Abstract
This study examined the distributional effects of energy subsidy reduction in Kuwait. A computable general equilibrium (CGE) model was calibrated on a Kuwaiti social accounting matrix (SAM). A simulation experiment was conducted by applying a 25% energy subsidy reduction. The SAM consisted of 10 household groups, categorized into nationals and expatriates, and subsequently classified into five income levels. The employed labor force was classified into two groups (nationals and expatriates), each disaggregated by four skill levels. Industries were disaggregated into 65 branches. The CGE model was specified in such a way that it would be possible to quantify welfare effects on each household group and then trace the changes to distributional effects, factor income, and employment by industrial origins. When accompanied by compensation, the energy subsidy led to an aggregate efficiency (increase in GDP) and welfare gains. The welfare gains among Kuwaiti nationals were progressive; the lower-income groups gained more than higher-income groups.
TopStudy Context
Kuwait spent US$5.5 billion on energy subsidies in 2019 (IEA, 2020). The bulk of this money went to electricity (57%), while the remaining proportion was shared equally between petroleum products and natural gas. These energy subsidies constitute 4% of Kuwait’s GDP.
Kuwait’s energy subsidy is approximately US$1,308 per person. This value puts Kuwait at the top in terms of world ranking, just above Iran (US$1,038) and Libya (US$838). This lavish energy subsidy rate did not happen by accident. The Kuwaiti government has a long-held policy to maintain a welfare state, using various subsidies as mechanisms to transfer wealth acquired from exploitation of the country’s natural resources to citizens. For instance, “the government owns a vertically integrated monopoly and manages the entire supply chain from electricity generation to retail distributions” charging consumers a nominal tariff of 6 cents per kWh, one of the lowest in the world (Gelan, 2018a).
The dynamics of energy consumption in Kuwait are compared with selected countries along three broad categories of indicators (Table 1). The first indicator is the total primary energy supply (TPES) per capita, measured in toe. This converts and combines all energy types into a single composite indicator.
Key Terms in this Chapter
Partial Equilibrium: Economic analysis confined to relationships between variables in a single market, assuming conditions in other markets remain unchanged.
Distributional Effects: Differential outcomes of policy implementations in terms of final benefits and cost allocations to members of society often classified by income groups.
Computable General Equilibrium (CGE): An economy-wide mathematical model that utilizes actual economic data to estimate reaction of an economic system to changes in policy, technology, or other external factors.
Policy Synergy: Coordination in design multiple policies to improve efficiency in their implementations and achieve optimal outcome.
Social Accounting Matrix (SAM): A comprehensive economy-wide database recording data about all transactions between institutions in a specific economy for a specific period of time, usually a year.
Feedback Effects: The process of self-influence that takes place in an economic system through interactions between different markets.
Calibrate: A procedure of feeding parameters and baseline database to equations of a mathematical model to specify and bench-mark a numerical computable general equilibrium.