Gasoline subsidies across most of Asia largely benefit the middle-class for whom first time car-ownership has become more of a novelty than a necessity. The great folly of the Asian subsidy decision of recent years is choosing policies that subsidise middle-class vehicle ownership and not fund public transport which would boost labour market mobility for the poor and very poor.
The existing subsidy structures across Asia are poorly targeted and the true welfare loss from unwinding them either by design or natural attrition (as international prices fall) should be minimal.
Most of Asia’s subsidy burden can be traced to the introduction or enhancement of subsidies during the dual food and energy inflation of 2007-08. South and Southeast Asia largely experienced a significantly negative terms of trade shock for over a decade from 2001 to mid- 2014.
Now Asia is experiencing a positive terms of trade shock.
As the ratio of trade to GDP is around 75 per cent to 80 per cent of GDP for ASEAN and over 400 per cent of GDP for Singapore, the impact of the positive terms of trade shock will probably be outsized.
The typical automatic stabiliser to a terms of trade shock is exchange rate appreciation. Asian currency depreciation is thus likely to ameliorate, not alleviate, this positive terms of trade shock.
Some degree of fiscal rectitude, via subsidy rationalisation, may prove to be the prudent policy choice.
This is an excerpt from the ‘South by Southeast Economic Insight – South and Southeast Asia’.