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The Economy-Wide Impact of Subsidy Reform: A CGE Analysis

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  • Roos, Elizabeth L.
  • Adams, Philip D.

Abstract

Oil prices fell from around $US110 per barrel in 2014 to less than $US50per barrel at the start of 2017. This put enormous pressure on government budgets within the Gulf Cooperation Council (GCC) region. The focus of GCC economic policies quickly shifted to fiscal reform, including the removal of domestic subsidies on energy products. In this paper, we use a dynamic Computable General Equilibrium (CGE) model to investigate the economic impact of the gradual removal of subsidies on refined petroleum and electricity, with specific reference to the Kingdom of Saudi Arabia (KSA). Our study shows that removing subsidies eliminates a large distortion in the economy. This improves the efficiency of resource use, so that even though employment and capital in most years fall relative to baseline levels, real GDP rises. In addition, we show that fully-funded compensation payments offset the increases in energy prices, leaving economic welfare of the Saudi-national population little affected. Removing the energy subsidies leads to an improvement in the net volume of trade, while leading to a mixed outcome for industries.

Suggested Citation

  • Roos, Elizabeth L. & Adams, Philip D., 2020. "The Economy-Wide Impact of Subsidy Reform: A CGE Analysis," World Trade Review, Cambridge University Press, vol. 19(S1), pages 18-38, July.
    • Handle: RePEc:cup:wotrrv:v:19:y:2020:i:s1:p:s18-s38_2
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    Cited by:

    1. Blazquez, Jorge & Galeotti, Marzio & Manzano, Baltasar & Pierru, Axel & Pradhan, Shreekar, 2021. "Effects of Saudi Arabia’s economic reforms: Insights from a DSGE model," Economic Modelling, Elsevier, vol. 95(C), pages 145-169.
    2. Shehabi, Manal, 2022. "Modeling long-term impacts of the COVID-19 pandemic and oil price declines on Gulf oil economies," Economic Modelling, Elsevier, vol. 112(C).
    3. Timilsina, Govinda R. & Deluque Curiel, Ilka Fabiana, 2023. "Subsidy removal, regional trade and CO2 mitigation in the electricity sector in the Middle East and North Africa region," Energy Policy, Elsevier, vol. 177(C).
    4. Haqiqi, Iman & Yasharel, Sepideh, 2018. "Removing Fossil Fuel Subsidies to Help the Poor," MPRA Paper 95907, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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