The first time she realised everything felt unfair was when the whole village queueing for cheap fuel included the driver of a new SUV. Her mother, clutching vouchers, slowed her head. “Why do they get it too?” she whispered. Across the world this question echoes. Why do nations expend huge resources only to see subsidies going to people who do not need them, while the poorest still struggle? The reason is a complex web of fiscal stress, political realism, and human cost.
In many countries subsidies for basic goods or energy are immense. According to International Energy Agency, explicit global fossil-fuel consumption subsidies reached $620 billion in 2023, with total cost including environmental externalities as high as $7 trillion in 2022. (Reuters)
For example, in Malaysia the government estimated spending RM 64 billion (about US $13.5 billion) on subsidies, incentives and aid in one year, in order to keep prices of fuel, cooking oil and rice down. (Reuters)
Given these large sums the pressure to make subsidies more efficient is growing.
Fairness meets value.
Subsidies can be a blunt instrument. As the International Monetary Fund (IMF) observed, “better targeting subsidies is as much about fairness as it is about value for money in public spending”. (IMF)
A key goal of targeting is to direct benefits specifically to lower-income households rather than universally, which reduces fiscal waste and improves the share going to those in need.
Why governments try it.
- Budget constraints: When commodity prices rise governments cannot afford huge universal subsidies. Malaysia’s prime minister noted that subsidies must focus on low-income groups, or the wealthy will be the main beneficiaries. (Reuters)
- Efficiency: In Malaysia, the analysis shows that direct transfers reduce income inequality more cost-effectively than general subsidies. According to a World Bank report, cash transfers were about four times more cost effective at reducing inequality than fuel and other subsidies. (World Bank)
- Policy consistency: Targeted subsidies can dovetail with social protection systems (e.g., cash transfers) which are easier to scale and less distortionary than keeping universal price caps. The IMF promotes replacing price subsidies with indexed cash transfers. (IMF)
The obstacles in the real world
Data and identification
To target subsidies, you must know who the poor are. Many countries lack reliable socio-economic databases. The result: exclusion errors (poor people missing out) or inclusion errors (wealthy receiving benefits). For instance, in Egypt around half of those eligible for a cash transfer did not receive it because of poor targeting. (library.fes.de)
Political and public resistance
Subsidies often become entrenched. Everyone may expect cheap fuel or electricity. Attempting to change this triggers fear and protest. The World Bank notes that subsidies may be politically easier than transfers, precisely because they require no means-testing. (openknowledge.worldbank.org)
For example, when Malaysia considered moving from universal fuel subsidies to a system that benefits only 80 % of households, the politics were delicate. (Reuters)
Administrative and logistical complexity
Switching to a targeted scheme requires new systems: registries, bank accounts, identification, monitoring. Many governments do not have the institutional capacity. The reform process is technical and slow. (IMF)
Unintended consequences and distortion
Subsidies often distort behaviour and markets. The World Bank notes that subsidies distort trade and production, for example in agriculture and manufacturing, reducing global competitiveness. (The World Bank Docs)
Moreover, when targeting criteria are clumsy, the intended benefits may disproportionately go to middle- or high-income groups. The aforementioned fossil-fuel subsidy analysis found that in many developing countries the top four income quintiles capture about 92 % of the benefits of fuel subsidies. (iisd.org)
When newly elected Prime Minister Anwar Ibrahim announced in November 2022 that the Malaysian government would review its subsidies to direct them to low-income groups, the challenge became visible. (Reuters)
The task: transition from a universal subsidy system (fuel, cooking oil, rice) to one where benefits go mainly to poor households. Malaysia estimated savings of US $1 billion to $2 billion per year from this shift. (Reuters)
Yet the data show the path is steep. The World Bank noted that in 2019 Malaysia’s taxes, transfers and subsidies reduced poverty by only 0.9 percentage points, and that fuel and other subsidies consumed fiscal space that could have gone to social assistance. (World Bank)
In other words, the government wanted to do “more for less” but faced institutional and political constraints.
Subsidies that go to everyone may help prevent immediate hardship, but they are often inefficient and regressive. When wealthier households capture a large share, poor households get little relative help. Targeted subsidies or cash transfers allow governments to reallocate funds towards health, education or social protection which in turn improve long-term outcomes rather than just temporary relief.
The IMF and World Bank analyses show that well-designed transfers can increase income and investment in human capital, without reducing work incentives. (IMF)
By contrast, universal price subsidies may free up consumption today but leave fewer resources for deeper poverty reduction.
Governments must juggle:
- urgency (rising cost of living demands quick subsidies)
- fairness (ensuring the right people benefit)
- affordability (public finances are under pressure)
- political viability (avoid backlash)
The “why” of the targeting struggle lies in this four-way tension. Opting for universal subsidies may win short-term popularity but push budgets into unsustainable territory or leave the poor less served in relation to expense. Moving to targeted relief promises efficiency but opens debates on fairness, data accuracy, and administrative capacity.
The story is not just economics. Subsidies convey identity and dignity. In many communities, the idea that “everyone gets it” underpins social solidarity. Changing that narrative raises questions: Who deserves help? How do we define vulnerability? It invites societal reflection on collective responsibility.
When subsidies for staples are cut or targeted, the symbol matters. Citizens may feel abandoned. Governments must therefore craft not just technical fixes but a narrative of inclusion and trust. A reform that fails to explain its purpose invites suspicion and resistance. As the World Bank noted, communication is vital. (openknowledge.worldbank.org)
Cultural and institutional legacies matter too. A country used to universal petrol subsidies may find it hard to pivot to means-tested transfers because citizens expect one size fits all. The mismatch between historic expectation and reform intention can be the hardest part of the “why”.
What practical steps help?
- Build comprehensive registries of households and integrate data systems.
- Gradually transition: narrow scope of subsidies before full replacement. The IMF recommends narrowing first on the products most important to the poor. (IMF)
- Replace universal price subsidies with direct cash transfers or in-kind support aimed at the poor.
- Communicate clearly: show who benefits, how much is saved, what will the savings do.
- Use fiscal savings to invest in social services (education, health) which improve resilience.
- Monitor and evaluate check exclusion/inclusion errors, adjust targeting mechanisms.
- Build political consensus: engage stakeholders, explain impacts, avoid reform that hurts without cushion.
When the waiting line for subsidised fuel includes those who drive luxury cars, the injustice becomes visible. But for government the injustice may be deeper: the poor still pay the price of inefficient subsidies, in misallocated funds, crumbling services and stagnant opportunities. The fight to target subsidies is also the fight to restore trust between citizen and state, to ensure that help reaches those who truly need it, and that the fiscal burden does not choke future generations.
If reforms succeed, society does not just get cheaper goods it gains fairness, resilience, and dignity. The battle is messy but essential. And the outcome may determine whether a subsidy becomes an instrument of hope or a burden shared by many.
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