Three new leaders face the challenge of food and fuel subsidies: Sisi, Modi, and Jokowi
Jeffrey Frankel 09 September 2014
Subsidies for food and energy are economically inefficient, but can often be politically popular. This column discusses the efforts by new leaders in Egypt, Indonesia, and India to cut unaffordable subsidies. Cutting subsidies now may even be the politically savvy choice if the alternative is shortages and an even more painful rise in the retail price in future. Ironically, it is India’s new Prime Minister Modi – elected with a large electoral mandate and much hype about market reforms – who is already shrinking from the challenge.
In few policy areas does good economics conflict so dramatically with good politics as in the practice of subsidies to food and energy. Economics textbooks explain that these subsidies are lose-lose policies. In the political world, that can sound like an ivory tower abstraction. But the issue of unaffordable subsidies happens to be front and centre politically this summer, in a number of places around the world. Three major new leaders in particular are facing this challenge: Sisi in Egypt, Jokowi in Indonesia, and Modi in India.
Development Energy Politics and economics Poverty and income inequality
subsidies, fuel subsidies, food subsidies, Agriculture, energy, Egypt, Indonesia, India, Poverty, environment, trade, WTO, Doha Round, Bali
Agglomeration and product innovation in China
Hongyong Zhang 21 July 2014
The Chinese government has been actively promoting innovation via policies such as R&D subsidies, tax relief, and location policies. Since 1995, central and local governments have established more than 100 clusters in over 60 cities. This column presents new evidence on the effect of the concentration of firms on product innovation (new products) in the manufacturing industries.
Spatial agglomeration of economic activities is generally assumed to improve productivity and spur firms’ innovation through localisation economies and urbanisation economies.1 There is an extensive empirical literature investigating the effects of localisation and urbanisation on firm-level productivity. Despite its economic importance, there are few empirical studies focusing on agglomeration and product innovation. Feldman and Audretsch (1999) and De Beule and Van Beveren (2010) are two of the few exceptions.
Productivity and Innovation
R&D, productivity, China, spatial concentration, innovation, subsidies, clusters, agglomeration
Dirty little secrets: Inferring fossil-fuel subsidies from patterns in emission intensities
Radek Stefanski 30 May 2014
No comprehensive database of directly measured fossil-fuel subsidies exists at the international or the sub-national level, yet subsidies may be crucial drivers of global carbon emissions. This column describes a novel method for inferring carbon subsidies by examining country-specific patterns in carbon emission-to-output ratios, known as emission intensities. Calculations for 155 nations from 1980-2005 reveal that fossil-fuel price distortions are enormous, increasing, and often hidden. These subsidies contributed importantly to increasing emissions and lower growth.
An astonishing feature of international energy and climate policy is that fossil fuels – often seen as the primary contributor to climate change – receive enormous government support (IMF 2013, IEA 2012). Surprisingly, no comprehensive database of directly measured, comparable fossil-fuel subsidies exists at the international level. This is both because of political pressure from the direct beneficiaries of subsidies and because of the immense complexity of the task given the profusion and diversity of subsidy programmes across countries (Koplow 2009, OECD 2012).
energy, emissions, pollution, subsidies, fossil fuels, energy subsidy, carbon
US electrification in the 1930s
Carl Kitchens 29 January 2014
Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.
In 1930, fewer than 10% of farms in the US had access to electricity. By the mid-1950s, almost every farm in the country had electricity. While the US was able to extend electricity to its rural locations rapidly over a 25-year period, much of the developing world still remains without electricity today. In 2012, 1.3 billion people lived without electricity worldwide.
Development Economic history
growth, Agriculture, technology, investment, subsidies, electricity, infrastructure, electrification
Counting thy numbers: Defining and measuring fossil fuel subsidies
Ronald Steenblik, Jehan Sauvage, Jagoda Egeland 15 September 2012
Reforming fossil fuel subsidies might seem to be an easy option – reduced fiscal outlays would help with debt problems while also helping to reduce greenhouse gas emissions. This column argues that, despite growing interest in reforming them, there still exists much confusion over the concept and magnitude of fossil fuel subsidies – and this needs to change first.
