to consider subsidy reform (in the MENA SPEAKS survey’s Jordan sample), diesel was the most frequently cited candidate for reform, followed by subsidy on bread (Fig. 7.6). Electricity and LPG subsidies, which are much larger, appear to be even more politically sensitive than bread subsidies: only
Fig. 7.5 Opposition to reform consumption subsidy on any product, Source Silva et al. (2013) calculations using the MENA SPEAKS survey, Note MENA SPEAKS = Social protection evaluations of attitudes, knowledge, and support
Fig. 7.6 Preferred product for inevitable subsidy removal, Source Silva et al. (2013) calculations using the MENA SPEAKS survey, Note SPEAKS = Social protection evaluations of attitudes, knowledge, and support
11% of respondents were open to LPG subsidy removals, and a paltry 7% were willing to consider electricity reforms. These figures underscore the challenges the government faces. In fact, the government appears to be sensitive to such concerns, and the November 2012 reforms did not fully eliminate LPG subsidies but did eliminate the subsidies on other petroleum products. It is interesting that the opposition to reforming expensive and regressive energy subsidies is stronger than opposition to food subsidies, which tend to be less regressive. A likely explanation for this finding is the relative importance of these energy products in the people’s consumption baskets.
These numbers raise the question as to how the November 2012 petroleum reforms went into effect without any significant public unrest. Silva et al. (2013) synthesize the vast literature in social protection to summarize the strategies that underscore successful reforms. First and foremost, they mention timing as the key to the success or failure of reforms. More specifically, they argue that it is easier to generate support behind a reform during a crisis, a situation that aptly characterizes Jordan. The population appeared to sense that Jordan was in fiscal crisis and petroleum subsidy removals were inevitable. Moreover, from initial episodes of hope, the social unrest eventually generated fear of violence, heightened by the experiences of neighboring Egypt and the Syrian Arab Republic. The subsidy reforms were likely aided by the strong aversion to the political and social instability that vocal opposition had the potential to generate.
Compensation of losers from reform also played a role in the reform’s apparent success. Although fiscal constraints often make it challenging for a government to provide direct compensation, the November 2012 reforms were accompanied by a generous cash transfer designed to fully compensate the bottom 70% of Jordanians for the losses suffered from the removal of subsidies. The cash transfer in fact appeared to overcompensate a large portion of the population (Araar et al. 2013). The speed with which the transfer took place is also a factor in the reform’s apparent success. The petroleum price hikes were announced on November 12, and within the next few weeks a large number of people started receiving the cash compensation.
In enacting future reforms, the government can learn from its own experience. One concern arose regarding the targeting efficiency of the cash program accompanying the 2012 subsidy reforms (see, e.g., Araar et al. 2013). The government itself has taken measures to improve the targeting, specifically by setting up the National Unified Registry (NUR) database to better target beneficiaries for future cash compensation programs. Tackling electricity subsidy reform, however, appears to be daunting for the government because of its sheer scale.