Linking Poverty with Fuel Prices

Precisely, an increase in gasoline price throws more people below the poverty line. In addition, such a decision would force the poor to become poorer, so both poverty incidence and poverty severity would increase. As a result, our poverty reduction efforts would not produce desired results.

BY Lok Nath Bhusal

Recently, the government decided to increase the prices of petroleum products in the wake of rising crude oil prices globally, but was forced to roll back its decision amid vehement protests in the streets against the price hike. Yet, this is not a permanent solution to the problem. A number of things have to be taken into account to provide a lasting resolution to this problem. From a market perspective the rise in prices was logical, for petroleum is not our domestic product and thus we need to accommodate the price according to supply prices in the international markets. However, from the poverty perspective, the above market based analysis provides very little justification for the hike in the prices. If we follow the later perspective as an analytical framework for identifying the general outcomes and impacts of the decision, it would entail us to rethink the decision. Indeed, in an age of welfare state, a responsible government must think seriously the potential ramifications of its decision on the various sectors of the economy, especially the impact on the poor people.

In fact, there exists a conflict between the decision to raise the price and the national objective of poverty reduction. If you attempt to establish the relationship between the two variables, apparently there would be statistically significant negative relationship. Precisely, an increase in gasoline price throws more people below the poverty line. In addition, such a decision would force the poor to become poorer, so both poverty incidence and poverty severity would increase. As a result, our poverty reduction efforts would not produce desired results. This not only challenges the government, it also makes the donor communities to justify the end results of their aid industries – poverty reduction.

First, let’s make an analysis of the gasoline price hike, and how it affects poor people. Once the price is raised, automatically transport entrepreneurs would increase the transport charges, resulting into an increase in the prices of all transported commodities. In fact, immediately following the price hike decision of the government the transport enterpreneurers decided to increase the transport fare by 25 percent. Indeed, this exceeds the majority of people’s hardships by any statistical measure. For instance, the price of rice that is transported to many rural hilly areas form terai would increase at least by the 25 percentage. In the similar vein, price of commodities from hilly areas would increase if they are brought to terai. Consequently, in both the above cases, the general price level (inflation) throughout the country would rise, spreading general hardship, misery and havoc among the populace, especially to the poor people. Indeed, since nobody in the economy is self-sufficient (person who consumes what he produces), the increased transportation costs would hurt everyone in the economy. Analogously, the price hike effectively denies the access of poor people to transport services, limiting them from access to market opportunities.

Making this analysis a step deeper suggests that wage labourers would loose the most because they do not produce anything for themselves. Essentially, majority of the poor are wage labourers, be they urban or rural residents. Also, it hurts the people who are just above the poverty line, irrespective of their means of livelihoods. This scenario adds new poor and makes the already poor poorer. Virtually, both incidence and severity of poverty increases as the net incomes form wage labour and subsistence living decrease in the face of increased general price level in the economy. Therefore, the issue of fuel price hike draws the attention of all those institutions which work in the development sector aiming to bring the fruits of their development efforts to the poor. Furthermore, this situation delves them into rethinking their development strategies so as to make them compatible with the market mechanism.

Second, let’s think what the development community including the government can do to offset the negative impacts on poor people out of the price hike. Both common sense and the most learned perspective would bring subsidy to the fore in order to solve this problem. However, the government has already exhausted with subsidy to the oil corporation for quite a long time, and of course there is no timeframe for the continuation of the price support. In addition, the government is constantly under pressure from the proponents of neoclassical economic ideology, particularly the hegemony of World Bank and the International Monetary Fund. These neoclassical pundits preach the doctrine of free market and limited government involvement in the economy, and thus make the government helpless to continue with the subsidy. Paradoxically, however, these pundits are quite acknowledged with the fact that increase in fuel price harms the poor and, at the same time, they also remain to be the pundits for poverty reduction through market mechanism. Also, they intentionally forget the huge state subsidies to agriculture in Western Europe, the United States and Japan when preaching the doctrine of unfettered markets for developing economies like Nepal. However, they are loosing the battle, as the concept of welfare state is getting prominent globally.

Whatever may be their underlying motives for such a dualistic standing, the other way around would be possible if the government makes a sincere effort to solve this problem. My advice to the government in this regard would be to create a Subsidy Fund pooling resources from all the donor communities and the government itself. We can reasonably argue that even if five percent of the total poverty reduction budget of all the donors could be pooled into this fund, it would offset the negative impacts of fuel price hike on the poor people. Potentially, this fund should support the oil corporation in the short run to bail out the losses it has been incurring, and to those companies engaged in generating renewable energy sources in the long run. Indeed, on the one hand, such a direct measure would help reduce the level of poverty more than with the extra five percent spending on the conventional poverty reduction programmes of the donors and the government while, on the other, it would help develop alternative domestic gasoline sources. I hope many donors would be more than happy to support such an initiative because it has every potential of creating a stable economy, and of directly supporting the poor people.

To sum up, although the recent hike in fuel prices was justifiable from market perspective, it would, without any doubt, increase both poverty incidence and severity in the country. Then, if the government and the donor communities are really serious and sincere with their poverty reduction agenda, they should and have to reconsider the issue most crucially. Ideally, my suggestion to the government and donors is to establish and support a Subsidy Fund by pooling a small portion of their budget which is allocated for their mainstream poverty reduction programmes. Obviously, while there can be mounting debate over this proposal, the materialisation of this initiative would make lasting impacts on poverty reduction alongside serving a permanent resolution of the ongoing acute problem. It is up to the government and the donor communities to decide, but time would record whether they are resistance to their conventional wisdom or willing to be innovative to deal with the problem of poverty in the face of raising gasoline prices. Indeed, time has come for checking their resilience.

(Bhusal, currently living in The Hague, the Netherlands, is an economist. He can be contacted at loknathbhusal@yahoo.com).

(Editor’s Note: Nepalis, wherever they live, as well as friends of Nepal around the globe are requested to contribute their views/opinions/recollections etc. on issues concerning present day Nepal to the Guest Column of Nepalnews. Length of the article should not be more than 1,000 words and may be edited for the purpose of clarity and space. Relevant photos as well as photo of the author may also be sent along with the article. Please send your write-ups to editors@mos.com.np)

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