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When helping the poor doesn't help

In a new study, the International Monetary Fund takes aim at energy subsidies, a common practice by countries to help the poor or benefit consumers and industry. The costs far outweigh any benefits, especially for the poor, finds the IMF.

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Vehicles line up at a gasoline station near Cairo March 1. Two fifths of Egyptians live on less than $2 a day and while the poor don't own cars a big rise in fuel prices due to subsidy cuts would feed through to higher transport costs which would push up the price of the food they buy.

Reuters

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Sometimes knowing when not to assist others can actually help them.

That’s the tough-love theme of a new study by the International Monetary Fund (IMF) that analyzes the damaging effects of government subsidies for gasoline, electricity, and other traditional energy sources.

The IMF’s advice is simple: It is far better to be transparent and true to consumers about the real price of energy than to mask subsidies as a good deed.

Subsidies, in fact, help the rich six times more than they do the poor because the rich consume more energy. And the $480 billion spent on direct government supports in developing countries would benefit the poor far more if that money were spent in areas like education and roads, the IMF concludes.

In Africa, government spending on energy subsidies is as high as on health care. And because Africa’s electricity suppliers are forced to sell power at low prices, they are not investing in new electricity capacity or improving service.

Overall, subsidies are a major drag on public finances, economic growth, social equity, and the environment. Even in wealthy countries like the United States, ending tax breaks and other indirect subsidies for fossil fuel producers would benefit everyone by slowing down climate change.

This may surprise many: The US is by far the largest subsidizer at $502 billion, with China at $279 billion, and Russia at $116 billion. If the US took into account the real cost of oil pollution and traffic congestion, the IMF calculates, it would need to raise the tax on a gallon of gasoline by $1.40.

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