Designing Subsidy Reforms When Trust is Low: A Survey Experiment from Latin America

For decades, economists have given standard advice on advancing Pareto improving economic reforms that have redistributive consequences: implement the reform while using savings to compensate losers from reform, ensuring that all are better off. Fossil fuel subsidies are a quintessential example of a distortionary economic policy prevalent in many developing countries. By pricing fuel below market value and failing to price in externalities, they promote over-consumption of fossil fuels and affect the adoption of clean energy alternatives, not to mention strain government budgets and crowd out forms of public spending that would promote economic growth. Although fuel subsidies are generally regressive—with richer households with higher consumption benefitting more in absolute terms—poor households still benefit from these subsidies, and any reform would affect them. Standard economic advice is thus to repeal the subsidies while compensating poor households for higher fuel prices.

Yet, citizens often have good reason to mistrust promises to compensate them for the costs of reform. If governments have a poor track record of implementing redistributive programming, compensation promises are unlikely to be credible. Similarly, if trust in government is low, citizens may be loathe to entrust governments with any ‘savings’ from lowering public spending on fuel subsidies. Using a survey experiment implemented across nine Latin American countries, we consider which groups may be most receptive to compensation and how different compensation strategies are most effective at reducing opposition to fuel subsidy reform.