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Cash transfers versus subsidies

banker counting cash money USD
(Photo: Envato Elements)
banker counting cash money USD

Yusuf Mansur

The writer is CEO of the Envision Consulting Group and former minister of state for economic affairs.

A recent article on the World Bank blog made the case that in “MENA: Uniform cash transfers are better than subsidies”, citing, among others, the Jordanian subsidy reforms. However, in spite of the overwhelming worldwide agreement about the superiority of cash transfers to subsidies, the proponents of cash transfer seem to forget several concepts, some theoretical and others practical, related to the implementation of the cash transfer mechanism.اضافة اعلان

One of the basic arguments against subsidies is that even though subsidies are meant to protect the poor, they tend to favor the rich. Take, for example, a blanket fuel or energy subsidy: a rich consumer may receive more than a poor consumer, since the former has more and larger assets (car/s, house/s, etc.). Producers, on the other hand, are less incentivized to find better or more advanced means of production since energy is a relatively cheap resource.

The same applies to food subsidies, where the rich are capable of consuming more than the poor and thus the subsidy enables not only waste among the rich and poor, but also misdirection of resources in the economy. A similar argument can be made with water subsidies.
Cash transfer is therefore considered superior in all respects. Moreover, recent empirical research has shown that cash transfer offers the receiver a greater feeling of control as he or she chooses where best to spend the money.
Of course, the worse forms of subsidies are those that guarantee a certain fixed price for the commodity because as commodity prices rise, the size of the fiscal burden on the budget grows.

Cash transfer is therefore considered superior in all respects. Moreover, recent empirical research has shown that cash transfer offers the receiver a greater feeling of control as he or she chooses where best to spend the money. However, there are caveats:

1) The shift from subsidy to cash transfer should be coupled with a private-public sector dialogue, and the pros and cons should be clearly explained. In Jordan, the shift from fuel subsidy to cash transfer was suddenly made in November 2012, and complete liberalization followed shortly afterwards, also in an abrupt manner.

2) The government must possess accurate data, and if it does not, it should expand the target group to ensure full coverage, even if waste does occur. Ultimately, the better the database the less the waste. In Jordan, in the case of the fuel subsidy removal, almost 70 percent of the population was included in the coverage.

3) Availability of administrative capacities and efficiency is a basic requirement for implementing the new direction. Otherwise, corruption, incompetence, delays, and other mishaps, which may typically occur in third world countries, more than in the advanced economies, could easily degrade the gains from the shift.  

4) Quality health and education facilities should be available, especially when the removal of the subsidies may impact these two necessary developmental requirements. Countries where these two basic publicly provided services are not readily available should think twice before shifting from subsidies to cash transfers.

5) Many times the high cost of the subsidy is due to monopolistic practices, which are quite spread in Jordan. Most claims of efficiency loss in literature are based on the supply and demand model, which assumes perfect competition in the market — a completely fictitious, non-existent market. The real world is run by monopolies, monopolistic practices, and imperfect competition, which tend to raise prices when cash transfers occur. Look, for example, what happened in the developed countries after governments pumped trillions of dollars in their economies.

6) Often times the need for subsidy may arise from government-created inefficiencies, such as not modernizing a refinery or buying food at a spot rate instead of using sophisticated purchasing mechanisms. It is far better to address such government-created shortfalls before delving into whether to give cash or subsidize.

The upshot is that the making of economic policy is never a straightforward exercise. The economy is a highly complex, constantly changing and evolving organism. Hence, shifting toward a cash transfer system instead of granting subsidies is not, and should not be, a remedy for all.


Yusuf Mansur is CEO of the Envision Consulting Group and former minister of state for economic affairs.


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