Modelling the Effects of Removing Subsidies on the Jordan Economy: First Application of the JorGE model

In Jordan, generalized price subsidies have for many years been part of the “social compact” and are still common, especially on food and fuels. But generalized price subsidies are neither well targeted nor cost-effective as a social protection tool. In general, though subsidies may reach the poor and vulnerable to some extent, they benefit mostly the better off, who consume a large proportion of the nation’s energy products. Subsidies are not only inefficient in supporting the poor; they also impose a heavy burden on the nation’s public finances. In addition, subsidies—especially those on energy products—impose welfare costs by distorting relative prices in the economy. In addition, they often lead to adverse impacts on congestion, health, and the environment, and inefficient specialization of domestic production. In this paper we use a Computable General Equilibrium model of Jordan, recently constructed under contract to the Jordan Ministry of Planning and international Cooperation (MOPIC), to examine the implications of removing local subsidies. Three scenarios are modelled. The first is a base case. This is a business-as-usual projection for the Jordan economy in which there is no change to current fiscal arrangements. The remaining scenarios deviate from the first in response to removing subsidies on electricity, food, water and public services starting in 2015 and implemented fully by 2018. In the first of the alternative scenarios we remove only the electricity subsidy, which is the largest. In the second scenario we remove all subsidies. The paper has five parts. After an introduction (Section 1), there is a brief general description of model, named JorGE. Section 3 contains a summary of key aspects of the model’s database. Aspects of simulation design are given in Section 4. The effects of subsidy removal are then discussed in Section 5, with results presented as deviations between the values of variables with the subsidy (subsidies) removed and the...