The Effectiveness of Government Subsidies for Goods
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Introduction
Subsidies, in Layman understanding, are policies by the government towards aiding one or more industries, normally bearing a financial benefit to that particular industry. Subsidies and taxes can be applied by the government as an effective tool of microeconomic policy. For instance, if the government intends to lower production of a particular commodity, they can tax the producer. This has the effect of raising the cost of producing the commodity and consequently its production goes down. Subsidies involve payment of certain portion of the cost of production to the firm with an objective of lowering the price of the good and thereby encouraging more consumption of the same. A subsidy has the effect of shifting the supply curve to the right. Subsidizing farm produce has the effect of ensuring there is enough food stuff and agriculture related products in the economy. However, critics of this economic policy argue that it breeds inefficiency and misallocation of scarce resources.
Objective
This research will be guided by the following objective:
To establish the effectiveness of government subsidies on commodities in the product market.
Literature Review
Conradie (2009) notes that the poor condition of most of the marine capture fisheries in the world has raised increasing public concern of late. There is an imminent economic impact of diminished resources of fish on the regions’ economies in both developed and developing world economies, as well as near commercial extinction of stocks of fish that have placed great impact on ecosystem. The declaration which emanated in the World Trade Organization (WTO) meeting that was held in Doha emphasized on fisheries as a sector which needs maximum considerations in the next meeting of international negotiations on world trade. While there is a concern on overfishing, the main operational concern remains the role played by subsidies in stimulation of overfishing. If it comes out that existence of subsidies stimulate overfishing, and then there is need to come up with a control mechanism or completely eliminate the policy. Subsidies often play two key extra roles; they do stimulate fishing and may possibly raise the national income of the country (Grosh, 2008). If the fishing level is below that level that can be safely sustained in the economy, then subsidies that enhance fishing could be useful.
Liebenberg, (2010) cite that subsidies could interfere with the World Trade Organization control regulations if they lie within the realms of the International Agreements on Subsidies and Countervailing Measures by the WTO. The concept of subsidies is delicate in the sense that government introduces them for valid purposes, like economic development strategies. However, with passage of time, subsidies that were intended for useful purposes may become entrenched and start serving primarily the desires of industry participants who receive the subsidies. Elimination of these subsidies therefore becomes a political thing in the locality, with external implications.
Thirtle (1993) argues that the policy of subsidies is a complex one due to the fact that there exists no agreement as to what a subsidy actually is. There also exists no scientific way of measuring a subsidy and evaluating its impact to the intended economic sector. In the policy level, we do not have an agreement on when subsidies can be considered harmful or useful. Part of the reason behind inexistence of agreement is the fact that it is complicated to evaluate the impacts of subsidies in the environment, economy, internal and international trade. Part of the reason for non- agreement on what the definition of a subsidy entails is because subsidies are nowadays being eliminated by governments, it could not be politically wise for a country admitting that a policy actually implies a subsidy.
Kirsten, (2003) explains a situation where South African government, through the Department of Agriculture, has been taking part in improvement of agricultural production as well as minimization of input costs to farmers for a long period. It is reported that government provided farmers with loans for crop production amounting to R470 million, subsidies for debt consolidation of R120 million, and also acted as a consolidated debt guarantor of R900 million in the early nineties. All this was intended to boost productivity to farmers. However, this aid changed in the mid nineties since the government lowered its funding directed to the commercial sector in attempts to improve the productivity and efficiency of the sector. Government also began support to small scale farmers through acquisition of arable land for them and microeconomic deregulation strategy that saw the rise of the informal farm products marketing in the economy, creation of a process of land reform that encouraged more ownership of land for production by 2000 as well as promulgation of the Water Act of 1998 which increased water access by farmers.
Schimmelpfenning, (2000) noted that measures of agricultural productivity conducted by South African Universities and showed great improvement of agricultural production following government subsidies. Research relating productivity was conducted by research institutions like private organizations such as Productivity SA and Universities. Overall, there has been increase of livestock production and productivity of field crops. This increase is slightly lower than productivity of horticulture. However, about 1910 yields o corn has raised more than 4- fold, sorghum yield by 7- fold and wheat yields by 4.4- fold.
Research philosophy, Approach and Strategy
Basically there are two forms of research approaches, namely Inductive and Deductive research approach. This research essay intents to use inductive approach, which is sometimes called building theory. Inductive approach generalizes observations made from specific point of view, thereby coming up with broader generalizations and theories (Grosh, 2008). The most appropriate research strategy for this project is the Ground Theory Strategy and is commonly applied for inductive reasoning that has no theoretical framework. Mode of data gathering will be questionnaire; the nature of data in this project is qualitative since it can be observed but not measurable.
Ethical implications of the research
First, approval of the research project was obtained from the module tutor. Each and every research project has to adhere to certain regulatory principles. This research project does not, in any way, compel respondents to contribute; participation is fully voluntary. Potential participants in the project are fully informed on the subject and have consent on the mode of questionnaire. As far as ethical standards are concerned, this research project does not in any way expose participants to circumstances that may harm or cause them any risk due to their participation (Grosh, 2008).
