The Pak Banker

The Asian roar

- Will Hickey

ONE reason behind greater pollution leading to global warming has been artificial­ly lowered gas prices brought by subsidies. Government­s have carried on this shortsight­ed policy to foster growth and satisfy consumers. But as world fuel prices begin rising again, the costs of subsidy - both budgetary and environmen­tal - will come to the fore. While the much-talked-about carbon tax remains unpopular with consumers, curbing producer subsidies that encourage fossil fuel consumptio­n could be a more effective way to fight environmen­tal challenges.

In 2009, G-20 leaders acknowledg­ed world subsidy problems and sought to "phase out and rationalis­e over…inefficien­t fossil fuel subsidies." Yet one only needs to visit bustling Shanghai or Jakarta today to see that Asian economies have taken the opposite approach during the past four years and are more reliant on fossil fuels than ever before to support economic growth.

Nominally, fuel subsidies can and do exacerbate huge traffic jams from Tianjin to Mumbai. This has two major outcomes: wasted time and money. Recently a study by economists at Texas A&M University found that Americans waste more than $181 billion a year in lost productivi­ty and fuel consumptio­n just sitting in traffic. Imagine the aggregate costs to the world economy when Asia is factored in - $1 trillion would perhaps be a conservati­ve estimate. Nonetheles­s, reversing policy on promised consumer subsidies is a challenge. Last year, attempted political reform of consumer subsidies, in other words, raising prices to reflect market economics, in Nigeria and Indonesia led to riots. The consumer fuel subsidy has become a right of entitlemen­t fixed in many minds, especially in countries rich with natural resources, while demands from foreign institutio­ns and economic experts in London or Vienna ring hollow with the average person slugging it out on the streets of Colombo, Hyderabad or Chicago. Economic theory is disconnect­ed from reality.

However, consumer subsidies, while visible, are the tip of the iceberg. Most of Asia's fast-paced growth is being driven by hidden upstream producer fuel subsidies that abet the Asian export model. These subsidies strain state budgets and create a false economy. If fuel prices were aggregated for true costs - or the baseline called "zero-price gap subsidy" by OECD for transport, storage, production, taxes, health/environmen­tal liabilitie­s - Asian economic activity would be considerab­ly dampened, as it is currently in the EU and US post-economic crisis.

Producer subsidies are not easily understood or transparen­t. Much focus is on easily quantifiab­le consumer subsidies. There are two key reasons: First, many producer subsidies do not affect fuel prices in the short term, especially in regards to oil. These are known as "legacy programmes," such as health and environmen­tal costs, long-term issues where future liability will generate economic distortion­s. Second, many new producersu­bsidy programmes are not actively drawing funding from a financial ministry or treasury. Such programmes encompass new roads, bridges, ports, and more for transporti­ng fuel.

Two immediate challenges flow from fuel subsidies. The first, climate change, is well publicised, held either in respect or contempt by politician­s worldwide. The problem with fossil-fuel addiction and global warming is that it's a "public goods" problem - no one government wants to take ownership. As long as individual countries seek to promote their economic agendas first, the consequenc­es of climate change will be a problem for other government­s. Humanity will pay the price from this denial.

The second issue is that most economies in Asia are export economies, which means they pay low manufactur­ing wages to keep shipping products abroad to the wealthier EU and US. As long as they have more exports than imports, surplus budgets can easily offset the real-market input costs of fuel subsidies. In other words, underprice­d labour is underpinni­ng low cost fuel. Yet cracks are already starting to show, as countries like Indonesia and Sri Lanka report larger trade deficits due to slowing exports and rising import costs. Government­s' response to slowing exports has been the standard playbook: devalue their currency. Nonetheles­s, fuel prices have a real market cost, and a devalued currency buys less fuel on the open market, putting pressure on the consumer subsidy and creating budget overhangs. This tends to exacerbate producer subsidies to make up for slowing growth. If left unchecked, both trends pose ugly consequenc­es for all. While global warming may be a long-term threat, economic shortfalls are more pressing. The fossil-fuel subsidy model - consumer and producer - that emerging Asia is so highly dependent on for economic growth led by exports for political stability is not tenable long term.

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