Fuel Price Subsidies and the control of corruption: a first approach

Fuel-price subsidies are pervasive and widespread around the globe. While there is by now a well-established understanding of the efficiency properties of fuel-price subsidies, there is limited empirical work on their determinants and, in particular, on the extent to which their presence (and their magnitude) is associated with countries that suffer significantly from corrupt practices. This chapter aims to explore empirically the link between fuel-price subsidies and a measure of the degree to which public power is exercised for private gain and the state is ‘captured’ by private interests (proxied here by the variable ‘control of corruption’). Using panel data over the period 1991-2008, this paper shows that in countries with relatively low level of corruption (high level of control of corruption), when corruption control increases, fuel subsidies decrease; for high level of corruption (low level of control of corruption), increasing corruption control does have only a small effect on fuel subsidies. Interestingly, these results hold independently of the level of per capita income of a country. What this suggests is that, from a policy perspective, a prerequisite for a substantial reduction in fuel subsidies is an increase in the control of corruption, when it is already relatively high.