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Digital Dividends: Identity, Payments, and Subsidy Reform
Rapid advances in digital technology, particularly in digital payments and identification systems, can be harnessed to transform the way states implement poverty-reduction programs and to help achieve the SDGs. CGD’s work helps clarify linkages among digital payment systems, identification, and the achievement of the SDGs.
Fuel subsidies are bad for the planet, expensive, and often regressive. With new, high-frequency price data researchers explore why they’re also so hard to kill.
Economists rarely reach the kind of consensus that we see on the topic of fuel subsidies. Bottom line: they’re a really bad idea. On the one hand, they encourage us to burn more fossil fuels and kill the planet, and on the other hand, they’re a massive drain of fiscal resources—equivalent to 6.5 percent of global GDP according to the most eye-popping IMF estimates—that are very poorly targeted at the poor.
Yet attempts to roll back subsidies often provoke strong political backlash. Movements from the Arab Spring in Jordan to Occupy Nigeria have marshalled popular resistance to raising fuel prices, and generally won.
So in the wake of the Paris accord, are countries doing anything to unravel these inefficient subsidies? At a CGD event this week organized by my colleague Todd Moss, Michael Ross of UCLA presented his multi-year project with Paasha Mahdavi of Georgetown and others to gather high-frequency gasoline prices from 157 countries around the world since 2003.
Global fuel subsidies are falling—but mostly due to a falling market price in the face of fixed price ceilings, not politically difficult reform
Two things jump out from the visualizations of their data that Ross, coauthor Chad Hazlett, and Mahdavi present in their recent paper in the journal Nature Energy.
First, the price you pay at the pump in most countries is higher than the global benchmark price of fuel, i.e., most countries are net taxers—not subsidizers of fuel. As it turns out, 95 percent of global fuel subsidies are concentrated in just 22 countries, all of which are also oil exporters. (Note the definition of a subsidy here is more restrictive than the expansive definition that IMF researchers use to get to 6.5 percent of GDP.)
Figure 1: Gasoline prices by country and benchmark price trends over time – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Individual country price trends are shown in grey, and the global benchmark price is plotted in red. Countries fall into two groups: those with prices above the benchmark (who tax gasoline) and those below it (who subsidize it). The overall shape of many trend lines is driven by changes in benchmark price. In general, countries that tax gasoline also allow the price to fluctuate in tandem with global prices, while those that subsidize gasoline keep their prices fixed for long periods. All prices are in constant 2015 USD per litre.”
Second, the lower lines are much less squiggly. That means that countries which subsidize fuel, by charging a retail price below the world price, tend not to let the price move with market fluctuations—whereas taxes are more often defined in proportional terms.
Fixing the retail price has an interesting side-effect: when the world price of fuel drops, the subsidy—defined as the gap between the world price and the retail price—automatically falls. Cheaper gas masquerades as subsidy reform! Mahdavi et al note that most reductions in fuel subsidies since 2014 have come from this phenomenon—which is fine from a fiscal perspective, but isn't going to save the planet or our lungs from air pollution.
Figure 2: Net taxes and subsidies by country in 2003 versus 2015 – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Eighty-three countries increased their net taxes or reduced their net subsidies between the first six months of 2015 and the first six months of 2003; they are shown in blue and lie above the 45◦ dashed line. By contrast, 46 countries reduced net taxes or increased net subsidies over the same period, and are shown in dark orange below the 45◦ line. While most countries had net taxes in both periods (placing them in the upper-right quadrant), 14 countries had subsidies in both periods (placing them in the lower-left quadrant). Just two countries changed from net taxers to net subsidizers (lower-right quadrant) while two others changed from net subsidizers to net taxers (upper-left quadrant). Text size is proportional to average gasoline consumption.”
Overall, are things getting better or not? The short answer is yes, but slowly. From 2003 to 2015, most countries started and ended as net taxers. And countries gradually raised gas taxes, shown by the cloud of names above the diagonal line in the upper-right quadrant. But most countries who started off with net subsidies kept those subsidies, as see in the population of the bottom left quadrant relative to the upper left.
So why do governments subsidize fuel? And why are climate-killing, anti-poor subsidies considered vaguely left-of-center and populist?
