An Evaluation of the welfare impact of higher energy prices in Madagascar

In this chapter we estimate the effect of a rise in petroleum prices on living standards in Madagascar combining information on expenditure patterns from the Enquete Aupres des Menages 2005 with an input-output model describing how petroleum price shocks propagate across economic sectors. We identify both a direct welfare effect (heating and lighting one’s house become more expensive) and an indirect effect (the price of food and anything else which has to be transported from factory to shop rises). We find that, a 17 percent rise in oil prices produces, on average, a 1.75 percent increase in household expenditures (1.5 percent for high-income households, 2.1 for the households in the bottom expenditure quintile). Circa 60 percent of the increase in expenditures is due to the indirect effect, mostly via higher food prices. Although energy price increases hurt the poor more in percentage terms, subsidizing would involve a substantial leakage in favor of higher income households. This raises the issue of identifying more cost-effective policies to protect the poor households against energy price shocks.