Distributional Effects of Reduction in Energy Subsidy

Abstract

This study examined the distributional effects of energy subsidy reduction in Kuwait. A computable general equilibrium (CGE) model was calibrated on a Kuwaiti social accounting matrix (SAM). A simulation experiment was conducted by applying a 25% energy subsidy reduction. The SAM consisted of 10 household groups, categorized into nationals and expatriates, and subsequently classified into five income levels. The employed labor force was classified into two groups (nationals and expatriates), each disaggregated by four skill levels. Industries were disaggregated into 65 branches. The CGE model was specified in such a way that it would be possible to quantify welfare effects on each household group and then trace the changes to distributional effects, factor income, and employment by industrial origins. When accompanied by compensation, the energy subsidy led to an aggregate efficiency (increase in GDP) and welfare gains. The welfare gains among Kuwaiti nationals were progressive; the lower-income groups gained more than higher-income groups.