I have followed with great interest the removal of subsidies on petroleum products by the Patriotic Front Government, citing the need to redirect the near KR754 million (K754 billion) cost of subsidising petroleum products to other government programmes. Having heard a plethora of perspectives for and against the removal of subsidies on various forums, I am still left to wonder as to whether there is a compelling economic argument for the removal of subsidies, and whether such a policy can necessarily improve economic performance?
To start off this discussion on the same footing, I believe it is imperative that we have a common understanding of what can be construed as a ‘Subsidy.’ There is an extensive use of the term ‘Subsidy’ in everyday economics, and yet the term itself is rarely defined. According to most online dictionaries, the term subsidy refers to ‘monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.’
Often it is used as an antonym to a tax, and as most of you might be aware, there is an endless list of taxes. For this reason, I have attempted to group all subsidies into three categories.
The first category will consist of all subsidies were the government provides goods or services at no cost or below market price, such as university education, public transport or health care. The second category consists of government regulatory policies such as border control restrictions on certain goods or services. This is particularly true on bans by government on the export or Import of certain commodities.
The third category consists of subsidies where government implores the private sector to invest in particular areas of the economy, with the government acting as a guarantor. Such subsidies will usually stimulate consumption that otherwise would not take place if the government had not acted. A good example of this is the government’s intervention in banking interest rates.
To move away from the jargon of defining subsidies, does their removal necessarily improve economic performance? Most people will argue, as does the PF government, that subsidies generally distort price indicators and are not a true reflection of the actual cost of the service or product being subsidised. The long time implementation of certain subsidies may be unsustainable and in some cases actually harmful to a free market economy.
The money generated from the removal of such subsidies can be re-invested in other developmental projects or even fund other subsidies. By any standard, the above argument sounds highly plausible.
But like I stated in the preamble of this discussion, given the current performance of the PF government, I strongly believe that the removal of subsidies will not necessary translate into any meaningful development in other areas of the economy. My argument hinges on the fact that there has to a functional economical and political equilibrium that supports policies in either field.
At the moment under the PF Government, such symmetry doesn’t exist. To mention for instance, the removal of subsidies on petroleum products and mealie meal is an astute and viable economical decision. And yet the PF government has shown very little political will in getting rid of the malignancy of corruption, nepotism and general incompetence in government.
What guarantee is there that the money generated from the removal of subsidies will be used for developmental projects? Already, there are land mark cases on the misapplication of funds meant for development such as the current corruption investigation into the $750 million euro bond loan. When the president goes on national television to castigate the anti corruption commission for investigating alleged corruption in government, you have to wonder whether the government’s economical policies are matched with its political will??
Secondly, the government has failed to develop any policies or incentives, especially in the case of the removal of mealie meal subsidies, to encourage entrepreneurship in the agriculture industry.
Unlike petroleum which is not produced in Zambia and is therefore open to international market manipulations, maize is Zambia’s staple food, locally grown too. Most countries that subsidise agriculture produce do so to prevent prices from plummeting due overproduction of the same produce, not under production as is the case of Zambia. Unless we right theses wrongs, there will be very little tangible economical growth as a result of subsidy removals.