The proximate cause is obvious: attempts to remove subsidies are often met with angry protests. Subsidies are politically popular. But at a deeper level, why?
Trust in government appears to be one factor. In a forthcoming paper in Comparative Political Studies, Jordan Kyle looks at public support for replacing fuel subsidies in Indonesia with a targeted transfer program—in which, crucially, monies would have to pass through local government. Kyle documents large variation in corruption in existing programs and finds that this corruption is highly predictive of support for fuel subsidy reform. In villages where transfers tend to go missing, poor households in particular would prefer to keep inefficient fuel subsidies than move to a transfer system.
In a separate project in Tanzania with colleagues Nancy Birdsall, Jim Fishkin from Stanford, and Mujobu Moyo, we found hints of a similar dynamic: citizens who have more trust in the current government were more supportive of exporting Tanzania’s recently discovered natural gas reserves and using the money for other purposes—whereas those with low trust were somewhat more inclined toward using the gas on shore or subsidizing fuel.
The technocratic hope, embodied in India’s Aadhaar system of biometric identification, is that new technology will make it possible to replace inefficient subsidies with reliable electronic transfers that don’t leak and are beyond the reach of local corruption and rent-seeking. My colleagues Neeraj Mittal, Anit Mukherjee, and Alan Gelb have documented in detail how the Indian government has pursued this goal with the reform of cooking fuel subsidies. The politics of Aadhaar remain contentious to say the least.
Using their price data, Ross and Mahdavi have now turned to exploring the determinants of successful (i.e. lasting) reform, asking who raises the retail price of gas and when? That work is still in process, but preliminary results suggest a few factors. Reform is more likely when prices are low (so a price hike is less painful), countries face sovereign risk (so the expense of subsidies bites), and elections are far off.
At the end of the seminar, Ross noted that so far their model has very little explanatory power. A slew of political and economic factors can't seem to predict when fuel subsidy reform will happen. And that seems to be a good metaphor for experts’ understanding of this topic more broadly. Fuel subsidies are bad economics. They cost gobs of money, increase carbon emissions, and fail to reach the poor. But they remain popular, often with the people we think benefit the least.
For so long we’ve operated under the prevailing assumption that greater economic cooperation among countries would guarantee peace and stability. But now, the world finds itself in a dramatically different context—one that is fractured socially, politically, and economically. Today, more than 2,500 top decision-makers from around the world are gathering to kick off the 48th World Economic Forum Annual Meeting in Davos, Switzerland to address these new challenges.
This year’s theme, “Creating a Shared Future in a Fractured World,” sets the stage for important discussions that prioritize global engagement and innovative solutions to address today’s challenges. Below, CGD’s experts weigh in to shed some light on the ongoing debates, with innovative evidence-based solutions to the world’s most urgent challenges, and also discuss what’s not on the agenda but should be.
For the policymaker looking to improve the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
This year, the global migration crisis finds itself buried in the agenda. However, it will remain one of the most urgent issues for generations to come if international leadership fail to tackle human mobility with pragmatic, fact-based policy tools. Now more than ever, innovation is imperative. To that end, Michael Clemens has a unique proposal.
Meeting the Sustainable Development Goals will require a major ratcheting up of private finance. So far, that hasn’t happened. Strengthening the role of the MDBs in mobilizing the private sector should be high on the agenda at Davos, says Nancy Lee.
There is no shortage of skepticism about whether global leaders at WEF are serious about addressing the needs of the poor and vulnerable, writes Cindy Huang. Visible progress through core business commitments would send an important signal that refugees are a crucial investment, not a cost—and that corporate leaders are committed to taking action towards, not just talking about, solutions that deliver social and economic impact.
As leaders of countries and corporations from around the world gather in a tony ski resort for this week’s World Economic Forum annual meeting, they will pass by posters showing the faces of people whose daily income is less than the price of a Swiss cup of coffee. The distance between those leaders and the people on the posters may be immense, but it is shrinking rapidly thanks to new digital technologies. Armed with a digital ID, a mobile phone, and a bank account, the landless laborer in rural Bangladesh is becoming an integral part of the new digital economy that will shape the politics and profits of the future. The top of the pyramid (Davos invitees) can no longer ignore the bottom (like the women in the Indian village described in a recent CGD blog post).
