Chapter 4


generally applies to the vast majority of the rural consumers. Rural households may,
however, be adversely affected as producers. Where subsidized food products are produced
mainly by low-income smallholders, the decline in producer prices and market sales,
resulting from the subsidy reduction, will increase the incidence of rural poverty. In cases
where imported food commodities have been subject to subsidies, the impact of a subsidy
reduction on producers' income is due to a substitution effect rather positive.

In summary, a cut in general food subsidies is likely to create hardship for certain vulnerable
groups. The impact needs to be assessed on a case to case basis, in order to be able to
replace, if required, the general subsidy programme by a targeted approach. This possibility
will be discussed in Chapter 5.

4.5 Reduction of other subsidies

Non-food subsidies may also be reduced as part of an adjustment programme. In the case of
basic consumer goods (for example, kerosene), the major impact on poverty and household
food security will, as in the case of food subsidies, lie in a reduction in real income resulting
from the rise in consumer prices. Again, this depends on the beneficiaries of the subsidies
and the share of consumption expenditures devoted to the subsidized items.

A reduction of subsidies on production inputs, for example diesel and fertilizer, will
increase the production and marketing costs and affect the producers and consumers alike
(see comments to figures A-4 and A-11 in Annex 1). An elimination of transport subsidies
increases the economic distance, hence to marketing costs to geographically remote areas
(for analysing see effects see discussion in section 5 of Annex 1). In addition to the effects
resulting from increased consumer and decreased producer prices, food security may be
threatened by the fact that, due to the obstacles to accessibility, the emergence of famines
may remain unnoticed and the chance of response reduced. As to a reduction of fertilizer
subsidies, the impact on poverty depends on the extent to which poor smallholders use
fertilisers. This varies considerably within and between countries.

4.6 Increase in prices / cutting of services provided by public enterprises

Services provided by public enterprises and institutions (health, education, transport, water,
electricity) absorb a significant proportion of government expenditures and are, therefore.
often affected by adjustment policies. Adjustment policies generally aim at reducing the
costs and losses of public enterprises (which, ultimately, are to be borne by the government
budget)

* by increasing the efficiency in the provision of these services,
* by cost recovering, and/or
* by privatization.


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