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The Macroeconomics of the Arab States of the Gulf$
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Raphael Espinoza, Ghada Fayad, and Ananthakrishnan Prasad

Print publication date: 2013

Print ISBN-13: 9780199683796

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683796.001.0001

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Government Spending, Subsidies, and Economic Efficiency

Government Spending, Subsidies, and Economic Efficiency

(p.65) 4 Government Spending, Subsidies, and Economic Efficiency
The Macroeconomics of the Arab States of the Gulf

Raphael Espinoza

Ghada Fayad

Ananthakrishnan Prasad

Oxford University Press

Public investment and subsidies can be inefficient, but in the GCC these are crucial engines of growth. Subsidies are also used to redistribute oil windfalls, and the problem of a government that wants to distribute oil revenues is an aspect fully symmetric to the one analyzed by Ramsey (1927) on optimal taxation. The second-best policy is to use subsidies across a wide range of goods, as opposed to the focus on energy chosen by the GCC. In addition, commodities for which demand is least elastic to prices (basic needs such as food, healthcare and education) should be subsidized at higher rates. However, subsidies can create additional distortions because households prefer to queue for subsidies (e.g. public service jobs, subsidized mortgages in Saudi Arabia) rather than participate in private markets. We draw a model where recruitment of public servants can induce a large disincentive to take private sector positions.

Keywords:   gulf cooperation council, middle east and north africa, ramsey, resource curse, energy subsidies

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