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THE most fallible science can
occasionally be right. For whatever reasons, right or
wrong, economists are generally against subsidies. On this
point, they can count on agreement from a wide range of
other professions, including even environmentalists.
Clearly, no system that is regularly subsidised is
sustainable.
Governments often find it convenient to provide subsidies
that benefit one or other constituency. The rationale given
is that the markets are not perfect and that certain goods
and services have, of necessity, to be underwritten by
society. The ostensible aim may be to promote any or all the
basic societal goals: social equity and distributive
justice, environmental quality, economic efficiency,
cultural values or community self-reliance.
The great majority of subsidies are not even recognised as
such. When public money is used for providing and
maintaining infrastructure – either physical or
institutional – as subsidy is involved. The road, railway,
shipping and other transport networks have huge subsidies
built into them that benefit those who use these services,
mostly the rich. The communication systems, water and
sanitation services and electricity, all services invariably
supplied at prices below cost are vast subsidies to the
sections of the economy that have access to these services,
again mainly the rich. Banking, insurance and a myriad other
intangible services ranging from foreign policy measures to
trade promotion delegations are gigantic subsidies, almost
entirely to the advantage of the rich.
If the purpose of a subsidy is to redress imbalances that
have arisen historically among various constituencies, in
other words to level the playing field, it is unlikely to be
met. In fact what subsidies generally achieve is the
opposite of their stated goals.
Within the framework of a market economy, subsidies tend to
distort prices and thus send the wrong signals regarding the
supply and demand for various goods and services. In
particular, they can quickly lead to over utilisation of
scarce resources.
But it is outside economics that subsidies have most
negative impacts. Because they involve public funds, which
be carefully accounted for to parliaments and auditors, they
immediately and inexorably lead to the establishment of
heavy, bureaucratic structures. These in turn lead to huge
administrative costs, corruption and other frictional
losses. In this process, the original aims and
“beneficiaries” or “target groups” are quickly forgotten,
and the “scheme” acquires a life and logic of its own.
Worse, it is the rich and powerful, able to manipulate the
political and administrative decision systems to their own
advantage, who become the unintended beneficiaries of
subsidy programmes. It is the contractors, the
middlepersons and other not very gender-neutral sharks in
society who are able to hijack the pork barrel, leaving a
few crumbs for the poor, the marginalised and the powerless
for whom the programmes were intended.
Worse still, subsidies create and attitude of dependency
that rapidly pervades the social consciousness of a
community, and effectively destroys their will – or even
desire – to build a self-reliant and resilient economy.
Subsidies are not justifiable, especially not for the
purpose they are most used today: to reduce the costs of raw
materials and other inputs for manufacturing, or to reduce
the sale price of consumer products.
But the market is here to stay, with all its power to create
efficient use of resources, and its ability to destroy
social, cultural and environmental values. Some degree of
levelling then becomes necessary for a playing field that
also includes the poor, trees and animals, and cultural
practices that are crucial to the survival of humanity but
vulnerable to the onslaught of market-based homogenisation.
Social investments, not subsidies, are a necessary
precondition for the market to work to the advantage of all,
now and in the future. Such investments are needed to
overcome barriers to entry for new industries, to create
infrastructure for sectors (like the rural enterprise) and
to develop the skills, health and well-being of our people.
The most fundamental social investment has to be in
innovation and infrastructure in rural areas. Only by
improving their productivity and the marketability of their
products can small enterprises compete with the larger
industries that rule the playing field today, and indeed set
the rules for the game of business. For this, massive new
support is needed for S&T geared to their needs: a reversal
of current expenditures where for every thousand rupees
spent on research for the rich, only one is available for
science geared to the needs of the poor. A similar reversal
is needed between expenditure for rural and urban
infrastructure.
It is only
thus that the small village entrepreneur can reach his or
her potential as a viable and successful competitor to the
large, heavily subsidised businessperson businessperson in
the city.
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