On January 30, the Secretariat of Public Finance published, through the quarterly report on the economic state, public debt and public finances, an 11.2% increase in the budgetary expenditure in subsidies between January and December of 2013, compared to the same period of last year. The increase in that sector is a tendency that exhibits not only the renewed welfare acts undertaken by current President Peña’s social policy but also the evidence of an unsustainable and contradictory protectionism in the face of the official discourse of enhancing productivity. However, it is worth analyzing what implications does an irresponsible use of subsidies might imply and which, although popular (and in many cases, populist) leads to adverse effects for economic development.
As an economic tool, subsidy aims to correct the negative externalities of the market and reassign resources in a more efficient manner (at least in political and social terms). In that sense, the intervention of the government can be justified in two principles: to heal the inefficiencies of the market and achieve a greater equality using a redistribution of goods. However, as a political tool, subsidies can convert into an inefficient and opaque mechanism that will respond to interest that go beyond attending society’s economic needs. That way, on one hand, subsidies can contribute to a decrease in inequality while, on the other hand, the appointment under which the subventions are allocated can favor perverse political incentives.
Currently, most of subsidies in Mexico are regressive. Generalized subsidies for energy consumption – as is the case of gasoline – are typical examples of differentiated price schemes that mostly favor individuals with higher income. Nevertheless, not only generalized subsidies for consumption are inefficient. However “cruel” it may sound, the welfare programs for senior citizens and the public finance of scholarships are also evidence of direct subventions whose redistributive effects are limited. This is mainly due to that, no matter the sector that it helps, all subsidy generates an opportunity cost. That is to say, in most cases, those same resources could be allocated in a more focused manner rather than sorting the economy’s structural problems, through the direct investment in growth that will not hinder competition amongst certain sectors in the market. Undoubtedly, it would be more adequate to invest effectively (rather than largely) in sectors such as health and education instead of proving support whose amount will not even be able to cover the basic needs of an individual, or scholarships whose purpose of maintaining a student inside a deficient system with a grime outlook for future wellbeing.
The continuous use of this public policy is largely explained by the lack of transparency with which resources are assigned and allocated. Nevertheless, this creates that calculating the subsided tariffs as well as measuring the consequences and efficiency of programs will result in an extremely complex task. On the other hand, given that the subsidy is usually seen by society as a protection instrument, the political cost of its eventual elimination tend to increase with the passing of time, which favors the subsistence of such practices.
The persistence that inequality and high poverty rates during the last two decades show that subsidies policies have been unsuccessful in providing the adequate incentives for a greater and more inclusive economic growth. Even worse yet, in the absence of a real reform strategy, something that is not implicit in approving one reform after another, the expectations of future growth will continue to be restricted. Certainly, the alternative explanation could be that subsidies contribute in mobilizing key stakeholders for political purposes.
CIDAC
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