offered from international forums and peers. Additional mechanisms, such as a template to facilitate and encourage full subsidy reporting to the WTO, have been suggested as a way to remove obstacles to monitoring (Steenblik and Simón 2011).
The next step is to design a strategy for the implementation of subsidy reform. Although the underlying argument for reform is that it will improve overall welfare, there will be winners and losers. For example, the removal of harmful fishery subsidies helps to encourage the management of a valuable resource, improving the likelihood that it will permit a lower but sustainable level of employment in the long term and liberate revenue that can benefit the economy elsewhere. Another common impact of subsidy reform is to increase the price of goods that have been subsidised. Although low-income groups typically benefit from only a small share of subsidies, they spend a larger proportion of their income on basic goods, including food, water and energy, and can be disproportionately affected if subsidies for these goods are removed.
In some cases, careful policy sequencing
may be required, to ensure that the poor can access reasonably priced alternatives to subsidised goods and services, as a prerequisite for subsidy removal.
The uneven distribution of the benefits and costs of subsidy reform explains why there is usually strong political opposition. Complementary measures need to be designed to offset some of these concerns, such as short-term restructuring aid for industries, support and retraining for workers and welfare transfers for the poor (see the section on Supporting Actions for
more information). These types of programmes should include substantial stakeholder consultation and are likely to take considerable amounts of time and effort in countries that do not already have the resources and systems in place. The IMF recommends a gradual reform strategy and suggests a number of potential short- term support measures, including the maintenance of subsidies that are most important to the budgets of the poor – mainly by replacing subsidies to producers with targeted consumption subsidies to poor households, and the redirection of funds into high priority areas for public spending, such as healthcare or education (see Box 8). Given the ultimate importance of stakeholder buy-in, a strong communication strategy is needed to reassure affected groups that they will be supported.
The third and final step is ongoing monitoring and review, essential to determine the effectiveness and any unintended consequences of subsidy reform, and whether the mitigation policies – especially financial support – are reaching their intended beneficiaries and achieving their objectives. If mitigation measures are designed with time boundaries or maximum levels of spending, it can help avoid their becoming entrenched and enable the government to adapt them to changing circumstances.
2.4 Establishing sound regulatory frameworks
The sector chapters in this report emphasise that certain regulatory reforms at the national level, such as those regarding property rights, traditional environmental
Box 8: Energy subsidy reform in action
Cash transfers – When Indonesia reduced its energy subsidies and raised fuel prices in October 2005, the government established a year-long programme to transfer unconditional quarterly payments of US$ 30 to 15.5 million poor households. Considering its quick implementation, the programme is considered to have operated well (Bacon and Kojima 2006). The same move was taken when fuel prices were raised in May 2008, with US$ 1.52 billion being allocated to cash transfers to low-income households (IISD 2010).
The proxy means testing method that was used to identify poor households when reforming subsidies was subsequently used in the government’s design and trial of an ongoing conditional cash transfer programme, the Hopeful Family Program (Program Keluarga Harapan), intended to increase
the education and health of poor communities (IISD 2010). Payments are made to female household heads through post offices on the condition that they meet requirements to use health and education services (Hutagalung et al. 2009; Bloom 2009).
Microfinance – In Gabon, the impact of subsidy reform was offset by using liberated revenue to help fund microcredit programmes for disadvantaged women in rural areas (IMF 2008).
Basic services – When Ghana reformed its fuel subsidies, fees for attending primary and junior- secondary
schools were eliminated and the
government made extra funds available for primary healthcare programmes concentrated in the poorest areas (IMF 2008).