Monday, June 16, 2008

Emerging Markets

Tom Friedman mentions Egyptian government pays $11 Billion per year as oil fuel subsidy compared to $3 Billion on health and $6 Billion on education. The ‘death’ trap for these emerging markets is clear. In ideal world, the emerging market states would have effective means to distribute more funds for health and education. These two sectors are better compared to oil fuel subsidy because those are much more targeted to needy than well off classes crowding subsidies as like in oil subsidy. But entrenched corruption, skewed development models never make it feasible to have more money channeled to health and education sector.

Chinese oil fuel subsidy is at $27 Billion, at 4% of the central budget. Even though China sits on trillion dollar reserve, from a central government point of view; it is hardly sustainable. As and when government decides to reduce subsidy, it will unleash one more wave of inflation in China. But Chinese story is less draconian because the state has been investing in health and education.

With India things are complicated because Indian government on one hand taxes soaring import bill of oil and refined products; on the other hand continues to provide subsidies of the order of $10 to $15 Billion per year. The muddled picture however cannot hide the trap of ‘oil subsidies’ and with it’s ultra populist polity; there is hardly any chance of going away from this death trap.

The problem of oil and oil subsidies is going drag down emerging markets and global economic stability.

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