The State Budget May Not Afford It All: Educate and Cure or Subsidize

• Author: Christian Ebeke - Constant Lonkeng Ngouana
• Pages: 5-8

IMF

Volume 16, Number 1 March 2015

www.imf.org/researchbulletin

B U L L E T I N

1

(continued on page 5)

In This Issue

1 An Exploration in the

Deep Corners of the

Oil Market

1 The State Budget May

Not Afford It All: Educate

and Cure or Subsidize

8 Q&A: Seven Questions on

Potential Output

11 Recommended Readings

from IMF Publications

12 IMF Working Papers

15 IMF Economic Review

16 An nual Research

Conference Call

for Papers

16 Staff Discussion Notes

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Research Summaries

An Exploration in the Deep Corners

of the Oil Market

Rabah Arezki, Douglas Laxton, Armen Nurbekyan, and Hou Wang

Oil prices

have dropped

dramatically

focusing the

attention

on the short

run. This ar ticle takes a longer view. It argues that the oil market is sha ped by

forces pertaining to demand an d supply. A simple model integrating these forces is

presented as a usef ul tool to explore likely scenarios. Notwithstanding the l evel of

uncertainty surrounding th e evolution of both demand and supply forces, simula-

tions point to the emergence of sup ply shortages suggesting that available forecas ts

predicting persistently low oil p rices may be too optimistic.

Oil prices have fallen by over 50 percent since June 2014. Much has been writ-

ten about what triggered this s lump, and the relative role of supply and demand

factors. Considering that pric e elasticities are extremely low in the short ru n,

The State Budget May Not Afford It All:

Educate and Cure or Subsidize

Christian Ebeke and Constant Lonkeng Ngouana

Energy subsidies have impor tant fiscal,

distributional, an d environmental costs.

They are often publici zed by governments as

sheltering the purchasing powe r of the less

wealthy from high energy cost s. But are they

really a free-lunch? We attempt to provide

an answer to this question in a l arge cross-

section of emerging marke ts and low-income countries. To account for the fact

that energy subsidie s and public social spending may be jointly determined (e.g., at

the time of the budget), we instrument energ y subsidies in a given country by the

subsidy intensity in neighbor count ries. We find that public spending in education

and health are on average lower by 0.6 percentage point of GDP in countr ies where

energy subsidies are 1 pe rcentage point of GDP higher. Moreover, the crowding-out

is exacerbated in the pre sence of weak domestic institutions, narrow fi scal space,