Social Unrest and Fuel Prices: The Role of Macroeconomic, Social, and Institutional Factors

This paper investigates the impact of fuel price increases on social unrest in addition to the macroeconomic, social and institutional factors driving this relationship. Using the IV fixed-effect estimator on a sample of 101 developing countries from 2001 to 2020, we find that changes in fuel prices are positively associated with the number of social unrest, mainly anti-government demonstrations. This impact is however amplified: (i) during economic downturns and periods of high exchange rate instability; (ii) when government spending is low, especially on health and education, thus suggesting that streamlining fuel subsidies and diverting parts of the reform savings to the health and education sectors is an appropriate policy that could appease social tensions. Further, social unrest risks tend to intensify following fuel price increases in countries with high income inequality, low institutional quality, and weak governance. Overall, the findings provide support to the grievance and deprivation theory in explaining the association between fuel price increases and social unrest, but fail to find evidence for the resource theory and the theory of political opportunities.