Winners and losers of economic development

Government policies create winners and losers

Regardless of what you think of politicians who love to speak in these terms, it is fair to say that the world is full of winners and losers. Government policy may be active, e.g. raising tariffs or taxes to improve its fiscal situation, or it may be passive, e.g. standing by while the forces of globalization and technology sweep jobs from an economy. In either case, some people benefit, some don’t, and some lose out. In fact, just about every benefit comes with a cost, but those costs are not evenly distributed.

Despite great progress in many sectors of the economy, inequality has increased in the US and elsewhere. According to the Pew Research Center, while median real wages have barely budged since 1970, most of the gains since 2000 have gone to the top 10 percent of the population.

How do we know what the impacts will be?

It is extremely difficult to predict the exact impacts of a given policy.  Many factors come into play, and there are direct and indirect impacts. However, you can make estimates, and that can be very useful. A big part of my work involves looking at the potential impacts of policy reforms in developing countries. Years ago, the World Bank developed an approach called Poverty and Social Impact Analysis , or PSIA. This is a type of evaluation. It deploys quantitative and qualitative research methods to muck around in people’s financial and economic cupboards (using surveys and focus groups, for example) to try and figure out how they might fare if the government enacts a new policy.

How does this work in practice? I often conduct studies on the effects of price increases on different population groups. Analysis allows us to predict what the effects will be in terms of affordability for different income groups. Quite simply, we assess the winners and losers of a given reform. If electricity rates go up 25%, but you also get more hours of electricity supply per day, what does that mean for you, as a poor household? The risk is that the losers, in the short-term, will be those for whom electricity bills are a serious chunk of their total expenditures.

The agony of asking others to delay their gratification

Of course, reforms typically aim for positive outcomes. But these don’t kick in immediately. In the short-term, most people may experience only costs. The long-term benefits are abstract and perhaps uncertain. This is especially the case if the government has a poor track record of following through on its plans.

The relative costs of a price hike will be higher for those least able to afford the good or service being reformed. Thus, raising water or electricity rates can be a delicate exercise. It can make people quite unhappy, and politicians quite nervous. But those tariffs do need to rise. Otherwise, what will ensure that a utility company can operate sustainably, invest in operations and maintenance, attract external financing, and expand its network?

Tariffs are not boring if you’re poor

If you think utility rates is a boring topic, think again. Such an attitude suggests you are comfortably middle class. Probably your eyes glaze over when you see news reports from some faraway country about the latest unrest over price rises. At most, you may be mildly irritated when your utility bill goes up.

In fact, it is not unusual in some countries that when prices rise, some people pay with their lives. Demonstrations and riots occur on a regular basis. People protest against government attempts to squeeze more money out of people (the demonstrator’s perspective). The argument that it will put a utility on a sustainable footing (the technocrat and economist’s perspective) is not accepted. Especially when the government is perceived as corrupt and unaccountable.

Demonstrations over prices can block policies…and bring down governments

Just last month, violent demonstrations broke out in Cote d’Ivoire against proposed electricity price increases. One person was shot dead by security forces. In Nigeria in 2012 cuts to fuel subsidies led to widespread, violent protests leading to two deaths and many injured. In Bulgaria in 2013 in response to a doubling of electricity rates, six people immolated themselves, and street protests brought down the government. In 2015, Armenians took to the streets to protest proposed electricity price hikes, and dozens were injured. There are many other such cases throughout the world.

The Cochabamba demonstrations in Bolivia, dramatized in the 2010 feature film Even the Rain starring Gael Garcia Bernal, is a great primer on this, although it shows just one side of the story: the poor protesting against the privatization of the city’s water supplier. (It’s also an excellent and evocative film which draws a parallel between oppression by elite outsiders over 500 years of history.) The other side of the story, not covered in the film, concerns the aftermath of the multinational water company’s departure. Sixteen years on, the cost of water has indeed stayed low, but most of the poor still don’t have access to it. In other words, it was Pyrrhic victory for the protesters

Put some effort into finding a way forward

Yet it doesn’t have to be either/or. Yes, tariffs do have to cover costs or the infrastructure will break down and a lot of people will be left without any water at all. But there is more than one way to skin a cat. As a government, you can raise prices – or reduce subsidies, effectively the same thing for the consumer – gradually. You can include protection measures for the poor. You can engage on the problem with people affected. You can be smart about communicating why you have to do this.

In 2003, I was part of a team that studied the impact on the poor of rising electricity rates in Moldova.  We found that the poorest 20% of households were not cutting back on electricity use, but were even consuming more. This was because the poverty rate had been coming down, so people in general had more money in their pockets to spend. In another study, in Lebanon, we found that the real (inflation-adjusted) cost of public electricity tariffs had been falling for years, but reliance on expensive private generation has pushed up household electricity expenditures.

The type of approach mentioned above – poverty and social impact analysis – can be usefully applied to all sorts of different reforms, not just utility tariffs.  By doing some investigating, and carefully analyzing the data, the road to reforms can be smoothed.  Social unrest can be avoided.

Government wins by generating goodwill among the population. It shows cares about them and is trying to work out a solution. And the people win because their needs and circumstances are being taken into account, and painful up-front costs are being reduced.