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MENCKENS LAW
Whenever A annoys or injures B onthe pretense of saving or improving
X, A is a scoundrel
Newspaper Days , 19411
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SUBSIDY
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SUBSIDY
Derived from the Latin word subsidium, -
coming to assistance from behind
Form of financial assistance paid by thegovernment to business or economic sector
Creates a wedge between consumer prices andproducer costs -- leading to changes in demand/
supply decisions
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OBJECTIVES
Subsidies are often aimed at :
- Preventing the decline of that industry
- Stabilising prices of its products
- Inducing higher consumption/ production
- Achievement of social policy objectives including
redistribution of income,.. etc4
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TYPES OF SUBSIDIES
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EFFECT OF SUBSIDY
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SUBSIDIES
IN DIFFERENT COUNTRIES
USA, INDIA, BANGLADESH, NEWZEALAND
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US - FARM SUBSIDIES
Direct Payments
Marketing Loans
Countercyclical PaymentsConservation Subsidies
Insurance
Disaster AidExport Subsidies
Agricultural Research and Statistics 9
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The U.S. Department of Agriculture distributes
between $10 billion and $30 billion in cash subsidies to
farmers and owners of farmland each year
> 90 % of agriculture subsidies go to farmers of five
cropswheat, corn, soybeans, rice, and cotton
More than 800,000 farmers and landowners receivesubsidies, but the payments are heavily tilted toward
the largest producers
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US FOOD SUBSIDIES
Largest portion of the U.S. Department of Agricultures
budget consists of food subsidies, not farm subsidies
Food subsidies cost taxpayers $79 billion in fiscal 2009and account for about two-thirds of USDAs budget
The largest food subsidy programs are food stamps; the
school breakfast and lunch programs; and the women,infants, and children (WIC) program
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US - HIGHER EDUCATION SUBSIDY
The Department of Education spends about $30 billion ayear on subsidies for higher education.
The bulk of that funding goes toward student aidprograms, with the balance going toward grants toeducational institutions
In 2008, grants to institutions cost $2.3 billion and aid
programs cost $27.6 billion, which included- student grants,
- student loans, and
- administration 12
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INDIAN SUBSIDIES
The Indian government subsidizes many industries andproducts, from gasoline to food
Farmers are given water, electricity for free & paid by the
state.
International Herald Tribune (2005) : stated that subsidiesamounted to 14% of GDP.
India spends relatively little on education, health, orinfrastructure
Farm & fertilizer subsidies rice , wheat etc 13
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SUBSIDY ISSUES
Burden on government finances being unbearable
Agricultural subsidies distort the cropping pattern and lead tointer-regional disparities in development
General subsidies on scarce inputs like water and power havedistorted their optimal allocation
Subsidies- mistargeted
Subsidies have a harmful effect on general economic growth ofsectors not covered by the subsidies
Impact of subsidies on the quality of health,environment andecology Eg :Tobacco Vs Beedi 14
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TRENDS
Rs. 9,581crore(1990-91)
Rs.40, 416crore (2002-03)
Rs.48, 636 crore(2003-04)
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Economic Survey, 2004-05
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INDIA - LPG SUBSIDIES
LPG in 2007 was priced at about 60 per cent of the supplycost resulting in large distortions in the Indian energymarket
The total cost of LPG subsidies to the state oil companiesand the government amounted to almost 70 billion Rupees($1.7 billion) in the first half of the 2007/08 financial year
76 % - allocated in urban areas
In spite of the ineffectiveness of the LPG subsidy inmeeting the goal of alleviating poverty, the governmentrecently extended the programme until 2010
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INDIA- PUBLIC DISTRIBUTION SYSTEM
(PDS)
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PDS provides rationed amounts of basicfood items (rice, wheat, sugar, edible oils)and other non food products (kerosene,coal, standard cloth)
At below market prices to consumersthrough a network of fair price shopsdisseminated over the country
BPL households - entitled with rationcard that allows them to buy more
quantity at subsidized prices
As much as 39 % of subsidized keroseneis stolen
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BANGLADESH & JUTE SUBSIDIES
Jute , the golden fiber as it was called, was
the key to Bangaldeshs Success & largest
hard currency earner
Jute and Jute products constitute one-third
of Bangladeshs export
82 percent of the population depends upon
agriculture for livelihood19
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In the 1980s, Jute prices collapsed , when plasticswere invented and was available at very cheap rates
The price of jute fell below the cost of growing jute
which led to the subsidization of jute and juteproducts
In 1990-91 fiscal year , around 3.25 billion taka wasgiven as subsidy to government owned companies and
even then they could not make profit
Productivity Reduced, Affected other industries likeCotton, Textile etc
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NEW ZEALAND - FARM SUBSIDIES
What would the world look like without agriculturalsubsidies?
