Fossil Fuel Subsidy Reform in the Developing World: Who Wins, Who Loses, and Why?

Fossil fuel subsidies are widespread in developing countries, and reform efforts are often derailed by disputes over the likely distribution of gains and losses. Subsidy reform is transmitted to households through changes in energy prices and prices of other goods and services, but also factor earnings. Most empirical studies focus on consumer expenditures alone, and computable general equilibrium analyses typically report only total effects without decomposing them by source. Meanwhile, analytical models neglect important open-economy characteristics relevant to developing countries. In this paper we develop an analytical model of a small open economy with a pre-existing fossil fuel subsidy and identify direct and indirect impacts of subsidy reform on real household incomes. Our results, illustrated with data from Viet Nam, highlight two important drivers of distributional change: the mix of tradable and nontradable goods, reflecting the structure of a trade-dependent economy, and household heterogeneity in sources of factor income.