Homeopathic Economics PDF Print E-mail
Wednesday, 09 May 2012 16:56
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Small annual tariff hikes that leave the consumer no worse off can save the oil and power sector from disaster
While pure economists will tell the government it needs to hike petrol prices by R8.6 per litre, diesel prices by R13.91, kerosene by R31.49 and LPG by R480.50 per cylinder, and frighten the government into complete inaction, a better solution would be to turn to homoeopathy. Indeed, that is the principle adopted by Kirit Parikh when the government asked him, in 2010, for a solution to oil pricing. While pointing out the difference between actual and free-market prices of various petroleum products—today’s annual under-recovery is around R2 lakh crore—Parikh used a different approach. He pointed out that per capita incomes rose 60% since 2002 when kerosene prices were last raised—this meant prices could have been raised by around R6 a litre instead of R3 without changing the level of welfare of consumers. He then added, for good measure, that just 1.3% of all rural households use kerosene for cooking. While the number of households using kerosene fell by a third between 1999 and 2005, the government cut PDS kerosene by just 13%. In the case of LPG, Parikh calculated a R200 hike in LPG cylinder prices would have left consumers unaffected.
This very approach has been used by Crisil while looking for solutions to the near-critical power sector where accumulated losses now exceed R2 lakh crore. While household incomes rose 13.4% per year in the 2005-10 period, Crisil points out, and household expenditure by 10.6% per annum, power tariffs rose under 5% per year. As a result, expenditure on light and fuel has fallen at a household level. The most important point, as Crisil points out, had power tariffs grown in line with household expenses, the R88,000 crore electricity utilities lost in the 2005-10 period would have turned into a profit of R8,000 crore. Economists call this Pareto optimality, where no one is worse off than before, but our political class would understand it better as homoeopathic economics.

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