Defending subsidies-By Ayesha Siddiqa

THE federal minister for defence and commerce, Chaudhry Ahmed Mukhtar, spoke about withdrawing subsidies on gas and electricity insisting that people would have to live without these. Since the minister is an elected representative who has to interact with people regularly and be answerable to them, one would shirk from calling him heartless.
The fact is that the government cannot afford to bankroll subsidies on oil and gas for which it would have to borrow money from the banks.

Qualified economists and those with experience of working with the IMF and the World Bank get very angry at the suggestion that Pakistan should not remove subsidies. They are of the view that the country would, in any case, have to pay the price difference for oil and gas and electricity which it could pass on to the consumers or pay itself through bank borrowing. This, in turn, would increase the government’s financial burden which will eventually be passed on to the public. Additionally, this would reduce the efficiency of the government and influence the growth of the economy. Not to forget that the multilateral aid donors these days are full of believers in private sector and smaller governments who would not like to see any government increase its sphere of influence. What’s good for the developed world is good for the developing world as well!

To the aid donors, countries and people have to make a choice about when will they pay their dues. The people of Pakistan, for instance, will have to bear the burden of a price hike in the energy sector be it today or tomorrow. What is inevitable is that they will have to pay up. For a good economist, people taking responsibility for paying the subsidies is a smart move which will be good for the economy. But socioeconomic development is not purely a function of the economy but is linked with the politico-economy of a state.

More important, removal of subsidies is bound to increase the short-term burden for the poor man, which, in turn, could lead to greater instability. Using economic progress as the logic for putting immediate burden on the people is hardly convincing. Nor does the idea impress anyone that the greater burden falls on the rich and not the poor. Increased prices might eat into the rich man’s savings and reduce his/her profit margins, but the rich are in a better position to survive than the poor once subsidies are removed.

An equally boorish idea is that of trickle-down to the masses. This concept has never worked except in Europe after the Second World War and there too the US had provided ample resources to counter the Communist threat. So, the bottom-line is that increasing financial burden in the short-term hurts as much and has an equally long-term effect on the poor.

The more significant issue, however, is to question what does a government define as an item important enough to be subsidised? Why is it that the government is willing to pass on the burden of fuel adjustment to the poor consumer but willing to foot the bill for other conspicuous state consumption? Electricity and fuel, at least, are items consumed by all including poor people. It matters if the price of these two items goes up as it increases the burden on the poor as well as the cost of other things which, in turn, further enhances the burden on the poor. But then there are other subsidies which government officials hardly talk about in the form of privileges for a select few.

The grand golf courses, the huge officers’ housing schemes (be they for civilians or the military), sports complexes, gyms, opulent facilities for civilian and military bureaucracy and political leadership, or many other similar structures also constitute subsidies which are more expensive because the benefit is for a limited number of people rather than the public at large. Such subsidies do not constitute public good despite the fact that these use public spaces. This is not to suggest that Pakistan is the only country where the elite get subsidies from the state. However, it is important for people’s representatives to negotiate subsidies favouring the poor as well to balance out the negative impact of concessions for the rich versus those for everyone.

For instance, India has a large programme of subsidies for poor farmers. The idea is to protect the farmers from the threat of famine and starvation. Many efficiency-minded analysts and economists have problems with the programme which they consider as being highly inefficient and prone to corruption. Under the programme, farmers get assistance to purchase food through a large bureaucratic system. However, the counter argument is that the programme might be inefficient but it is necessary to keep the balance within the larger society. After all, the Delhi government spent billions of dollars to construct a metro to subsidise the rich capitalist who wanted his workers on the job on time. So, why complain about the subsidies provided for the poor people?

The price adjustments are there to stay which means that commodity prices are not going to go down. The government in Islamabad seems to shirk from removing subsidies which, as mentioned earlier, would hurt only a limited number of people who seem to have accumulated most of the capital. For instance, there is so much resistance to apply the capital gains tax as opposed to the general sales tax which will affect everyone including the poor.

Perhaps, while making claims about withdrawing subsidies the commerce minister or even the finance minister have not thought their financial policy through. It is supposedly a people’s government which is expected to offer more to the common man than what we have had in the past. If the finance officials have not given serious thought to the issue of subsidies it could be due to the fact that the government has had no time to plan its policies. It is surprising that Pakistani political parties do not make shadow cabinets once they are out of power. Such a tradition prepares them well in advance for the time when they are in power and cater for the eventualities. The problem of the current economic plan is one of the ramifications of such lack of planning.

It will certainly help if the present regime would carefully think about how it distributes resources and opportunities amongst different classes.

The writer is an independent political and strategic analyst.

Source: Daily Dawn, 27/6/2008

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