Costly populism

Costly populism


subsidy is an indirect payment given by governments for various economic and social reasons. A major part of the "cost" of the subsidy is paid by the government. At the same time, granting subsidies more than often lead to overuse of goods and services and environmental degradation.

With the steady decline in the state of the environment and economies being propped by economically unsustainable methods, Andre de Moor and Peter Calamai study the role of subsidies in the degradation of the environment in their report Subsidizing Unsustainable Development, Undermining the Earth with public funds . While agreeing that a subsidy may be an economic necessity, the authors argue that a subsidy invites overuse and at the same time decreases the money meant for development purposes. The authors analyse four areas water, agriculture, energy and transport, to present their case.

Water is considered to be a good indicator of the state of a country's economy. Promises of water supply are major election issues. Such promises are made and fulfilled without considering the fact that overuse of a resource can result in its depletion. This concept, according to the report, has led to countries like Libya to overdraw their water by 100 per cent. Subsidies on water do not place the actual costs on the consumers. Water subsidies are extended to agriculture too. This area of the economy receives both direct and indirect subsidies. According to the report, in the developing world subsidies for agriculture amount to around us $10 billion and that in the oecd countries , the total transfers from agricultural policies for the year 1995 was us $ 336 billion.

In a chapter dealing with energy, the researchers state that "subsidies tilt the playing field in favour of more polluting energy penalising efficiency measures and renewable energy sources". Though the authors do not substantiate their claim that efficiency measures are penalised, a reason that "polluting energy resources" are subsidised could be because they are labour intensive. Tapping a non-renewable energy source require labour from mining the source to converting it to energy. A renewable energy source would not require that much labour and the labour involved would be very skilled. Encouraging a renewable energy production could jeopardise many industries and jobs. However, this is not to say that non-renewable energy sources should be wiped out from the list of energy options.

The authors suggest a number of steps to reduce the ill-effects of subsidies. They say that no new subsidies should be introduced. Also, the actual cost of the subsidies be made visible to the people. Though these suggestions hold water the one which is nebulous is "get the price right and let the market distribute the resources". Price of a commodity or resource depends on the willingness to pay and its demand. This could lead to increase in the use of a particular resource. In their argument for a reduction in subsidy and for reduction in the involvement of the government, the authors state that the poor pay more for water because of its irregular supply. What the authors fail to take into consideration is that willingness to pay is proportional to the degree of need. The poor are willing to pay more because they have less. But will the rich be willing to pay more for the same amount?

There is not doubt that a subsidy in most cases does not serve its intended purpose and leads to unfavourable consequences. But allowing the 'market' to decide what goes were and how much should be used can be as disastrous option.

The report has been able to provide a glimpse into the cost involved in a subsidy. With tables and comparisons such as "consumers and taxpayers in western industrialised countries divert us $335 billion each year to transfer us $66 billion to farmers" makes the report hard hitting. However, the all important rationale behind it is left unsaid politics. Subsidy is no longer a magic wand, it has become a Damocles sword on governments who use it as a political tool. It would take a decisive government to do away with subsidies which reach a global total of us $700 billion for the four areas discussed. The authors recommendation that oecd countries should lower their import tariffs to reduce subsidies globally, is a welcome initiative. This report will be of immense help to all those involved in formulating policies and to those interested in knowing how their government is spending their money.

Down To Earth