Subsidy

With the institution of monetary supports, or subsidies, governments are able to buffer economic shocks that impact their society. Subsidies are government expenditures that are intended to help stabilize an economy by ensuring that the citizens are able to afford essential household goods and services or by providing domestic businesses the opportunity to remain viable despite cost disadvantages in competing with foreign producers. Subsidies may also be used to support other socially beneficial initiatives, such as those that help restore or improve the environment or stimulate job creation. In a globally competitive environment that is interconnected, governments and political figures are tasked with the responsibility of ensuring economic stability.

Brief History

In many countries, there is a high prevalence of what is referred to as consumer subsidies. These consumer subsidies serve as government expenditures that make essential household goods and services more affordable to consumers by artificially lowering domestic prices. Consumer fuel is a common example. Energy producers, such as oil companies, in the United States receive subsidies from the U.S. government in the form of cash, tax breaks, price controls, and other incentives that lower the cost of production and thereby keep consumer prices low. This strategy applies across various types of governments, ranging from democracies to autocracies. With respect to the literature regarding the impact of consumer subsidies in developing countries, it has been reported that subsidies have indeed played a pivotal role in sustaining households in said countries in which goods and services make up a substantial portion of expenses.

In essence, subsidies are funding that is provided to either government agencies or private firms with the purpose of aiding programs with the sole purpose of ensuring their continued viability. When implemented successfully, these subsidies, whether consumer-oriented or not, have been known to sustain over time, despite political or economic changes. In doing so, the consumer subsidy programs function as a buffer that either protects the general population from any shocks that may impact the price of food, gasoline, electricity, and other household goods and services or serve to facilitate innovation, ensure distribution, and so on. Many economists consider such programs necessary to keep economies stable because sudden price increases can lead to numerous economic and political disturbances.

While the middle class has primarily benefited from consumer subsidies, many argue that it is in the best interests of human and economic development that low-income individuals receive subsidies in the form of aid programs for education and basic healthcare needs. For example, under the Affordable Care Act (ACA), some families qualified for subsidies based on their household size and income, which aimed to lower out-of-pocket healthcare costs. Support for subsidies in the United States inevitably divides along political lines, with conservatives favoring corporate subsidies that drive business and liberals favoring a social "safety net" in the form of direct support for individuals. Subsidy programs require legislation by politicians whose decision making may be influenced by powerful program beneficiaries. Further, subsidy support may be used as political leverage to gain or cement political power.

Overview

According to the literature on international trade theory, it is well documented that subsidies have been known to ignite positive impacts on merchandise exports. Since the establishment of the World Trade Organization (WTO) in 1995, the primary goal of the WTO has been to ensure continuous trade, particularly by providing protection against unfair trade practices. Aside from success with reducing import quotas and tariff barriers, however, the WTO has struggled to reach a consensus with respect to the handling of subsidies, specifically regarding limiting trade distortions. The Ninth Ministerial Conference in Bali in 2013 exemplified this when a proposal that would include lowering the limits on export subsidies was significantly opposed by WTO countries. In addition, the continual argument over the matter of subsidies has given way to the present relationship between merchandise exports (particularly as a function of gross domestic product) and government-funded subsidies. In doing so, this relationship highlights the lack of agreements during negotiations and that a subsidy-based trade war will likely prove disadvantageous for the WTO participants who represent developing countries.

There is, however, much-substantiated justification for the implementation of subsidies, such as industrial development and the funding of environmental initiatives. Specifically, the success of such subsidies is largely contingent upon the local industry in which it is instituted to help as well the role of domestic and foreign goods. This is particularly relevant when import tariffs prove more economically advantageous versus export subsidies. As a result, the literature has reported a higher prevalence of subsidy measures in lower-income countries as they attempt to reach long-term goals through the use of more economically efficient means, such as import tariffs.

Furthermore, subsidies have also contributed to the success of domestic firms among their foreign counterparts with respect to exports in the global market. Subsidies provide economically disadvantaged domestic producers with the opportunity to sell their products in the international market at a lower price, which then helps them to increase their exports and, ultimately, their profits as well. This interconnected relationship between subsidies and exports leads domestic firms, in particular, to a more economically advantageous standing. Such a scenario is evident in both the United States and Europe, where export subsidy programs give a significant advantage over foreign competition. The strategic policy then causes some firms to establish production facilities in countries where they can receive production and export subsidies, which then helps their firms to thrive in unstable conditions.

Bibliography

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