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Is subject of fuel subsidy removal a red herring for T&T’s bigger economic problem?

“In T&T, our social protection policies are open to manipulation and are informally enforced as most of them are not enshrined in law. Fuel subsidies also do provide important relief for lower income brackets to achieve social mobility by accessing education and transportation, or pay lower prices for food items or electricity.

“To suggest that adjustment is inevitable is based on political rhetoric and not entirely an objective economic argument, which does not take all these factors into account.”

The following Letter to the Editor on the proposed complete removal of Trinidad and Tobago’s fuel subsidy was submitted to Wired868 by Keston K Perry:

Photo: A motorist hangs up a gas pump. (Copyright Africa TVC News)
Photo: A motorist hangs up a gas pump.
(Copyright Africa TVC News)

The recent decision to remove the fuel subsidy has sparked an important debate—yet not quite a comprehensive one—about its longevity and purpose.

There is an official position by the government which is that it must go. Several observers have concurred. It is often spoken about as a fait accompli or common sense action.

Two major arguments put forward are that the high cost to the environment, and that it benefits the rich more than the poor. However, when we pick apart these general arguments, there is more in the mortar than the pestle.

In Timothy Mitchell’s book Carbon Democracy, he notes: “The leading industrialized countries (Great Britain, United States, Japan, Germany, etc) are also oil states. Without the energy they derive from oil their current forms of political and economic life would not exist.

“Their citizens have developed ways of eating, travelling, housing themselves and consuming other goods and services that require very large amounts of energy from oil and other fossil fuels.”

The roll-back of fuel subsidies may therefore hold back our development in some ways, especially when renewable energy is not an immediate option.

Photo: The price of crude oil remains low at present.
Photo: The price of crude oil remains low at present.

These subsidies became popular after the 1970s Arab-Israeli oil crisis that led to the formation of the Organization of the Petroleum Exporting Countries (OPEC).

As Stephen Buzdugan and Anthony Payne recalled in the Long Battle to Global Governance, this period for oil-producing developing countries had great optimism as they sought to improve their living standards and accumulate greater wealth than was possible before.

Petroleum subsidies, therefore, were one way that they could redistribute wealth to their populations, including health, education, and other social and public services of which they were previously deprived. Many important gains were made in T&T with the expansion of universal education, infrastructure, and the rise of a middle class, though not enough economic diversification was achieved to create new income streams to sustain them.

Then came the 1980s and the debt burden of developing countries, who borrowed to finance various forms of capital investment, worsened in the face of spikes in US interest rates, which meant their debts and servicing fees multiplied overnight.

The period thereafter also significant openings of economic sectors, including the foreign-used motor vehicles industry that soon boomed. Importers were now able to purchase automobiles in larger quantities from Japan and Korea for example.

Photo: Vehicular traffic heading into Port of Spain. (Courtesy Nation News)
Photo: Vehicular traffic heading into Port of Spain.
(Courtesy Nation News)

All of these were not the energy-efficient vehicles we know today, but operated primarily on leaded gas and diesel engines that were more polluting.

Therefore, the unfettered importation of vehicles into T&T is what led to environmental damage and has worsened the effects of climate change, not the oil/natural gas itself. In fact, natural gas was hitherto used to power industries, including steel by utilising energy efficient technology.

Any suggestion that opening markets was inevitable is a myth as it was a direct result of policy decisions. Such popular opinions do not stand up to the evidence. It would therefore seem that the current debate centres on the so-called economic principle of ‘getting the prices right’.

In other words, it is believed that there is an objective price associated with any natural resource—notwithstanding that it is provided freely by nature, and even requires imported technologies and national institutions like the National Gas Company or Ministry of Energy to help exploit them.

This ‘objective’ price, without any state intervention, is seen as beneficial to all. So removing the fuel subsidy reveals the ‘true market price’ of petroleum, which, it is believed, would reduce consumption or change ‘consumer preferences’, thereby reducing the negative effect on the environment.

Photo: Time to tighten those belts.
Photo: Time to tighten those belts.

