From Costly Habit to Strategic Investment: Why Subsidy Reform Cannot Wait

Expert analysis on the World Bank’s report ‘Hooked on Subsidies: The Case for Reform’ (2026)

The World Bank’s new flagship report, Hooked on Subsidies, is the most rigorous attempt yet to put a number on what subsidies cost emerging economies — and what better-designed support could deliver instead. WL Advisory reads it as a practical manual for finance ministries, regulators, and the private sector partners who must absorb the consequences of reform.

A bigger bill than most balance sheets show

The headline finding is striking: emerging market and developing economies (EMDEs) spend an estimated 6.9% of GDP on subsidies, equivalent to roughly a quarter of all government revenues — more than health and education combined. And that figure is the floor. Implicit subsidies — non-cost-reflective tariffs in water and electricity, contingent liabilities, preferential procurement, subsidized credit — are largely absent from public accounts. Water tariff under-pricing alone is estimated at over 6% of GDP in MENA. The fiscal picture most governments work with, in other words, materially understates the size of the subsidy footprint.

Where the spending falls short

The report’s diagnosis is uncompromising. Corporate income tax (CIT) incentives — the dominant tool in EMDE investment-promotion policy — generally fail to attract incremental FDI, tend to favor large incumbents, and erode the tax base. EMDEs offer roughly twice as many tax incentive programs as advanced economies, yet rely disproportionately on profit-based incentives, which evidence consistently identifies as the least efficient form of support. VAT exemptions, often defended as pro-poor, are typically regressive: wealthier households capture a larger share of the absolute benefit, and informal markets — where many low-income consumers actually shop — never collected the VAT in the first place. Agricultural input subsidies skew toward larger landowners. Energy subsidies entrench fossil fuel consumption, undermining both fiscal sustainability and climate commitments.

Reform is not retrenchment

The report’s most important framing, in our view, is this: ‘Subsidy reform is not about withdrawing support. It is about support that works, achieved at lower cost.’ The fiscal prize is meaningful — up to 1.9% of GDP per year in savings — but the real opportunity is repurposing. Direct, well-targeted cash transfers reach poor households more effectively than VAT exemptions. Cost-based investment incentives outperform profit-based holidays. Targeted R&D and innovation grants outperform blanket sector subsidies. Cost-reflective utility tariffs paired with consumer assistance programs simultaneously improve service quality and protect the most vulnerable.

A disciplined reform architecture

For governments serious about reform, Hooked on Subsidies sets out a credible operating model: comprehensive Subsidy Expenditure Statements published alongside the budget; a staged design framework testing rationale, instrument fit, fiscal cost, additionality, and implementation capacity; and an explicit political-economy strategy with stakeholder mapping, phased price corrections, visible compensation, and structured communication. The report is unusually candid about why reforms fail — vested interests, credibility gaps, weak delivery units — and prescribes correspondingly concrete antidotes, including senior political sponsorship, an empowered delivery unit, published roadmaps, and monthly performance reviews.

WL Advisory’s perspective: subsidies are sticky for a reason

At WL Advisory we share the report’s diagnosis on inefficiency — but we believe its title risks being read more harshly than the substance warrants. Subsidies are not simply a bad habit emerging economies are failing to break. They are, and have long been, one of the most widely used industrial-policy instruments on the planet. The United States’ Inflation Reduction Act, the European Union’s Green Deal Industrial Plan, Japan’s METI semiconductor support, Korea’s K-Chips Act, China’s electric-vehicle ecosystem, and the Gulf’s sovereign-led diversification programs are, in essence, subsidy programs at very large scale. The advanced economies that today urge EMDEs to rationalize their subsidies are simultaneously deploying them to attract the next generation of factories, research labs, and clean-tech champions. Any honest conversation about reform has to start there.

In countries like Morocco, the difficulty of eliminating subsidies is not merely political stubbornness; it reflects real social and economic functions that markets, on their own, do not fulfill. Subsidies on butane, basic foodstuffs, water, and electricity have for decades served as a de facto social protection floor in the absence of fully developed targeted-transfer systems. Industrial incentives — from Casablanca Finance City to the automotive and aeronautics ecosystems, from solar-park tariffs to the Charte de l’Investissement — have been instrumental in turning Morocco into a credible nearshoring and renewable-energy platform. Removing these instruments without first building credible substitutes — a functioning unified social registry, robust competition authorities, deep capital markets, a workforce equipped for high-value sectors — would not deliver efficiency. It would deliver disruption.

Our reading of Hooked on Subsidies is therefore one of qualified agreement. Yes, accounting must improve. Yes, regressive VAT exemptions and profit-based tax holidays should be reformed. Yes, fossil fuel subsidies should be phased out and redirected toward decarbonization. But the goal cannot simply be to subsidize less. It must be to subsidize differently — more transparently, more conditionally, more strategically — while preserving the State’s legitimate role in shaping industrial trajectories and protecting vulnerable households. The countries that do this well are not the ones that abandoned subsidies. They are the ones that learned how to use them with discipline.

WL Advisory’s takeaway

For our region — and for Morocco in particular, where reforms to butane, sugar, flour, and electricity subsidies have already begun to reshape the social contract — this report offers two clear messages. First, the analytical and political tools to reform well exist; the binding constraint is institutional discipline, not technical knowledge. Second, the private sector should expect a steady reweighting of incentives away from broad price subsidies and toward targeted, performance-based, and increasingly green instruments — but not their disappearance. Investors, utilities, and corporates that engage early with the redesign — proposing measurable performance commitments, ESG-aligned governance, and partnerships with public actors on social-transfer plumbing — will both shape the new framework and navigate the transition with less friction. WL Advisory continues to support clients on subsidy strategy, tariff reform, incentive design, and public-private alignment across the region.

Source: World Bank, Hooked on Subsidies: The Case for Reform, Washington, DC, 2026.