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Consequences for Income Distribution

Given the regressive nature of current distribution arrangements, the cash grant alternative would reduce economic inequality. The impact could be substantial: Iranian energy price reforms of recent years were coupled with the introduction of a universal household cash grant. As a result, the country’s Gini coefficient is estimated to have dropped to 0.37 in 2011 from 0.41 in 2010 (Sdralevich et al., 2014, 52). This is about two-thirds of a standard deviation in the international distribution of country Gini values. Similarly, World Bank simulations have estimated that poverty in Egypt would be cut by one-third if energy subsidies were reduced by 50 per cent and the savings used to finance a universal cash grant (Sdralevich et al., 2014, 57). The more even income distribution achieved through cash grants would probably also boost domestic demand, as poorer households, who would disproportionately benefit, have a higher propensity to consume.

Consequences for Energy Consumption

If grants were financed through energy reforms, this would positively impact domestic energy markets: higher energy prices would help reduce energy consumption both through immediate price effects and by providing longer-term incentives to choose more energy-efficient technology and lifestyles. Drawing on panel data from 66 countries, Charap, Ribeiro da Silva, and Rodriguez (2013) estimate a long-term price elasticity of energy consumption of 0.3 to 0.5. This indicates a considerable potential for energy savings: assuming that a typical Arab country’s energy prices could be doubled, consumption would decrease by between 19 and 29 per cent given these elasticities. More realistic energy prices would also reduce the energy dependence of industry, end the often politicised rationing of cheap industrial energy, and provide incentives for investing in more modern production processes.

Despite maldistribution, levels of inequality in the Arab world are moderate compared to most other developing regions; basic infrastructure, state capacity and public services could be improved but again compare reasonably well to the bulk of the Global South. The region would hence have much development potential if economic distortions were reduced and distributional spending leveraged so as to empower rather than segment and immobilise populations.

 
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