New Zealand
One of the first and still one of the few modern countries tohave completely dismantled its system of agricultural pricesupports and other forms of economic protection forfarmers
Second decade of subsidy-free farming, New Zealand enjoysa worldwide reputation for its high-quality, efficient andinnovative agricultural systems
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MINI-HISTORYOF NEW ZEALAND
AGRICULTURE
Major realignment of global trading relationships in 1972
- Britains decision to join the European Economic
Community
Triggered a period of escalating inflation, making it
increasingly difficult for farmers to secure good prices on
the international market
Governmental policy - farmers were offered subsidies to
purchase more fertilizers, and tax breaks for increasing
herd sizesfurther depressing commodity prices through
oversupply22
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In 1982, Federated Farmers of New Zealandrecommended - controlling inflation, rather thancompensating farmers for the consequences ofinflation, should be the national priority
Recommendations rejected by then-Prime MinisterRob Muldoon but later accepted in 1984 when the
Labour Party won a landslide election
Transition Period lasted about six years, with landvalues, commodity prices, and farm profitabilityindices stabilizing or rising steadily by 1990
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THE RESULTS
Today New Zealand has around 80,000 farmholdings on 15.5 million hectares (38.3 millionacres)
Agricultures contribution to the New ZealandGDP has risen from 14.2% in 1986-87 to 16.6% in1999-2000. Agriculture accounts for 11.4% of thetotal workforce
Agricultural productivity has gone up 5.9% ayear on average since 1986. Prior to 1986agricultural productivity gains were about 1% ayear. 24
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In 2001 governmental assistance to agriculture was
equal to just 1% of the value of agricultural output,
compared to an average value for developed countries
of 31%. Remaining assistance in New Zealand is
primarily in the form of funding for agricultural
research
Around 90% of New Zealands total farm output is
exported. These exports account for over 55% of totalmerchandise exports. Most food consumed in the
country is domestically produced.25
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IS SUBSIDY GOOD/BAD??26
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INDIAN SCENARIO
Food subsidy: PDS - leakage, low coverage ofpoor , small magnitude of benefit derived by thepoor
Electricity: unit cost increasing
Public irrigation: mainly for richer farmers
Health & Education: bias towards the better-offpeople
Vote bank Politics 27
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GENERAL PROBLEMS WITH SUBSIDIES
Redistribute Wealth
Damage the Economy
Prone to Scandal & Corruption
Uneven Playing FieldWeakening of Private Sector
Taxpayer Cost
Damage the Environment
Damage Trade Relations
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USAGRICULTURE SUBSIDIES HIT POOR IN
AFRICA
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CONCLUSION
Subsidies in areas such as education, health andenvironment at times merit justification
Subsidies that are ineffective or distortionary need to beweaned out
Subsidies lead to increased levels of consumption andwaste
Place a heavy burden on government finances, weakeningthe potential for economies to grow
They do not always end up helping the people who needthem most.
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AGENDA FOR REFORM
The agenda for reform should focus on:
Reducing the overall scale of subsidies
Making subsidies as transparent as possible
Using subsidies for well defined economic objectives
Instituting systems for periodic review of subsidies
Setting clear limits on duration of any new subsidyschemes
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Whenever thegovernment annoys or
injures a productive market on the
pretense of saving or improving an
unproductive market, thegovernment
is a ______________!!!
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Thank you
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REFERENCES
All the trouble in the world P. J.
ORourke(1994)Agriculture Subsidies, Food Subsidies
Chris Edwards(2009)
Business Subsidies Tad Dehaven & ChrisEdwards (2009)
Higher Education Subsidies - NealMcCluskey and Chris Edwards(2009)
Ten Reasons to Cut Farm Subsidies ChrisEdwards(2007)
Environmentally and EconomicallyDamaging subsidies Concepts andIllustrations - Carolyn Fischer and MichaelToman
www.wikipedia.com34