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6.2
6.2.1 DISTINGUISHING BETWEEN
‘GOOD’ AND ‘BAD’ SUBSIDIES
Subsidies are introduced or maintained for various
social or economic reasons: to promote economic
growth, secure employment or stabilise incomes by
helping small producers. These are all ‘good’ – or at
least politically rational - purposes.
However, subsidies all too often end up as long-term
rigidities which distort prices and adversely affect
resource allocation decisions, benefiting some producers
to the detriment of others (including foreign producers).
For analytical purposes, it is therefore important to
distinguish between the stated objectives of subsidies
and their actual effects.
The difference between ‘good’ and ‘bad’ subsidies
often comes down to their specific design and implementation.
Key questions (Pieters 2003) include:
• do they serve (or continue to serve) their intended
purpose (effectiveness)?
• at what cost (efficiency)?
• how are the costs and benefits distributed (equity)?
• last but not least, are they harmful for the environment
in general and for ecosystem services and
biodiversity in particular (environmental impact)?
Answering these questions requires a careful assessment
covering all three dimensions of sustainable
development (economic, environmental and social)
(De Moor and Calamai 1997; OECD 2005). The assessment
process can help identify priorities for phasing
out or reform; for instance, subsidies that have clearly
outlived their rationale should receive close attention.
When a subsidy programme is launched, policy-makers
are often not fully aware of all its implications, including
the risk of environmentally harmful effects. Ex ante
REFORMING SUBSIDIES
HOW SUBSIDIES CAN
MISS THEIR MARK
strategic impact assessments, undertaken as an
integral part of policy formulation, can help minimise
or avoid such effects and many of the other pitfalls
associated with subsidies (see Chapter 4). They can
also help identify opportunities for better instrument
design.
In reality, subsidy programmes rarely seek to implement
a single clearly-defined policy objective. They tend to
have a long, complex and somewhat chaotic history,
having been introduced and amended over decades,
often under political pressure, often without a long term
strategic vision and frequently for multiple objectives
(Barde and Honkatukia 2003).
This mix of explicit and implicit objectives sometimes
creates a daunting barrier to reform. It means that subsidies
can too easily be presented as ‘multifunctional’ –
the argument being that we cannot afford to remove
them. Disentangling the effects and purposes of subsidies
and separating myths from reality are important
preconditions for successful reform. This makes the
issue of cost-effectiveness in achieving stated goals a
very useful test (OECD 2003a).
We can see this clearly by looking at subsidies defended
on social grounds, for instance, to support smaller
marginal producers in critical sectors such as agriculture
or fisheries. However, a careful analysis of
distributive effects reveals that many subsidies
are actually not well targeted, which means they
may not be very cost-effective. In agriculture for
example, a 2003 study showed that most subsidies
in OECD countries went to larger farms (which tend to
be the richer farms) and that only 25% of market price
support ended up as net income gain for farmers;
that is, the bulk of the difference ended up somewhere
else in the value chain (OECD 2003c).
TEEB FOR NATIONAL AND INTERNATIONAL POLICY MAKERS - CHAPTER 6: PAGE 8