October 17, 2005
On Subsidies and Incompetence: How Social Solidarity Rings Hollow
In checking today's edition of the Moroccan business daily "L'Economiste" (most famous in my circles for having a bit back published an article on banking that included the inadvertent (or so one would hope) text: "My love I want to lick you everywhere.") online I was quite amused by the front pager on the inconveniences of the totally batty and absurd petrol products subsidies program.
The underlying article conveys the detials, which are essentially because the grossly incompetent (from a current planning perspective) Finance Ministry has refused to acknowledge the reality of USD 50/barrel prices and has planned its subsidies program (which was de-indexed from the market a few years back in a fit of stupidity) against (as I recall) 20 odd dollars/barrel, the government is 5 billion Moroccan dirhams in the hole to the local distributors and refiners. That's roughly 470 million USD at current prices.
A non-trivial sum.
The point here is the idiocy of the subsidies to begin with, which are boosting consumption at a time of accelerating prices, while doing nothing to help the country address conservation issues. At the very least they should be bloody indexed.
This entirely leaves aside the fact that despite the prattle about social solidarity, the untargetted subsidy actually is gives more to industrial users at the expense of taxpayers than to the poor. A targetted subsidy to say a certain size of butagaz (the weiner nat gas bottles the poor use to cook and do just about anything) might be rational.
However, this is precisely the sort of irrational economic policy that if the country is forced to lift it, the drooling morons in the anti-globo left will squeel on about oil companies and Big Business, etc. etc.
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My basic economics may be wrong but subsidies to producers always seem the most efficient market-skewing way for politicians to buy support. Aside from subsidizing the powerful, it also creates a temporary state with BOTH lower prices AND more production. Price controls OTOH lead to shortages and angry producers; government handouts, like education payments or direct aid to the public, leads to higher prices.
Although why Britain's health system allegedly works is beyond me (maybe it doesnt), except for the fact that medical costs in general ought not be naturally high -- the medical profession here in the USA is a hugely powerful supply-stifling monopoly; and combined with direct large-scale government handouts in medical payments (Medicare etc.) they lead to high prices and lower access.
Actually medical science isnt rocket science and anyone with a good mechanical brain can do it. So a high priced market is not the natural state.
Rambling way way off topic.....
Posted by: matthew hogan at October 17, 2005 08:28 PM
As you say, price controls are pretty bad.
Subsidies to producers seem to become too easily entrenched because there are concentrated benefits and diffuse costs. Look at farmers in the US.
As you say, government handouts (such as deductibility of items such as gas bottles), does lead to higher prices but this also leads to higher production and/or quality and it ends up being less expensive to consummers of that product. I think, but am not sure, that it would also encourage the entry of new suppliers to a greater extent than subsidies to producers because it is consummers who would choose which producer gets the money.
Whether this means that this particular product should be deductible, I don't know, but I propose that the unintended consequences that result from deductiblity for consummers are lesser than that of subsidies to producers.
Posted by: Baal Shem Ra at October 18, 2005 11:19 AM
Sorry for double post, forgot something I remembered just as I was posting:
About subsidies to producers: Taking the example of farmers: When you subsidise producers, what can happen is that even if the product can be more cheaply had from outside producers, domestic producers still get the subsidies. Having "client-side subsidies" (deductiblity for consummers) seems more adaptable to changing conditions.
Posted by: Baal Shem Ra at October 18, 2005 11:23 AM
I should note in the Moroccan case, there is very little local production with respect to the energy products, it's all imported, often in 'finished form' although there is a refinery in country.
The effect then of the subsidies program for energy products is quite simply boost Morocco side consumption and then pay for the differential with taxpayer money - adding a whole level of inefficiency and cost as insult to injury.
It's perverse and utterly wrong-headed as the real effect is not helping the poor so much as finding an inefficient and costly way to transfer more domestic wealth to the hydrocarbon producer nations.
Adding to the massive pecularities, there is an independent power producer cap such that IPP projects as wind power farms (several locations in the country are absolutely brilliant for that) are capped at economically inefficient levels of production. Thus despite official policy of attempting to substitute imported energy inputs, one ends up being locked into them because IPP projects are capped too small to be economically efficient, and the national state monopoly too much of a basket case to actually build any such things itself....
Posted by: lounsbury at October 18, 2005 11:56 AM