Fossil fuel subsidies have attracted renewed attention following the Pittsburgh Summit of September 2009, where leaders of the G20 committed to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” (G20 2009). Leaders of the G8 and of APEC have subsequently issued similar statements. But while energy subsidies are not new, with some support policies going back decades, the context within which they are provided has changed dramatically.
Environment Global governance
subsidies, fossil fuels, G20, G8, APEC
Industrial policy works for smaller firms
John Van Reenen 17 February 2012
The Great Recession has beckoned the ominous return of protectionism. While not condoning such policies, this column argues that if governments must provide investment subsidies to domestic firms, there is a much larger bang for their buck if they target small businesses rather than larger ones. Cash-strapped governments should take note.
The Great Recession has brought industrial policy back into fashion. Huge subsidies have been granted by governments around the world to private firms, most dramatically in financial services, but also in other sectors like automobiles (see for instance Evenett 2011). Despite the ubiquity and cost of such schemes, rigorous evaluations of the causal effect of these policies are rare.
EU policies Industrial organisation International trade
subsidies, protectionism, small business
Tax policies for low-carbon energy
Gilbert E. Metcalf 27 June 2009
Nearly all economists agree that the most efficient way to address environmental problems is to raise the cost of the pollution-generating activity, but US policies subsidise clean-energy alternatives instead. This column criticizes that approach – subsidies lower the cost of energy, play favourites with technologies, are often inframarginal, and frequently interact in unexpected ways with other policies.
Nearly all economists agree that the most efficient way to address environmental problems is to raise the cost of the pollution-generating activity. Whether one uses a tax as famously suggested by Pigou (1938) or a quantity constraint such as a cap-and-trade system as proposed by Dales (1968) and others, the point is to "internalise the externality" by raising the cost of pollution to the firm or individual so that they have the appropriate incentives to engage in the socially optimal level of this activity.
environment, subsidies, Carbon tax, cap and trade, industrial policy
Trade protection: Incipient but worrisome trends
Richard Newfarmer, Elisa Gamberoni 04 March 2009
Trade protection is on the rise around the world and risks pushing the economy into prolonged contraction. Officials have proposed more than 60 new trade restrictions since the beginning of the financial crisis. While a serious outbreak of protectionism has yet to occur, vigilance and leadership are required.
With the global economy teetering on the abyss of severe recession, political pressures demanding import protection to protect employment are surfacing with increasing intensity around the world. However, if there is one lesson from the experience of the 1930s, it is that raising trade barriers merely compounds recessionary forces – and risks pushing the economy into prolonged contraction.
tariffs, non-tariff barriers, subsidies, protectionism, anti-dumping
Can production subsidies explain China’s export performance?
Sourafel Girma, Yundan Gong, Holger Görg, Zhihong Yu 08 July 2008
China has largely reduced the scope of its production and innovation subsidies at the firm level, but some still remain. Recent research shows that such production subsidies do, on average, boost firm-level exports especially in more innovative and capital-intensive industries and especially for firms with previous export experience.
China’s exports are booming and – somewhat surprisingly – not just in labour-intensive goods. As Yale trade economist Peter Schott writes in his recent Vox column, China exports an astonishingly wide range of goods – including many in high-tech sectors (Schott 2008).
International trade Productivity and Innovation
China, subsidies, export performance
Now is the time to reduce international trade and migration barriers
Kym Anderson, L Alan Winters 21 April 2008
Current prospects for liberalisation of barriers to international trade and migration seem dim. In this column, the authors of the Copenhagen Consensus paper on global economic integration outline the magnitude of the gains that politicians are opposing.
In June 1930 the Smoot-Hawley tariff act in the US turned a stock market collapse into a crippling, decade-long Great Depression. Now, with a financial meltdown going on, is therefore NOT the time for politicians to be more protectionist. Yet last year the European Union dropped the principle of "free and undistorted competition" from its Lisbon treaty, and this year US presidential hopefuls Barack Obama and Hillary Clinton are muttering negatively about liberal trade and migration.
International trade Migration
Doha Round, protection, migration barriers, liberalisation, trade negotiations, subsidies