Lobbying With Voodoo Economics

This month, Libyan businessman Husni Bey and chairman of the HB Group released the findings of a study on government subsidies which detail the value of subsidized commodities per family; these findings have demonstrated that the expected consumption per family is extremely high.

A simple division of the total fuel subsidies by the number of passenger cars produces seven gas tanks per month per passenger car; flour subsidies give each family 37 loaves of bread a day. The study applies the same approach for all commodities, concluding that it is economically inefficient for the government to provide these subsidies.

Bey — who commissioned the study — is the chairman of HB Group, a large importer and distributor of most consumer products in Libya. The HB Group has a substantial market share, which grants the group what some may consider an unfair leverage on the retail channel, in a country where anti-competitive regulation practically does not exist.

Bey’s study does miss the obvious, however; for example, the increase of fuel costs to the 480 distribution vehicles fleet of HB Group will clearly eat into the margins of their distribution operation. HB group will have to pass the additional cost to consumers in the form of higher prices. This scenario will occur at all points of the value chain leading to hyperinflation. Another example: a family that does not own a car will likely use the minibus to get to school and work. Removing the fuel subsidies will dispropotionately affect these families, increasing their transportation costs far than families who own a car; a great deal more when one considers the average size of a family is just shy of 6 members. Libya currently lacks the kind of sophisticated public transport system that needs to be put in place before fuel subsidies can be eliminated.

Bey’s study identifies a method for removing subsidies that is simple and neat, but problematic. In addressing a complex problem Bey’s solution is to calculate the value of the subsidies per person and hand it to them in the form of monthly cash handouts and stop the subsidies. The real question is: why propose monthly handouts? The short answer could be that Bey & Co may be able to take advantage of additional sudden unconstrained and undirected purchasing power of the Libyan consumer.

The study ignored the effects on the private sector, a sector that Mr. Bey always claims to champion and represent. Companies in multiple industries have based the price of their products and services on the cost of subsidized goods. Many have signed government contracts with a price that factors in a cost of subsidies energy; removing this subsidy without renegotiating contracts will have the effect of a perfect storm on the Libyan private sector.

Mr. Bey has launched a lobbying campaign against subsidies, using the study as his launching pad. It is acceptable to lobby for reform in Libyan economic policy when it is aligned with self-interest, but with civil society Institutions that are practically non-existent, grave danger lies in this type of short sightedness. A solution designed to support Libya’s oligarchs at the expense of all other Libyans is not the right solution.

Anti-competitive practices are unregulated, and oligarchs who already control a large share of many Libyan markets will be able to grow an even larger share, locking others out of the market if purchasing power is shifted quickly from subsidies to additional freely spendable cash income.

Entrepreneurs who are competing with the oligarchs dominating many industries should not be preempted. Young and new entrepreneurs and small businesses need to be given a chance grow their business in fair competition with the oligarchs  who in turn should not be in a position to effectively stop new businesses which may compete with them from emerging.

Last month the state of Illinois, which currently provides subsidies to residential customers with electric space heat, proposed an order to establish a process to remove these subsidies, the process would adopt a cap approach under which there would be a limit of 10% on the total annual bill increase for residential customers. The process will last 4 years and the full value of the subsidies is less than $70 Million.

If a state in a country that champions free markets proposed a process that takes 4 years to remove just $70 Million worth of subsidies, we clearly need to put in more thought and a developed process to remove a whopping $11 Billion’s worth. Removal of subsidies must be a gradual, carefully planned process. This process should include improvement in average income and social welfare programs. The process should also include enforceable market regulation to protect the consumer from anti-competitive practices. Most importantly it should guarantee that those dependent on the subsidies do not fall through the cracks.

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