Government Spending, Subsidies and Economic Efficiency in the GCC
AbstractPublic investment and subsidies are typically inefficient but in the GCC these are crucial engines of growth. Subsidies are also used to redistribute oil windfalls in the region, and the problem of a government that wants to 'distribute' oil money is a problem fully symmetric to the one analyzed by Ramsey (1927) of optimal taxation. The second-best policy (when lump-sum transfers are not available) is to use subsidies across a wide range of goos (as opposed to the focus on energy chosen by the GCC). In addtion, the 'inverse' Ramsey model implies that commodities for which demand is least elastic to prices should be subsidized at higher rates. This suggests subsidizing basic needs at higher rates, in particular food, healthcare and education. In addition, when subsidies are very large, they create additional distortions because households prefer to queue for subsidies (e.g. public service jobs, subsidized mortgages in Saudi Arabia) rather than participate in private markets. As an example, we draw a model where recruitment of public servants can induce a large diincentive to take private sector positions and compute the conditions under which the disincentive is so strong that overall employment is actually decreased as public servants are being hired.
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Bibliographic InfoPaper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 095.
Date of creation: 2012
Date of revision:
Gulf Cooperation Council; Middle East and North Africa; Resource Curse;
Find related papers by JEL classification:
- Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
- O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-ARA-2012-10-06 (MENA - Middle East & North Africa)
- NEP-ENE-2012-10-06 (Energy Economics)
- NEP-PBE-2012-10-06 (Public Economics)
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