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