Thuppahi's Blog

There is a common misconception that free markets favour the wealthy at the expense of everyone else. In reality, many policies criticised as market failures are not examples of free markets at all. Rather, they are often the result of government interventions that distort prices, misallocate public resources, and disproportionately benefit those who need assistance the least. Fuel subsidies are a case in point.

As American economist Murray Newton Rothbard, a central figure in the libertarian movement, in his seminal work, Man, Economy, and State  argued, “ The picture of the free market is necessarily one of harmony and mutual benefit; the picture of State intervention is one of caste conflict, coercion, and exploitation.”

The government’s announcement of a Rs. 41 billion fuel subsidy is driven by a legitimate concern. Fuel prices affect almost every sector of the economy, from transport and agriculture to manufacturing and food distribution. When fuel prices rise, these costs ripple through supply chains, pushing up the cost of living and placing considerable pressure on households and businesses. However, recognising the burden of rising fuel prices does not automatically make a universal fuel subsidy the right solution. The real question is whether this Rs. 41 billion will provide meaningful relief to those who need it most, or whether a substantial share of public funds will end up subsidising consumption by those who can comfortably afford to pay the market price.

Consider what a universal fuel subsidy means in practice. It offers relief to the daily commuter struggling with rising transport costs, but it also subsidises the fuel consumption of those who can easily afford to pay the market price. Sri Lanka continues to import high-end, fuel-inefficient vehicles, including Rolls-Royces. Under a blanket subsidy, the owners of these luxury vehicles benefit from public funds just as much as lower-income households that depend on affordable transport to get to work and make ends meet. In effect, taxpayers are helping subsidise the fuel consumption of the wealthy, while scarce public resources that could provide targeted relief to those who need it most are spread indiscriminately across the population.

This is where the distinction between free markets and crony capitalism matters. A free market allows prices to reflect scarcity and changing economic conditions, enabling consumers and businesses to make informed decisions. Crony capitalism, by contrast, often relies on government interventions that create privileges, distort incentives, and distribute benefits without adequately considering who needs them most.

The question is not whether people need relief from rising fuel prices. It is whether public money is reaching the people who need that relief most.

According to World Bank estimates, 70% of fuel consumption is accounted for by the wealthiest 30% of the population. This distribution highlights a fundamental weakness of universal fuel subsidies: a substantial share of the benefits can accrue to higher-income consumers, even as the government incurs significant fiscal costs.

A more effective approach would be to allow fuel prices to reflect international market conditions while directing public assistance towards vulnerable households and essential services. Public transport, for instance, plays a critical role in ensuring that lower-income workers can access employment, education, and healthcare. Where rising fuel costs threaten the affordability and availability of public transport, targeted support can help protect those who depend on it.

Sri Lanka must also consider the people living below the poverty line, as well as households that remain vulnerable to economic shocks even if they are not officially classified as poor. Well-designed social protection mechanisms can provide these groups with meaningful relief without subsidising fuel consumption across the board.

Price signals matter. When prices rise, consumers have an incentive to adjust their consumption, conserve fuel, and consider alternatives. Keeping prices artificially low weakens these signals and can encourage consumption that the country’s finances and foreign exchange reserves may struggle to sustain. If fuel prices are prevented from adjusting to global market movements, the government must absorb the difference, potentially creating additional fiscal pressure.

There is another lesson Sri Lanka should not forget. When global fuel prices rise sharply, delaying necessary domestic price adjustments can make the eventual correction much more painful. A larger gap between the market price and the domestic price means a greater adjustment may eventually be required. An increase of Rs. 100 per litre, for example, would be considerably harder for households and businesses to absorb if domestic prices had been held artificially low for an extended period.

Sri Lanka has experienced the consequences of failing to make timely economic adjustments. Currency depreciation and rising international fuel prices can compound one another, driving up domestic costs even when global prices subsequently ease. The fiscal burden of past policy decisions can also persist long after the original circumstances have changed. In effect, taxpayers may continue to bear the cost of earlier mistakes through public finances and the wider economic consequences of those decisions.

This is not an argument for abandoning social protection. It is an argument for designing it properly.

M Roberts, if the objective is to protect low-income households, assistance should be directed towards them. If the objective is to keep public transport affordable, support should be designed around that need. If the objective is to protect the economy from external price shocks, the government should strengthen targeted safety nets and maintain a credible, predictable pricing mechanism rather than suppressing prices indefinitely.

Markets are not inherently anti-poor, nor are they designed simply to benefit the rich. When prices reflect real economic conditions and governments protect those who genuinely need assistance, markets can encourage more efficient resource allocation while preserving public resources for essential social needs.

The choice is not between an unrestricted market and a government that cares about the poor. It is between policies that distribute public money indiscriminately and policies that direct assistance where it can make the greatest difference.

A prosperous Sri Lanka needs the latter: market prices that communicate economic realities, and a social safety net that protects people rather than subsidising consumption regardless of need.

That is what a pro-poor, pro-market approach should look like.

The fuel subsidy debate is a reminder that free markets and crony capitalism are not the same thing. A free market allows prices to reflect economic realities, while crony capitalism thrives on privileges and interventions that distort them. When public money is used to subsidise everyone’s fuel consumption, regardless of their ability to pay, the result is not necessarily fairness. It can mean using taxpayers’ money to subsidise the luxury consumption of the wealthy while those who genuinely need relief receive only a fraction of the benefit.

The real purpose of economic policy should not be to make everything cheaper for everyone, but to make opportunity more accessible, protect those who need support, and ensure that public resources are used where they matter most.

Because a free market is not about choosing the rich over the poor. It is about building a system where prosperity is possible, and support reaches those who need it most.

Until next time,

Dhananath Fernando
Chief Executive Officer,
Advocata Institute.