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Wednesday, 5 June 2013

Blind Guides on Subsidies

Daily Mail’s Gilbert Nkamba tries to define a subsidy:
A subsidy is a direct relief by the government to its citizens or a group aimed at mitigating the full impact of the forces at play in a liberalised economy, or cushioning the impact of interaction of the forces of demand and supply
This is only partly true. It is not the whole truth. A subsidy can also be given to producers for export purposes. In other words you can subsidise an agricultural good, for example, just to increase the share of your exports abroad. So a subsidy is not always about domestic consumers.

Under the export subsidy scenario, domestic consumers effectively pay relatively more than foreign consumers (adjusting for transport costs etc) – because without the “export subsidy” foreign consumers would have bought a relatively more expensive product. Domestic consumers also pay more in absolutely terms because these consumers pay taxes which goes on those export subsidies.

Most explicit export subsidies are actually forbidden by WTO rules – especially if linked to volumes of exports (to avoid so called “dumping”). But such subsidies are not always easy to detect because sometimes they happen by accident. Like in Zambia’s case with maize!

It may surprise some to learn that our agriculture subsidy is not purely a consumer or producer subsidy in the domestic sense. In recent times it has actually been an export subsidy! We have been subsidising SADC consumers.

What has happened in the past is that FRA accumulates massive subsidised maize stocks that is then offloaded in regional export markets at a major financial loss (because there’s no where else to take it). Under the current model the bumper harvest has always been bad news for the tax payer. We are effectively subsidising our regional neighbours since FRA is forced to sell at below market prices.

Muhabi Lungu and others writing about consumption subdisies and rationale for government intervention show a poverty of understanding the multi-faceted nature of the economic problem. Incidentally, I laughed when I heard Lungu suggest that “maize is a public good”. It certainly is not! Any basic economics textbook will tell you that a public good is aproduct that one individual can consume without reducing its availability to another individual and from which no one is excluded. Clearly maize does not have those qualities!

But I digress, my point is about the Daily Mail. I still think they need economists on their team so we don’t have half-baked analysis! ZNBC also needs proper economic correspondents with degrees in that subject. They need to start hiring our many young economists studying at our universities to help them a get a clearer picture of the issues. We are in danger of being misled!

Copyright © Zambian Economist 2013

1 comment:

  1. I always enjoy your posts because you find a not-so-arrogant way of educating the masses on Economics. My initial thought was why on earth would anyone think a commodity would be a public good? but not everyone took a basic economics class and this is why I appreciate your blog... you find a common sense way to explain things.

    Thank you!

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