Sunday, February 19, 2006

Compensation for fuel rises

Rising fuel prices have been accepted by parliament as part of the 2006 budget. World oil prices have risen sharply over the last couple of years. Because the government fixes fuel prices in Jordan, it has had to shoulder the difference in cost between local and international prices.

In principle, the government has no business fixing the price of anything, including fuel. This situation is the result of a historic anomaly, when Arab countries (especially Iraq) used to give us oil free, and the government would sell it as a source of revenue (claiming even then that it was subsidized). Now nobody is giving us any oil for free, and the prices have risen, which means that the government is paying cash for oil imports. The cost to the budget is over a half a billion dinars per year.

So, raising the prices is a first step from the government to get out of pricing fuel, which is a good thing. The bad part is that it will cost businesses and individuals a lot more money for transportation and heating. Clearly, this will cause a lot of short term hardship, especially for low income families. How can this be alleviated?

Some ideas being suggested is distributing coupons for fuel and raising the salaries of employees. The idea is reminiscent of Abdulkarim Kabariti's promise to compensate for raising the price of bread in 1996. At the time, he promised "paying before raising", with the term ending up as a running joke because of its sexual implications. The government gave people coupons for a few dinars for about a year before stopping. I doubt that any coupon scheme would really be a long term endeavor. Ideas are to restrict these coupons to families with monthly incomes of less than 300 dinars, although there are no suggestions concerning the value of these coupons.

The idea to raise salaries is especially inappropriate. On a practical level, only government workers will benefit from such compensation. Why should only government workers be compensated? Furthermore, the government would do well to think about cutting its payroll rather than increasing it.

What should be done? I believe that we should see what government typically does to help poor people. This includes direct welfare payments to people who are already known to be poor. What about people who are not on welfare but have low incomes? A reasonable approach would be to alleviate their economic conditions through expanding the services that the government offers. This means spending more for better and more affordable public transportation, improving and expanding access to health care and subsidizing university education at public institutions. The last item is especially important, since higher education is becoming a heavy burden on poor families, and it is an investment in the future as well as in the present. 500 million dinars a year is a huge amount of money for a country like Jordan. If it becomes available for prudent spending, it could go a long way towards helping the low income families. This would be much more useful than some phony coupon scheme or something along those lines. I think only North Korea still uses coupons.

The worse part of all of this is that private businesses that actually produce things and employ people to do something useful will not be compensated. This may result is harming sectors that actually should be helped, as they represent the model for what we want businesses to do in Jordan.