# **Introduction**

This paper develops a conceptual framework related to the political economy of fuel subsidies, with a view to subsequent empirical applications. The paper seeks to provide systematic explanations of why and how fuel prices, including subsidies to or taxes on fuels, vary between countries. A key question in this context is how formal models can be fruitfully specified, and subsequently parameterized and estimated, to give more substance to empirical relationships between fuel prices, political variables, and other variables.

This research grows out of empirical work currently ongoing in the World Bank dealing with energy subsidies and related themes. For previous broader discussions of such issues see World Bank (2011), and Commander (2011). Current work focuses on building, estimating and testing empirical models for fuel (gasoline, diesel and kerosene) pricing across countries over a 20-year period, based on a much more extensive data set for such pricing integrated with a wide range of economic and political variables; see Strand (2011); Beers and Strand (2012); and Kotsogiannis (2011). Recently it has also become possible to match these with data for car ownership by country for a large set of countries (matching many albeit not all of the countries for which we have fuel price and consumption data).<sup>2</sup> Some empirical political economy aspects of fuel pricing have been treated in earlier papers, including Hammar, Löfgren and Sterner (2004), and Fredriksson and Millimet (2004), albeit on the basis of far more limited data sets than those we have available. Most existing work has focused on high-income countries. Our improved data situation also opens up the possibility to meaningfully include a range of new political variables, representing democratic or autocratic governments, length of regime or regime type tenure, and democratic system (such as presidential versus parliamentarian).

For this exercise I find it useful to start with a rather coarse classification of government types and population groups, to make a preliminary investigation of what factors are likely to mainly drive their interests in each case. I also distinguish between fuel types and focus on gasoline and kerosene which may seem as rather “opposite” in terms of political backing and interest in terms of constituencies interested in low prices: gasoline is presumably, on the whole, preferred by households in the middle class, and kerosene by households with lower average incomes (in the lower class by my classification). Classes are defined in a stylized way.<sup>3</sup> By middle class I will

> 2 Car stock data have, been subject to serious empirical scrutiny in previous research. See e.g. Dargay (1991; 2001; 2002), Fridstrøm (1998);  Lescaroux and Rech (2008), Medlock and Soligo (2002) focusing on high-income countries; and Dargay, Gately and Sommer (2007) and Storchmann (2005) where also lower-income countries are included.

> 3 I do not discuss separately an upper class. In a democracy, this would be non-consequential given that it is very small as compared to the two other classes. In an autocracy it could be more consequential. My approach here is then simply (for such cases) to lump it with the middle class by assuming that households in both classes consume, and are concerned with the price of, gasoline.

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