Energy Subsidies, Public Investment and Endogenous Growth

Gabriela Mundaca

MPRA Paper from University Library of Munich, Germany

Abstract: This paper deals with impacts of fossil fuel subsidy reform on economic growth, focusing mostly on the countries of the Middle East and East Africa (MENA) region. We first develop a theoretical growth model, and use it to demonstrate that a country can achieve higher levels of economic growth if the government reduces its energy subsidies. Our empirical work confirms the main results from the theoretical model. That is, a country that initially subsidizes its fossil fuels, and then eliminates or reduces these subsidies, will as a result experience higher economic GDP per capita growth, higher employment, and greater levels of labor force participation, especially among the youth. These effects are strongest in countries where fuel subsidies are generally high, such as those in the MENA Region. We here predict that for a given level of subsidy, a 20 cents average increase in the gasoline and diesel price per liter can increase the GDP per capita growth rate by about 0.46 percent and 0.24 percent, respectively. In the MENA countries, savings in subsidies seem to be earmarked by the region’s governments to health expenditures, education expenditures and public investment in infrastructure. These channels appear to be strong contributing factors to higher long-run growth when fuel subsidies are reduced.

Keywords: energy subsidies; economic growth; public investment (search for similar items in EconPapers)
JEL-codes: Q3 Q4 Q43 Q48 (search for similar items in EconPapers)
Date: 2015-07-16
New Economics Papers: this item is included in nep-ara, nep-ene, nep-fdg and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Energy subsidies, public investment and endogenous growth (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:65741

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