Efficiency in the GCC

Raphael Espinoza ()

No 95, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Public 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 goods (as opposed to the focus on energy chosen by the GCC). In addition, 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 disincentive 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.

Keywords: Gulf Cooperation Council; Middle East and North Africa; Resource Curse (search for similar items in EconPapers)
JEL-codes: O53 Q32 Q38 (search for similar items in EconPapers)
Date: 2012-09-18
New Economics Papers: this item is included in nep-ara, nep-ene and nep-pbe
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Citations: View citations in EconPapers (3)

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