The Kiss of Death?

by Ashok Khosla

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.