Regime Type, Coalition Size, and Consumer Subsidies as a Form of Goods Delivery

A common argument in the political economy literature is that rulers who are accountable to larger coalitions will allocate spending toward public goods rather than particularistic, private goods that benefit the few. Price subsidies for energy and public utilities do not fit this claim comfortably. These subsidies, while delivered broadly, are costly and distortionary, crowding out other forms of public spending. Yet, attempts to reduce them are often met with vigorous political protests. New data on the extent to which countries subsidize coal, oil, natural gas and electricity allow a fresh look at long-standing questions in political economy research about policy outputs. First, do democracies provide subsidies at higher rates than non-democracies? Second, do other institutional forms that create accountability to broader segments of society provide greater subsidies? Prepared for delivery at the 2016 annual meeting of the American Political Science Association, Philadelphia, September 1-4, 2016. Subsidies for electricity, fuel, water, food and other basic goods are a fruitful, but perhaps neglected, subject for political economy research. From a budgetary standpoint, these subsidies can be a significant burden on the state, and substantial evidence indicates that the benefits flow disproportionately to upper income groups that use more of the subsidized goods but need the subsidies less. From an economic perspective, subsidies distort incentives for energy and water consumption, starve public utilities of funds for investment in infrastructure for delivery systems, and crowd out other forms of public spending that would be more productive. Yet, despite these downsides, subsidies are politically salient. Measures to reduce subsidies have produced significant political protests in many countries (Auvinen 1996). Focusing on subsidies for fuel and energy, this paper tests propositions that connect the level and type of goods provision to the methods by which rulers are chosen and the size of the constituencies that support them. A common argument in the literature1 is that rulers who are accountable to larger coalitions will allocate spending toward public goods rather than particularistic, private goods that benefit the few. Since public goods tend to be welfare-enhancing, the story goes, social welfare is greater where political institutions make rulers accountable to broader segments of the population. Subsidies, however, do not fit neatly into this public versus private goods dichotomy. Though typically delivered broadly and non-exclusively, they tend to generate negative economic externalities. Country-level data on the extent of subsidies has become available recently, facilitating cross-national empirical tests on the relationship between political institutions and the extent of subsidies. For example, the IMF has released data on the levels to which countries subsidize coal, oil, natural gas and electricity. These data, covering more than 160 countries, allow a fresh look at two basic questions. First, do democracies provide subsidies at higher rates than non-democracies? Second, do other institutional forms that create accountability to broader segments of society provide greater subsidies? 1For example, Bueno de Mesquita et al. (2003).