Before meddling with subsidies, ask why we need subsidies

by Pak Sako
26th Oct 2012

Two groups, CPI and REFSA-IDEAS, are debating government subsidies.

This debate is critical because politicians are taking their cues from it.

It is important that good judgement prevails. Much is at stake.

But first, what is a subsidy? Why do we need it?

Some believe subsidies are government money spent on primary healthcare, infrastructure, culture or the environment.

But these are not subsidies. These are fundamental public provisions that a decent society would collectively provide for all its members in most ordinary circumstances.

A subsidy is different. It is a special kind of public expenditure.

A subsidy is designed to support a disadvantaged group that cannot secure the needs and necessities for survival because an underlying condition is persistently preventing their fulfillment.

When we get a burn, we run cold water over it and bandage. It is lousy policy to do away with running water and bandages without properly attending to the cause, which is contact with fire.

Similarly, subsidies may be essential to make life bearable for vulnerable groups and the needy as long as the root causes that provoke the subsidies are still there.

Don’t like subsidies? Address the underlying structural faults.

To reduce (or even increase) a subsidy, study it and consider the data. Manoeuvring in the dark without information can be harmful.

Now what are the underlying reasons that necessitate subsidies?

There are of course sociological and behavioural factors.

But a major reason is that we operate in an economic system that is systematically biased in favour of capitalist interests.

In this pro-capitalist system, the lower income classes often do not get their fair share of the economic wealth that comes from economic growth.

Business enterprises generate profits by shifting all sorts of hidden social costs onto society— an additional level of disenfranchisement.

When a government allies itself with big businesses, it is all the more unfortunate.

Creating “free markets” in this kind of political-economic condition will not remove the conditions that demand subsidies. It aggravates them.

That is why the REFSA-IDEAS proposal must be regarded with caution. Their motivation may be good, but their approach is narrow.

IDEAS (Institute for Democracy and Economic Affairs) is a free-market, neoliberal think-tank.

Neoliberals believe that the market system is a magical mechanism: if it operates freely, without interference, it should ensure everybody’s wellbeing.

Hence why neoliberals tend to maintain that subsidies ought to be reduced or eliminated.

For them, subsidies are bad ‘government interventions’. Neoliberals would propose that individual citizens keep the money instead and spend it themselves to best satisfy their wants or needs through ‘efficient’ free markets.

But markets are neither magical nor self-correcting.

Not all things in life can, or should, be marketised and monetised into packages to be allocated by markets. Many essentials are best secured for everyone through government or other collective ways, not individually via markets.

CPI (Center for Policy Initiatives) is a social democratic think-tank.

It proposes that we be careful when trying to adjust subsidies. It holds that subsidies have a role to play (e.g., as a safety net for the vulnerable) given the unfair structural defects of our political economy.

CPI says policy actions on subsidies should be evidence-based. We should inquire beforehand into the empirical facts, figures and the potential effect of changes in subsidy levels on the various actors.

CPI’s position is more reasonable. It suggests tackling the issue of subsidies logically and scientifically.

The point is to analyse subsidies as well as their context prior to taking action.

Subsidies may be required until we consciously create that better state of being in which subsidies become less pressing or necessary.

We should be asking what are the alternative measures to take so we do not rely on subsidies.

This might call for radical changes to the set-up of ‘the system’.

History tells us that becoming more and more market-oriented and capitalistic is not the solution.

That view has been discredited. Recall the 2008 economic meltdown and its after-effects.

To tackle complex real-life problems, we need to take a holistic look and use all the tools available at our disposal.

We do not swing the “free market” hammer at everything.

Ask the right questions, see the underlying defects of ‘the system’, check out the figures, think creatively about alternatives, then talk about ‘reforming’ subsidies. First things first.