Subsidies Essay ⋆ Environment Essay Examples ⋆ EssayEmpire

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Subsidies encompass a wide range of policies that convey financial benefits to a specific industry or economic sector in order to achieve various policy objectives. They usually involve financial transfers from government to industry (termed explicit subsidies). However, they may also include indirect monetary transfers, such as lower tax and interest rates or provisions of social insurance that alter risk calculations and therefore have bearing on investment strategies and business activities within an industry (termed implicit subsidies).

A distinction can also be made between two broad general classes of subsidies: Consumer subsidies, which reduce prices below market levels for consumers; and producer subsidies, which benefit industries involved in production. The latter form of subsidy operates through several mechanisms, which generally include the reduction of fixed and variable costs or the support of prices and incomes. Some industries may also benefit from export subsidies, which apply only to products when they are exported. Subsidies given to one economic sector or to consumers may have the effect of creating a negative subsidy to another sector, an effect labeled “implicit taxation.” On the other hand, governments may utilize both consumer and producer subsidies at the same time, absorbing the costs in order to control producer profits and consumer costs. The government of Mexico has utilized this approach for some agricultural products. Some types of producer subsidies, such as tariffs on imports, may even benefit the government by providing new sources of revenues.

Producer subsidies have been applied to a wide range of economic activities, including agriculture, natural resource-based extraction (such as forestry, fisheries, minerals, fossil fuels), and various industrial sectors. Subsidy programs are initiated and justified for a variety of reasons. Governments may seek to assist new and emerging industries by providing infrastructure and loan programs for capital construction, or they may seek to encourage firms to adopt certain business practices or technologies, including those that are environmentally beneficial. Governments may wish to subsidize businesses that are in danger of bankruptcy or that are weathering poor economic and environmental conditions. Local as well as national governments use subsidies to stimulate economic development and employment. They may also provide industries with a competitive edge in international markets. Although justified at one time, subsidies often become entrenched and end up serving the interests of a small group of stakeholders. As a result, beneficiaries often vociferously resist their proposed elimination.

The creation and elimination of subsidies are local political issues with national and increasingly international ramifications. The impacts of subsidies can be categorized in three broad areas: 1) economic or distributional impacts on trade, 2) environmental impacts on conservation or the sustainable resource use, and 3) social impacts. Subsidies, by their nature, are always associated with distributional effects. Thus, within a given country, some industries will benefit over others. Similarly, considered from the vantage point of international markets, industries subsidized by their governments have an advantage over unsubsidized competitors in other countries, thereby creating trade distortions. Some analysts believe that subsidies support the misallocation of economic resources, encouraging overproduction and impeding market exit. There is evidence to suggest that subsidies can impact the sustainable exploitation of resources by causing or exacerbating the conditions that lead to overcapacity or by stimulating increased capitalization within the sector.

However, as noted by some analysts, subsidies may have positive social effects. In developing countries, subsidies may play a role in reducing poverty, enhancing food security, and promoting community development. Different types of subsidies may have different consequences and different levels of impacts. The existence of a wide diversity among types of subsidy programs and the lack of transparency complicates the analysis of causality and consequences.

Some analysts believe that subsidies eventually undercut the economic health of the industries they are supposed to benefit. Subsidies that increase profits to an industry, either by enhancing revenues or by decreasing costs, tend both to increase production in the short term and capacity in the longer term. With diminished constraints on the industry, businesses will capitalize and new ones will enter the sector. This increased growth will eventually dissipate profits. Thus, the short-term increase in profits caused by subsidies may negatively impact the long-term economic viability of the industry. In industries involved in resource extraction this may have ramifications for both the sustained yield of the resource as well as the well being of the individuals engaged in production. On the other hand, some consider government-funded programs that engage in research and development, monitoring, enforcement, and management activities to be producer subsidies with positive environmental ramifications.

In the international arena, the General Agreement on Tariffs and Trade first addressed subsidies in 1948. The Agreement on Subsidies and Countervailing Measures (ASCM) emerged from the Uruguay Round of negotiations in 1984, the same round that led to the formation of the World Trade Organization (WTO). The ACSM contains a specific definition of subsidies, addressing the issue with a traffic light approach, prohibiting some (red light), specifying others that are actionable (yellow light), and identifying a third group of nonactionable subsidies (green light). The WTO has continued to work on the issue of disciplining subsidies as part of the 2001 Doha mandate, although recent negotiations have not met with success.

The issue of subsidies has also been taken up by the Convention on Biological Diversity (CBD) in its work on perverse incentives. These incentives include subsidies that, by lowering costs or increasing profits, encourage overexploitation of resources and thereby degrade biodiversity. At the 4th Conference of Parties in 1998, governments were urged to identify perverse incentives and to remove or mitigate their negative effects on biodiversity. The CBD continues to tackle the issue of subsidies through the work of the Subsidiary Body for Scientific, Technical and Technological Advice.

Bibliography:

John Jackson, The World Trading System: Law and Policy of International Economic Relations (MIT Press, 1997);
Mateo Milazzo, Subsidies in World Fisheries: A Reexamination (World Bank, 1998);
William Schrank, Introducing Fisheries Subsidies (FAO Fisheries Technical Paper, 2003);
William Schrank and Walter B. Keithly, Jr., “The Concept of Subsidies,” Marine Resource Economics (v.14, 1999);
World Trade Organization Agreement on Subsidies and Countervailing Measures (LT/UR/A-1A/9).