The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries

This paper reviews evidence on the impact of fuel subsidy reform on household welfare in developing countries. On average, the burden of subsidy reform is substantial and is approximately neutrally distributed across income groups; a $0.25 decrease in the per liter subsidy results in a 5% decrease in income for all groups. More than half of this impact arises from the indirect impact on prices of other goods and services consumed by households. Fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups; in absolute terms, the top income quintile captures six times more in subsidies than the bottom.