This position is flawed in a number of respects. Most notably in that these prices are not controlled by invisible forces of demand and supply but by international corporate and/or government decision-makers who set them.

In a country where 10 percent of the top income earners take home 45 percent of national income and the lowest 10 percent get only five percent of the pie, this is a serious problem.

In T&T, our social protection policies are open to manipulation and are informally enforced as most of them are not enshrined in law. Fuel subsidies also do provide important relief for lower income brackets to achieve social mobility by accessing education and transportation, or pay lower prices for food items or electricity.

To suggest that adjustment is inevitable is based on political rhetoric and not entirely an objective economic argument, which does not take all these factors into account.

The relevant question is what led to the top income earners gaining the most from subsidies as observers claim? Was it not government policy?

From the late 1980s onwards, the sale of public assets to private individuals and multinationals, as well as market opening enriched certain segments of society, including expatriates, and a new asset-owning class.

Photo: Nigeria protests the imminent removal of their fuel subsidy.
Photo: Nigeria protests the imminent removal of their fuel subsidy.

These reforms also undermined some of the meagre social gains accomplished the decade before, while distorting the distribution of wealth. These shifts have often not been noticed especially when the price of oil is high, and due to policy changes by the Patrick Manning-led administration, which tried to redistribute some of this wealth.

The question then arises as to who is the fuel subsidy being taken away from: industrial producers, expatriates or regular citizens? By taking away subsidies, it maintains the disadvantageous status quo, with the inequality gap growing and becoming more and more apparent nationally.

At the global level, how can the burden then be on developing countries with limited resources and incomes when the richer countries themselves have utilised the same resources to become rich?

No one is denying the climate catastrophe the world is now faces, due to the excessive use of fossil fuels by rich Western countries. But shouldn’t there be equity in how other countries are able to transition and develop?

The present discussion also does not look at options for regulating and banning certain types of industrial activity that use a high degree of fossil fuels when producers can pay for the international price of their energy needs.

According to the late Alice Amsden from MIT: “Any analysis of late industrialisation (or development) must have at its core… economic development—which, in this case, is getting relative prices ‘wrong’—in conjunction with… the state.

Photo: The economic rainy day is here. And it's a bad one. (Copyright UK Telegraph)
Photo: The economic rainy day is here. And it’s a bad one.
(Copyright UK Telegraph)

“It is not adequate merely to maintain that the state ‘induces’ investment and is ‘autonomous’ (or that markets are free and efficient). All governments know that subsidies are most effective when they are based on performance standards.

“Nevertheless, state power to impose such standards, and bureaucratic capability to implement them, vary from country to country.”

Why has the government been so reluctant or unable to regulate businesses or subject them to performance standards when they receive subsidies?

So there are many instances where price is not the main issue but broader developmental goals are important, not included in this current discussion about fuel subsidies. There is also a fundamental distinction between using the ‘market’ as a tool to achieve social goals, and adopting it as a  panacea.

Subsidies were introduced to improve the life of citizens. And if their use-by date is up, we need to decide how we plan to tackle poverty and inequality. This should not be circumspect, but instead an open debate regarding how our remaining resources should be utilised.

Photo: Time to roll up your sleeves!
Photo: Time to roll up your sleeves!

Politicians and their advisers are there to help guide such decisions, not foreclose the debate altogether when it concerns our collective development.

About Keston K Perry

Keston K Perry
Keston is a PhD candidate in Development Studies at the University of London's School of Oriental and African Studies (SOAS). He has 10 years' combined experience in the private, government and non-governmental sectors and international organisations.

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9 comments

  1. Can someone summarise this article for me..

  2. A well researched article with merit.

  3. Based on something I heard Mariano Browne say, on the basis of current oil prices, there is no subsidy being paid on super and premium users are actually paying a “tax” as premium prices are above the market.

  4. Of course. Distraction from bigger issues is always beneficial.

  5. Earl Best

    This sounds nice but does not stand up to close scrutiny. Wheel and come again, Mr Ph.D candidate.