As the WEF notes, digitization is transforming business models, the policy landscape, and social norms. But what does it mean on the ground? Over the past few months, we’ve been analyzing a dataset from the Indian state of Rajasthan to better understand the use and impact of digital technology on people. Among other things, the data show how digital technology can be used to improve the delivery of subsidies and pensions and to achieve financial inclusion; nearly 100 percent of household survey respondents now have a bank account. That’s an impressive accomplishment, but it is not the whole story. We’re concurrently finding gaps in how much people actually use those accounts. Likewise, even though women do transact on the accounts, it is still men who use the household mobile phone (and by extension control the family finances), often because women lack the requisite mobile literacy. Digitization can be inclusive but it opens the risk of a gender-based digital divide.
For the policymaker looking to improve services and the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
Governments can use technology to reduce exclusion…
Governments are investing significant resources to create digital infrastructure, but these investments will only realize their full potential if the private sector takes advantage of digital public goods. For example, last week CGD learned how Malawi has just achieved near-universal electronic ID coverage for its adult population in less than six months. The government and institutional donors together invested $52 million to register all adults at a cost of around $5.50 per head. This is a significant outlay for Malawi, but the government anticipates many benefits, ranging from extending the right to identification to their citizenry to increasing tax revenues and expunging payroll ghosts. Also important are the opportunities for the private sector, such as increased financial inclusion and enhanced ability to travel.
Malawi isn’t alone. Governments—from municipalities up to the national level—are using digital technologies to accomplish a variety of goals as several recent CGD publications have pointed out. Specifically:
Targeting the poor with transfer subsidies directly into their bank accounts generates fiscal savings, allows governments to eliminate market distortions, and fosters competitive markets (see CGD case study of India’s targeted liquid petroleum gas subsidy).
Financial inclusion supported by electronic Know Your Customer (e-KYC) based on digital ID opens up opportunities for formal participation in financial markets, especially for women.
…and there’s a huge role for the private sector as well
In and of themselves, improvements in public programs can yield substantial economic and social benefits. But the greatest benefits will come if the private sector builds on top of the digital infrastructure to expand opportunities. One might think of the private sector as the multiplier effect on top of a digital government stimulus package. Take the opportunities that India’s Unified Payments Interface opened to the mushrooming number of private providers of digital financial services, or the dramatically lowered cost to onboard a banking client through its e-KYC service. India is not alone; the identification infrastructure built in Kenya underpins its remarkable expansion of mobile financial services. The ID system reports responding to over a million identity checks a day through its automated system, mostly from financial institutions.
This is not just the public sector trumpeting about possibilities either: Mastercard, the Secure Identity Alliance, and the GSMA (a worldwide trade organization of mobile network operators) have all endorsed the Principles on Identification for Sustainable Development, which CGD facilitated in 2017 with the World Bank Group.
As policymakers and private actors gather at Davos, enthusiasm over technological innovation will undoubtedly run high. But that technology is most effective when everyday users—not just early adopters—can easily take advantage of it. How can we extend human-centered design to focus on the millions who are entering the digital economy every day? Finding ways to ensure that all groups on the margin are included is not only a political and social imperative, but an opportunity for the private sector to serve new markets in the digital economy. The leaders in Davos are just a WhatsApp message away.
Recent advances in the scope and sophistication of identification systems could have far-reaching consequences for development. While there is no one-size-fits-all approach, there are common features that ID systems should share if they are to support development.
Digital identification has become a focus for development policies and programs, and not a moment too soon. ID programs are being rolled out at a rapid pace, often in countries with little in the way of identification infrastructure. The capabilities of the new systems are dramatically increased through digital technology, in particular, biometrics, while their reach is expanding through integration with mobile technology. Some developing countries are at the global frontier. India’s Aadhaar program is a pioneer in digital identification on several fronts, including through the program’s integration with mobiles and financial accounts to reform the country’s vast array of schemes and programs (the so-called JAM Strategy) and its use as a platform for a range of advanced services (the “India Stack”). Similarly innovative and sophisticated systems are being rolled out in many countries.
