Chapter 1: Getting to know subsidies
Why be concerned about subsidies?
Why should you, as a citizen, care about subsidies? After all, don't many subsidies serve useful purposes? Yes, they do. Subsidies enable children from poor families to attend higher education. They support research vital to developing new vaccines and predicting natural disasters. And they help unemployed people to learn new skills, or to relocate to areas with better job prospects.
But precisely because government expenditure is limited, citizens should care about subsidies if for no other reason than to ensure that they serve the public interest and not merely a private one. Nothing speaks louder about a government's actual intentions and activities than how it spends its money, your money.
A lawmaker may proclaim support for energy conservation, yet still vote for generous tax breaks to buyers of large, gas-guzzling vehicles. A president may lecture an international gathering on the importance of helping developing countries to export their way out of poverty, and later that same day approve a new subsidy that effectively blocks imports from those same countries.
The second reason to care about subsidies is that they can have profound and long-lasting effects on the economy, the distribution of income in society, and the environment, both at home and abroad. Subsidies have shaped the pattern and methods of agricultural production, even in countries that provide few or no farm subsidies. They have encouraged fishing fleets to search farther and deeper than ever before, aggravating the problem of over-fishing. They have fueled unsustainable energy production and consumption patterns.
And, most worryingly, they continue to do so.
What is a subsidy?
The word subsidy is derived from the Latin word subsidium, which meant "support, assistance, aid, help, protection". In medieval times it referred to a payment made to the king. While the definition has since moved on from that, the habit of royalty accepting subsidies has not. Research carried out by FarmSubsidy.Org, for example, has shown that in 2004 the Queen of England and the Duke of Westminster each received half a million pounds sterling in farm subsidies, and Prince Albert of Monaco 287,000 Euros. Republics like France and the United States no longer have sovereign rulers, but some of their farmers live like kings, thanks to generous subsidies.
Nowadays, to most people, a subsidy means a payment from a government to a person or company. Many subsidies are indeed provided in that form, as grants or, more generically, direct payments. Grants are the elephants in the subsidy zoo: they are large and highly visible. But there are numerous other subsidy beasts which are better camouflaged, stealthier, and keep closer to the ground.
The only internationally agreed definitions of a subsidy are those of the United Nations Statistics Division, which is used for the purpose of constructing national accounts, and of the World Trade Organization (WTO), which is used for the purpose of regulating the use of subsidies that affect trade. The WTO definition is the more comprehensive of the two and can be summed up as follows: A subsidy is a financial contribution by a government, or agent of a government, that confers a benefit on its recipients.
There are many people in the world, particularly environmental economists, who would like to add to that definition. But for the purposes of this Primer it provides an adequate entry point to the topic.
Penetrating the rhetoric of subsidies
The English language offers a rich vocabulary for expressing the notion of subsidy. Familiarization with these synonyms is useful both for understanding the rhetoric of subsidies and for conducting literature and data searches.
State aids is the term used within the European Union for subsidies provided by its Member States. It is used also by some U.S. states. "Aid" by itself, because of its common association with foreign aid, is used less frequently than in the past to mean a domestic subsidy. Industry assistance is a more general term than subsidy, and can include low-cost general services, such as advice to small businesses on how to fill in their tax forms. Lawmakers like speaking of aid or assistance because the terms are subtly suggestive of short-term help or relief, even though the programmes involved may be long-running.
The word "support" has a precise meaning within the trade-policy community. The OECD, for example, refers to support when discussing its aggregate of subsidies and transfers to producers created through artificially high prices (i.e., market price support), the producer support equivalent, or PSE. Domestic support and aggregate measure of support are terms used in reference to obligations under the WTO's Agreement on Agriculture.
In the political sphere, however, "support" is highly imprecise. When a government declares it "supports" a particular technology, industry, or sector, that "support" can mean anything from simple well wishes to suitcases of money.
Perhaps the most ambiguous euphemism for "subsidy" is incentive. That is because an incentive can be positive or negative. For example, use of a relatively clean form of energy can be stimulated either by a tax on more-polluting forms of energy, or through a subsidy to consumers of the cleaner energy. The budgetary implications of the two forms of incentive could not be more different.
The notion of specificity
One of the important distinctions used by economists and lawyers interested in the trade or competition effects of subsidies is between specific and non-specific subsidies. Specific subsidies go to particular groups of beneficiaries, as opposed to the population as a whole. A subsidy that is available only to cotton farmers is specific. A subsidy to supply flu vaccine for anybody who needs one is considered (by trade lawyers) to be non-specific, because almost anybody can benefit from it. The notion of specificity provides a useful conceptual framework for considering whether a subsidy is likely to distort trade or competition. However, the distinction between a specific and general subsidy is not always easy to make.
Whether a subsidy is specific or general is less relevant to the question of whether a subsidy has adverse environmental effects. Some very general subsidies can have major environmental impacts. Roads and ports provide numerous economic benefits, but roads may also cut across and fragment wildlife habitat, and ports may damage estuaries or fishing grounds. Subsidies, to the extent they stimulate the construction and use of such physical infrastructure contribute to these damaging effects.