The Asian roar
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.