How to satisfy an electorate under these stormy economic conditions? One form

How to satisfy an electorate under these stormy economic conditions? One form of redistribution is through subsidies, and this least pleases economists.
There isn’t a country of any size that isn’t grappling with this. Democracy can make it harder to do the right thing economically, whereas raw power sometimes facilitates actions the International Monetary Fund could love. Embargo-stressed Iran has begun unwinding some of its worst economic policies under theocratic rule.
Subsidies generally take the form of lowered costs or added benefits for a favored class, and if they aren’t means-tested (which can be difficult to do fairly and accurately) they can result in serious economic distortions and many unintended beneficiaries. The distortions hurt the general productivity of an economy (you get too much of something and not enough of another) and the accidental gains limit the succor to be given to those targeted for help.

Fuel and food are favored categories for subsidy in some form. Interestingly, this is often true both on the producer and consumer end. And when producers are assisted–say, by restricting “oversupply”–the result can be higher prices for those buying the goods. Further, the fiscal cost can be high. It’s been reported that a fifth of Indonesia’s budget goes to subsidizing petrol, rice, fertilizer and electricity. India, with its bloated deficit, is constantly challenged to cut this handout spending, but a period of price inflation just makes any cutbacks harder to enact. The new government of Yingluck Shinawatra in Thailand is determined to make rice both more lucrative for Thais to grow and easier for Thais to afford–good luck, Yingluck.

I haven’t been able to find good aggregate comparisons of total current subsidy levels, but research help from Seline Jung at Forbes did turn up slices of the picture in Asia-Pacific.

First the good news: Australia and New Zealand seem to have the lowest agricultural subsidies. The Kiwis effectively reformed their economy three decades ago and most of the efficiencies have been retained through various governments.

Japan and South Korea have atrociously high producer subsidies in agriculture–by a 2009 OECD count, at close to half again the level of gross farm receipts. (This is 5 times the level in the U.S.) Among the billions of dollars’ worth of aid: a 65% discount off the highest tariff for Korean electricity. So the farmer can wash his dirty jeans twice?

On the buying end, India tries to segregate its assistance for rice and wheat by income group to help the needy, but the Asian Development Bank found that even for those not in need, the price for these staples in 2008-9 was less than half the economic cost of providing them. (Economists mostly agree that a better way to help the poor is to provide direct cash payments which let them boost their purchasing power. The new identity card system headed by Nandan Nilekani in India is intended in part to move assistance in this direction.)

Fossil-fuel subsidies for Indians, meantime, also remain high–15% in 2010 according to the International Energy Agency, and achieved by holding down retailer prices. That rate was nearly matched by Thailand but was below Malaysia’s 17% and well below Pakistan’s 29% or Bangladesh’s 42%.

Then there are the subsidies to producers of favored “alternative” energy sources. Biofuel cushioning in China was growing through 2006, based on compilations by an NGO called the Global Subsidies Initiative, which looks askance at such public aid to private interests generally. What makes uneconomic production of ethanol and the like especially suspect is that it reduces the available food supply, which circles us back into the whole food-subsidy morass.

Clamorous interests, both wide and narrow, always will be demanding more, especially in free and democratic societies. The best we can expect is that, in the relative openness of such political environments, the true nature of who gains and the true cost of providing those gains will be evident for all to see.

http://www.forbes.com/sites/timferguson/2011/10/04/the-subsidy-slush-in-asia/