Research Methodology
In this research, primary data would be preferred to all other sources. By designation and implementation of an effective questionnaire to research the objective, the necessary primary data is easily deduced. The questionnaire consists of five questions and would cover a total number of a sample of 10 respondents, who will be different employees in the Ministry of Agriculture, Trade and Industrialization as well as private sector. Respondents would be required to place marks on the questionnaire as to their answers on the alternatives (Strongly Disagree, Strongly Agree, Agree, Disagree), with the last question being open in the sense that it asks respondent to suggest how to make government subsidies more effective (Haddad & Shepherd, 2011). A mixture of structured and semi- structured questions are used in the questionnaire.
Analysis and Findings
This part show the detailed questionnaire analysis and findings from ten respondents who include employees from various government ministries that deal with subsidies as well as traders who have ever conducted business in subsidized industries.
Chart 1: When government issues subsidies, does it meet its economic objectives?
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Chart 2: Do subsidies result to other undesired effects like inefficiencies
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Chart 3: Do external factors like trade negotiations such as WTO agreements have impact on effectiveness of local subsidies?
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Chart 4: Do you think there is need for imposition of regulatory controls on subsidies by the government?
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In the final question which is an open- ended question, all ten respondents were required to give an answer as to what suggestions they though could make government subsidies on commodities effectiveness. Some of the suggestions offered include transferring such policy makers from the hands of politicians. This, they said, would ensure the policy decision as to how and when to give subsidies are not politicized (Myers, & Kent, 2001). A special committee within the government should therefore be established to be handling this. A few respondents suggested that subsidies be completely eliminated, arguing that they just breed inefficiencies. Others said they do not have any problem with the present mode of administering subsidies.
Validity and Reliability
Validity is used in relation to the degree at which the questionnaire and the results accurately portray or assess the particular concept the researcher trying to measure. External validity is the degree to which the study results are transferable or generalizable. This research project essay is generalizable since the results received from a sample of ten respondents are taken to represent the larger population (Wade, 2004). However, the research project results are not transferable since their application can not be shifted from one context to another. Reliability is used in relation to the degree to which questionnaire yields of a project remain consistency over several trials. There is assurance of reliability of this research project.
Bibliography
Caballero-Anthony, M., Chang, Y., & Putra, N. A. (2012). Energy and non-traditional security (NTS) in Asia. Berlin, Springer.
Clements, B. J., Rodríguez, H., Schwartz, G., & International Monetary Fund. (1998). Economic determinants of government subsidies. Washington, D.C.: International Monetary Fund, Fiscal Affairs Department.
Grosh, M. E. (2008). For protection and promotion: the design and implementation of effective safety nets. Washington, D.C., World Bank.
Haddad, M., & Shepherd, B. (2011). Managing openness: trade and outward-oriented growth after the crisis. Washington, D.C., World Bank.
HYPERLINK “http://qn.som.yale.edu/content/should-government-subsidize-alternative-energy” http://qn.som.yale.edu/content/should-government-subsidize-alternative-energy
HYPERLINK “http://www.forbes.com/sites/ciocentral/2013/02/14/government-subsidies-silent-killer-of-renewable-energy/” http://www.forbes.com/sites/ciocentral/2013/02/14/government-subsidies-silent-killer-of-renewable-energy/
Lines, T. (2005). Agricultural commodities, trade and sustainable development. London, International Institute for Environment and Development (IIED)
Myers, N., & Kent, J. (2001). Perverse subsidies: How tax dollars can undercut the environment and the economy. Washington, DC [u.a.: Island Press.
Organisation de coopération et de développement économiques. (2007). Subsidy reform and sustainable development: Political economy aspects. Paris: Organisation for Economic Co-operation and Development.
Wade, R. (2004). Governing the market: Economic theory and the role of government in East Asian industrialization; with a new introduction by the author. Princeton, NJ [u.a.: Princeton Univ. Press.
Appendix 1: Questionnaire
Your sacrifice to fill in this questionnaire is highly appreciated, especially considering that your schedule is understood to be a busy one. All data is intended for no other purpose other than academics. Please put an appropriate mark (.) in the box provided after the question.
When government issues subsidies, do the subsidy help meet the economic objectives?
Strongly Agree Agree Disagree Strongly Disagree
Does the issue of subsidies result to other undesired effects such as price falls, inefficiencies etc.?
Strongly Agree Agree Disagree Strongly Disagree
Do external factors such as WTO agreements determine effectiveness of subsidies?
Strongly Agree Agree Disagree Strongly Disagree
Do you think there is need for imposition of regulatory controls by the government?
Strongly Agree Agree Disagree Strongly Disagree
What suggestions would you advise the government to put in place to encourage effectiveness of government subsidies?
THANK YOU
