The argument over subsidies

If there has been one consistent message that has come out of the global financial crisis it is one of getting your financial house in order. That is a lesson that most of us individuals learn as adults – live within your means, don’t spend tomorrow’s income today and save for a rainy day. I have said this before in these columns, that somehow as the decision-making process spreads outwards from the individual into the collective, these hoary lessons lose their meaning.

The larger the group of people, the more we seem to believe in the power of the collective. Oddly enough that is why insurance works – because of the law of averages (or statistics as the case may be) decides the actuarial rate. So a person who wouldn’t normally take a loan is now able to decide to leverage on behalf of a company or association, enabling the company to meet its business goals and grow. This growth then allows them to meet their financial obligations.

Take this approach several levels larger and your generally see how governments around the world have managed to raise debt that is now being measured in multiples of their GDP. The collective makes it possible to leverage their capital and fuel growth.

But all parts of the collective are not equal. All members do not feel growth of an economy equally and the ability to either contribute or benefit from the collective is varied. That’s where the subsidy helps. In most cases a subsidy is targeted, in some cases it is across the board.

Several high-profile announcements in the region have now drawn attention to subsidies on food items, energy and utilities in particular. Some subsidies will continue despite all arguments – like those towards education, health and higher technical training – as governments empower their citizens to become full-fledged contributors to their national economies.

As a result of having a good run financially due to the relatively high and stable price of crude, this cost of subsidy has not really been felt till date. So it seems appropriate that the questions are being raised well in time. Do you change existing subsidy models to target benefits at those who need it the most? Or do you reduce subsidies across the board to get people to contribute equally?

One of the elements that may be hit first is the price of petrol. It seems fair at first glance that fuel prices in the region are among the cheapest in the world – after all isn’t the raw stock just a drill head away? The fact is that after the cost of refining and pitting it against the demand from around the world, fuel costs more than we pay at the pump. And we live as if that will stay the case forever. When we buy a car we want the biggest engine and the most power even if our need is only for a shopping transport. Car manufacturers see the GCC countries as almost the last bastion of market support for their large V8 engines, clunky old automatic gearboxes and yesterday’s technology. I’ve just made the switch to a 1.6-litre turbo engine in a car that is still finding it hard to be accepted by the general market because it’s a large sedan with a ‘tiny’ engine. Not too many people will be following in my footsteps. But then why would you when fuel is only 120 Baiza a litre? The same approach sees us still live with ancient window air-conditioners and bathtubs in a country where a large part of our domestic water is produced through energy-intensive desalination. So we have tubs filled with drinking water, air-conditioners that are left on all day and water heaters that are used to heat water in summer as well. I suffer the chills of a typical frozen GCC hotel interior to drive a V8-powered car out into the blazing desert sun. Somehow it doesn’t seem out of place – but all of that is powered by a benevolent subsidy regime that is increasingly under pressure. And it is about time.

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