Trust in Government is Essential for Subsidy Reform

2014-08-05 15.42.19

by Meir Alkon

Developing countries around the world maintain energy subsidies, often as an important part of putatively pro-poor social policy. These subsidies have numerous social costs including their fiscal burden and the promotion of energy use that is environmentally unsustainable. Often, these subsidies also tend to be highly regressive. Despite the regressive nature of many energy subsidies, attempts at reform are frequently stymied by political coalitions that include poor voters, even when these reforms have the potential to make subsidies less regressive or to improve the quality of energy access.

The persistent political opposition to subsidy reform constitutes an important puzzle in developing democracies. It is not possible to reform these energy policies without gaining the support of poor voters, who make up a large part of the electorate. My recent research in India (preprint here, published version here), coauthored with Johannes Urpelainen, suggests that a lack of trust in government helps to explain the puzzling persistence of opposition to reforming inefficient energy subsidies.

To understand the sources of opposition to subsidy reform, we conducted focus groups and open-ended interviews across five Indian states, complemented by a survey of over 2,000 farmers in three of those states (Bihar, Gujarat, and Rajasthan). In the context of Indian agriculture, we focused on electricity pricing and diesel subsidies. Agriculture in much of India is highly dependent on groundwater for irrigation, and the costs of electricity and diesel required to pump this groundwater constitute a critical electoral issue.

Because electrified pumps are much more efficient than diesel pumps, a rational irrigation policy would encourage farmers to use electrified pumps with electricity prices that both cover the cost of power generation and discourage excessive groundwater pumping. However, in practice state governments (a) provide farmers with diesel subsidies, which encourage the use of diesel pumps and disproportionately benefit wealthier farmers; and (b) provide highly-subsidized or free electricity that eats into the bottom line of electricity supply companies, resulting in rationed, intermittent, and unreliable electricity provision for farmers.

Emerging from the focus groups and tested in our survey was the central importance of trust in government as an essential precondition for farmers’ support of subsidy reform. Moving from diesel and electricity subsidies to more efficient energy policies requires, first and foremost, that farmers trust the government to fully implement a reform program. In particular, interest in subsidy reform is strongly predicted by trust in the central government, suggesting that farmers believe the central government is in a good position to carry-out reforms.

We also examined the precise nature of farmers’ policy preferences across different states. In Gujarat and Rajasthan, trust in government predicts greater willingness to accept higher electricity prices for a more reliable supply. In Bihar, trust in government makes farmers more willing to give up diesel subsides for electrified pumps. Our findings were further corroborated by field interviews, which highlighted pervasive skepticism about government intentions and capabilities, stemming from a history of unfulfilled campaign promises. This understandably makes farmers frustrated and unreceptive to future promises of reform.

The results of our research have important theoretical implications for understanding public opinion on social policies generally, as well as specific policy implications for energy subsidy reform in India. A vicious cycle is created when low capacity and/or lacking political will to implement reform begets a lack of trust in government. In democracies where voters’ trust in government is low, incremental trust- and confidence-building measures may be essential preconditions for gaining public support for much-needed reforms. In India, where the subsidies under study constitute an environmentally and fiscally unsustainable, poverty-perpetuating equilibrium, both state and central governments will have to invest in capacity and establish a track record of fulfilled promises, in order to get the large agricultural voting bloc on board with subsidy reform.

The author is a PhD candidate at Princeton University and can be reached at