Irpe / Earth Council: Subsidizing Unsustainable Development

Irpe / Earth Council: Subsidizing Unsustainable Development - Perverse Incentives

In principle, subsidies can be beneficial, especially if they are sharply focused and limited to achieving one de-sired effect. Usually the original purpose for introducing subsidies is to support the poor, to stimulate economic development or growth, to protect employment and in-vestment, to safeguard domestic supply and reduce exter-nal dependence. In practice, subsidies tend to become deeply entrenched in the expectations and interests of those who benefit from them, long after they have served their original purpose. There is also great resistance to any attempt to change these subsidies, even when their costs have reached a point where they far outweigh any conceivable benefits. In many cases such incentives also exact high costs in environmental and social terms which represent a constraint on the transition towards sustainable development.

AndrŽ de Moor and Peter Calamai collaborated to bring the results of de MoorÕs study, "Perverse Incen-tives" to a wider audience in a report commissioned by the Earth Council. The report demonstrates dramatically how in many cases the subsidies provide disincentives to sustainable development. Through its research and policy framework, the report explains concepts, definitions and approaches; selects possible benchmarks for helping to identify a subsidy; and provides indicators to measure economic effects and a checklist of different types of most common subsidies in practice. The study analyses subsi-dies in four key sectors: water, energy, agriculture and transport for developed countries, developing countries as well as the countries of CEE. For each sector, estimates of the magnitude of subsidies and implications for sustain-able development are presented. The concluding chapter of the report identifies the main barriers to subsidy reform and discusses several strategies to overcome them. The authors conclude that the key issues is to assess whether subsidy policies are actually serving their original purpose or if they have become counterproductive. Moreover, the social and economic costs accompanying subsidies and the effect that subsidies have on sustainable development are analyzed.

According to the authors, a subsidy is any measure that keeps prices for consumers below the market level or for producers above the market level. In other words it reduces the costs for both consumers and producers by giving direct or indirect support.

De Moor and Calamai maintain that identifying sub-sidies is not the most difficult task: reforming them is the biggest challenge. Many obstacles for subsidy reform exist from which the most common are:

opposition from vested interests and stakeholders
distributional consequences
addiction to entitlements
uncertainty about the results
concern over international competitiveness
lack of foreign resources for transition and support
administrative, institutional and skill/knowledge bar-riers

Sectoral analysis shows that many existing subsidy policies do not serve their stated purposes. Subsidies to energy production or consumption often do not promote economic development but rather lead to greater inefficien-cies. They are often not the most effective policy to pro-vide support to the poor. Subsidies to road transport often encourage overuse and simply create more pollution. Wa-ter subsides tend to benefit the rich instead of the poor, while agricultural subsidies often are expensive and some-times ineffective. Generally, the study highlights that the support should not be linked to inputs, production or consumption. Instead, governments should specifically target the original objectives through direct support or by providing income access.

The study points out a variety of potential strategies for overcoming reform barriers:

Create more transparency concerning subsidies, espe-cially their costs, impacts and rationale.
Develop alternative policies that target the same objec-tives better and also compensate losers.
Buy out existing stakeholders.
Initiate comprehensive economic reform.
Introduce an obligation on the part of the government to justify of each subsidy.
Create training and education programs.
Use crises to question and expose subsidy policies.
Stimulate an international dialogue on subsidy reform and support development projects that speed up such reform.

Final remarks concluding the report emphasized that the political will necessary for both the identification and removal of the unsustainable subsidies cannot be created by studies or reports. It must come from policy- makers and citizens who believe that sustainable development is the long-term public policy goal.

AndrŽ de Moor, Peter Calamai: Perverse Incentives. Institute for Research on Public Expenditure (IRPE), Oranjestraat 8, 2514 JB The Hague, The Netherlands. AndrŽ de Moor, Peter Calamai, Subsidizing Unsustain-able Development: Undermining the Earth with Public Funds. 1997. IRPE, commissioned by the Earth Council Costa Rica, P.O. Box 2323-1002, San JosŽ, Costa Rica. 66 pp., price USD 7.50. This publication is a popular version of the above specialist study.

REC * PROGRAMS * SOFIA INITIATIVES * ECONOMIC INSTRUMENTS * GREEN BUDGET