Simulating progressive social transfers: gas subsidies and solidarity bonds in Ecuador

After two decades of neglect, social expending has become a cornerstone in
the current fight against poverty in Ecuador. Ecuador is presently considering the
elimination of regressive gas subsidies and the shift of these resources into pro-poor
targeted Solidarity Bonds. Great distributive gains are expected from this reform.
There are, however, a number of considerations that may prevent this policy shift
from obtaining substantial poverty and equality gains. Despite their regressivity,
implicit gas subsidies still represent a considerable proportion of total household
consumption among poor households. Also, solidarity bonds siphon off a substantial
share of their total benefits to middle income groups.
This paper estimates the redistributive consequences of policy reforms on gas
subsidies and solidarity bonds in Ecuador.a
A simulation methodology estimates both
direct and indirect (labour-driven) distributive effects of four alternative scenarios: (i)
total elimination of gas subsidies; (ii) selective elimination of gas subsidies among
non-poor households; (iii) total elimination of gas subsidies and shift of resources to
solidarity bonds targeted to the poor; (iv) selective elimination of gas subsidies and
shift of resources to solidarity bonds targeted to the poor.
Estimates confirm that the redistributive gains from these reforms are rather
small both for poverty and inequality. Incentives to work following the elimination of
subsidies compensate – or even outdo – immediate poverty rises. Also, the
elimination of gas subsidies without further expansion of subsidy bonds will
unambiguously increase poverty in Ecuador between one and one and a half percent
points.