5. Key Lessons
- Juan Cordoba, Robert Gillingham, Sanjeev Gupta, Ali Mansoor, Christian Schiller, and Marijn Verhoeven
- Published Date:
- December 2000
Large budgetary savings from price-subsidy reform are difficult to achieve in the short run. Most countries have adopted a gradual approach.
When reform is gradual, the government can reduce the likelihood of policy reversal and inadequate progress by adopting and making public a detailed timetable of reform measures.
Rapid reform is feasible only when governments are politically strong and the social disruption from reform is assessed to be small. Reform can also be more rapid under favorable exogenous circumstances, such as low prices for imported staples.
34. Social protection mechanisms
Mechanisms for protecting the poor should be established before the reform of generalized price subsidies is initiated and prices of subsidized items change.
Compensation schemes that protect households from real income losses should be temporary, to be replaced with permanent social policy instruments.
Using income for targeting benefits in developing countries and transition economies is often not a practical option in the short term. Targeting benefits to households with specific characteristics can be relatively efficient in certain cases.
The choice among targeting options can be severely constrained by lack of data on the poor and by weak governance and administrative capacity. Self-targeting may remain the only feasible option.
A generalized subsidy limited to, or below, the amount consumed by the poor protects both the poor households as well as politically vocal groups, while generating budgetary savings.
35. Political disruption
The risk of political disruption is highest when rapid reform is attempted without credible social protection mechanisms, and the government is unpopular.
Governments should be encouraged to adopt the stakeholder approach to reform, thus avoiding an undue burden on any single group, and initiate mass information campaigns for explaining to the public the benefits of price-subsidy reform and the working of social safety nets.