19 October 2005

Perverse subsidies: a continuing story

Perverse subsidies are subsidies that are economically irrational, environmentally destructive and socially inequitable. Apart from agriculture (which is fairly well documented and quantified, especially by OECD), other recipients are the road transport and energy sectors. Subsidies to private road transport include the hidden costs of providing road users with roads, space and complementary traffic services such as highway patrols, traffic management, and paramedics. For the years 1991 and 1989, two different studies estimated the net subsidies to road transport in the US at $55 billion and $174 billion, respectively, or 1 and 3 per cent respectively of that country’s GDP. (The wide range reflects the different estimates for parking subsidies and for providing complementary traffic services.) Questionable on many grounds road funding — as well as funding for public transport schemes — would appear to be another example of middle-class welfare. Most of the benefits of these works go overwhelmingly to those who have more money to spend on travel, and more time in which to do so.

In the mid 1990s it was estimated that subsidies for energy in OECD countries were running at between $70 billion and $80 billion; their main purpose being to support energy production. Coal is most heavily subsidised, followed by nuclear energy and oil.

Estimates are bound to be imprecise, but it would be reasonable to put the total sums wasted on perverse subsidies in the developed countries at about 3 per cent of their combined GDP — this is equivalent to about 8 per cent of their governments’ total spending.

My case for Social Policy Bonds, or rather, against existing ways of spending on social and environmental goals, relies heavily on perverse subsidies. They, and all the other forms of corporate welfare, are significant in themselves, but their size and persistence also cast a heavy shadow over other government interventions. This is not an argument about big against small government; it is more about the distance between government and the people it is supposed to represent. However, big government does seem to be remote government, and remote government also seems to be unresponsive government.

And that’s how a few agribusiness corporates, pretending to represent family farmers, have done so much to destroy the landscape and social fabric of rural Europe, the US and Japan, have siphoned off billions that could have been spent on hospitals and schools and people in genuine need, and are even now threatening to derail the global trading system.

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