The economic burden of subsidies on developing economies seems far heavier than the benefits that accrue to the citizens from such subsidies. Let us have a discourse on this.
The provision of subsidy distort prices and production levels, financial and resource allocations across firms/sectors/countries, with adverse effects on overall living standards and impede structural adjustment while aggravating budget deficits.
Direct subsidies to essential services are good e.g. subsidies in educational fees for poor students. However, I agree with Yogesh Chandra Tripathi , that it has adverse effects on economy.
As most can attest Subsidies are good in principle but not so under most conditions. My view is that some of the issues are design but others are more operational in nature.
Several questions when I see subsidies are:
- Are the inputs tied to specific outputs?
- Are there clauses of commitment to achieve the specific output
- Are the subsidies tied to a framework of tools to achieve the output?
- Are the outputs quantifiable? If so what is the time frame and can they be estimated at regular intervals?
- What is the exit strategy? The problem with most subsidies is that unless they create a mechanism of sustainability they end up being a permanent solution and therefore a burden.
In Greece we have obtained the 'know-how' for good and bad practices relevant to subsidies.
Every country has the responsibility for the good or bad way that will follow in order to use a subsidy.
There is not a single answer to the question.
One problem that I've seen with subsidies is that they cannibalize resources that can be used to build infrastructure that will in turn bring in foreign investment into the country.
Companies are looking at where can they establish operations where they can operate smoothly. If the infrastructure is bad ( waterworks, electricity, roads, etc.) then that company will not establish operations there. Even local companies that grow under that environment leave to look for better places. Tax incentives are only part of the attractiveness a country can offer but infrastructure is the other big part of the equation.
There is a balance that needs to be established between helping the people vs helping the country, one cannot survive without the other.
It is a Trojan horse to get a feet into the door; once the economic addiction is started, the natural resources of the land and key locations (e.g.for real estate) will be monopolized, i.e. it adds to the privatization of nature (i.e. distributive injustice). Subsidy is a tactical moment of the landlord's game and a delicate version of crony capitalism, i.e. it is playing ping-pong with vital assets (the centralized state vs. private 'agents').
Subsidy when not properly managed, it leads to corruption. With transparency and sincerity it could be of relief and help go the citizens.
Subsidies in developing economies can have mixed effects. While they can provide short-term relief and support, they often lead to market distortions, dependency, budget strain, and crowding out of private investment. However, well-targeted subsidies can address market failures and promote development goals. Policymakers must carefully consider their design and implementation to mitigate negative impacts and achieve development objectives efficiently.