Our new book—Identification Revolution: Can Digital ID be Harnessed for Development—considers where these trends are heading. Is everyone on the planet fated to be uniquely identified by a number? What are the implications for development? Will the new systems help people to assert their existence and their rights, strengthen the administration of public programs and enhance government accountability, and open up opportunities by reducing transactions costs? Or will the new systems exacerbate already-existing risks, such as the exclusion of vulnerable groups and the erosion of privacy? Will the considerable sums being spent on the new systems prove to be a waste of money?
The Opportunities and Risks of the ID Revolution
We wrote this book to provide a basis for discussion of this rapidly evolving area. We conclude that digital ID has the power to do both tremendous good and to inflict serious harm depending on how it is used. On the positive side, not only is “legal identity” now recognized as an SDG in its own right, but the ability to assert one’s identity is also important for the achievement of at least eight SDGs and 19 targets, from enabling access to economic resources to financial inclusion, gender equality and empowerment, social protection, and clean elections. Together, identification and enhanced payments systems, especially through mobiles, have the potential to greatly strengthen state capacity.
On the other hand, there are also examples that illustrate the potential downsides. Some of the systems in use today to help deliver social payments or underpin engagements between citizen and state have their origins in repressive or exclusionary policies; examples include Spain and South Africa. Several countries have committed millions of dollars to ID systems that have delivered few benefits to the poor; in some cases, the formalization of identification processes had led to increased statelessness and marginalization. But, given the many powerful drivers for implementing the new systems, it is not realistic to turn back the clock. Every country in Africa, for example, either has, or has committed to, a national ID system. The task is to ensure that digital ID systems are as development-friendly as possible.
Making Digital ID Work for Development
How can stakeholders support development-focused ID systems? First, they should take the SDG agenda seriously. Together, the identity-related goals and targets include virtually all the useful applications of ID systems. If there is not a coherent plan to link systems with such uses, the ID-related investments are not likely to produce much of a development return.
Second, governments and development partners should move towards a more strategic view of identification policies and systems as a component of development policies and investments, including the goal of an integrated, lifetime system encompassing civil registration and identification. This strategic priority applies to both developing countries and their development partners; in previous research we found that donors have been supporting many ID programs, but in an ad hoc way directed to particular projects, whether a transfer or health program, or an election. This approach may have supported useful experimentation but has also contributed to multiple redundant systems.
Third, the development community needs to move toward a common set of principles to help shape engagement. These include the essential principle of inclusion of poor and vulnerable groups; a focus on the legal and institutional basis for the systems to ensure that they support, rather than erode, users’ rights (including data privacy: only about half of developing countries have a legal framework covering this area); and technical features and standards to ensure robust performance and avoid countries being locked-in by vendor-specific hardware and software.
Progress Toward a Strategic Approach to ID and Development
Fortunately, there is progress. So far, some 22 organizations—virtually all the significant players in the area—have endorsed a set of common principles to help establish a shared understanding of the issues and encourage cooperation. The multilateral development banks and many bilateral agencies have launched initiatives to facilitate a strategic approach to identification and improve our understanding of the strengths and weaknesses of multiple country systems. New initiatives, such as ID4Africa, have been established to enable South-South learning by bringing together governments, development partners, and the identification industry itself to share experiences and learn about the still-rapidly-evolving technology. Emerging work on technical standards and open source approaches can help countries avoid vendor lock-in and foster interoperability between digital ID systems, including across borders.
It is still early days in the identification revolution, but understanding the institutions, policies, and technologies shaping digital identification systems today will be critical for anyone concerned with inclusion, governance, access to rights, the quality of service delivery, and many more issues at the heart of twenty-first century development. Our book offers a primer on identification and registration systems in the digital age, including practical guidance for governments and development partners on ensuring that digital ID systems achieve their full development potential.
India’s reform of household subsidies for the purchase of LPG cooking gas stands out for a several reasons. The paper provides a detailed picture of the reform through its various stages, including how the process was conceptualized, coordinated, and implemented. It analyzes how such a reform must be able to adapt to concerns as they arise and to new information, how digital technology was used and how it is possible to use a voluntary self-targeting “nudge” to defuse potential resistance to income-based targeting.