ERCUMENT KILIC

SUBSIDIES IN TURKEY AND THE WORLD (PART 2)


THE TURKISH TIMES - MAY 15, 2002

Screwball Economics, Voodoo Financing:

"Subsidies..

A thing of the Past? "

Analysis by Ercument Kilic

PART 2 of 2

CURRENT CONSIDERATIONS AND IMPEDIMENTS TO SUBSIDES AND REFORMS:

The original objectives may remain valid, but subsidies have to be addressed in a more cost effective, targeted policy by the government by developing alternative policies which better address same objectives, and compensate the losers. The key concern though is to assess whether subsidy policies, actually serve their purposes, at what cost, how the costs and benefits are distributed; and whether subsidies are harmful to sustainable development in Turkey. Existing subsidies, must be carefully examined, reduced, or at least reformed in Turkey. Honesty is the best policy:

    Make subsidies visible

    Publicize their costs and effects

    Make people realize that subsidies have to be financed through either taxes or deficits.

    Unleash educational campaigns can build more support for reform.

    List the winners and losers

    Inform policy-makers about better alternatives so they don’t backslide into the easy solution of subsidizing.

    Promote public awareness and debate about subsidies/ encourage such political hon­esty and resoluteness.

So it all comes down to good governance. Let the markets dis­tribute resources and apply sound pricing policies.

Along these lines, certain atti­tude changes in the concept of subsidies are in the works in the U.S. for instance. In, September 2001 the Bush administration released a new agriculture policy which could lead to marked reductions in federal subsidies for large faming operations, and marks a dramatic, shift away from the traditional emphasis on supporting staple crops, at all costs. This new policy is the result of an attempt by the Bush administration to define new goals and principles that can best, guide the future growth and development of the farm, food and the agricultural industry in the new century .The report suggests that  the past policies designed for “narrower purposes” in an isolated economy cannot meet the current needs of  the modern currently expanding food and agricultural system. It offers a set of princi­ples to guide policy development for trade, a farm safety net conservation and the environment, rural communities, nutrition and food assistance, and other programs. In particular, the report cautions that farm policy, includ­ing .safety nets, must promote sustainable prosperity for farm­ers, rather than long term depend­ence  on government support. Currently, federal subsidies reward largely farmers producing corn, cotton, rice, soybeans and wheat. The $20 billion annual subsidy program skews the agri­cultural market, jeopardizing international trade agreements and artificially inflating land prices, the report notes.

Stunning examples show how politically painful and difficult subsidy reduction can be. Considering the usually heavy opposition, enormous political will and courage are required to reduce subsidies. Fiscal concerns may provide the spur for reform, in particular when countries such as Turkey are running budget deficits. Subsidies may even affect the balance of payments. Budgetary resources generated from subsidy removal can, playa key role in mobilizing public support by using these freed resources to compensate those who suffer most from subsidy reform. For instance, rather than subsidizing poor households, it may be more cost effective to provide them with direct income support which  has the smallest economic costs and leakages. This way, a government does not artificially manipulate of the laws of supply and demand as subsi­dies do a notoriously bad job of targeting assistance the poor in developing countries

Another major aspect of sub­sidy reform concerns internation­al competitiveness. Considerable global political effort has been expended on producing level playing fields, by removing sub­sidies among other things. Yet subsidies often become integrat­ed into domestic economic sys­tems through pressure from the interest which they most benefit. Many then believe that subsidy removal would harm the compet­itiveness of the country or harm the competitive, position of the supported industry. Countries may thus be reluctant to act uni­laterally, and loose international competitiveness.

Concerted international action is also essential to prevent or overcome such potential dead­locks. One approach can be to keep emphasizing the negative effects of maintaining subsidies including the possible offsetting measures which other countries see themselves forced to take. Such an argument  may be helpful in mobilizing support at the international level. An other approach is agreement among a group of countries to reform their economies and simultaneously provide mutual assistance in overcoming potential obstacles.

HOW FAST TO REFORM?

Here, are two contrasting, stylized options: rapid reform versus gradual change.

Gradually phasing in reform :Together with compensating measures and adjustment sche­mes, a gradual phase-in could cushion transition and minimize the social costs of adjustment. Phased reform could start with  local experiments that can expand as lessons and successes emerge. Phasing in reform may build support 'among subsidy recipients, because it would give them time to adapt, helped by government programs where necessary. However, gradually phasing in reform requires a long-term (political) commitment to continue the adjustment process, even after the initial push dwindles.

Reform through shock therapy: Governments could launch a vigorous, drastic .reform in a shortest possible time. Shock therapy may be particularly rele­vant where political commit­ments and stability yare uncertain in the long run. Rapid reform may also be preferable for transi­tion economies when many relat­ed problems are already being addressed. Governments could consider integrating subsidy reform with overall policy reform. Another advantage of shock therapy is that it may quickly produce results, enabling governments to sustain reform politically. The World Bank (1996) reports that countries in which liberalization has been most rapid and comprehensive have been more successful than slow reformers. Advanced liber­alizers have generally experienced an earlier and stronger recovery and also come out far ahead over the long run.

A policy reform that involves liberalizing markets  restructur­ing sectors and creating sample room for fair competition elimi­nates many of the root motives for subsidy policies. Privatization and the deregulation are first steps towards such transition; remember however, that the way these market oriented reforms are put in place matters great1y; they are the means to an end. Another key element is to impose and sustain financial discipline, which is not only vital to restruc­turing of the economy, but may also help control inflation. A comprehensive study by the World Bank(l996) on the evolution of transition economies has shown that economic growth deteriorates dramatically when inflation rises above, a critical threshold of about 40 per cent annually. But restructuring existing firms and imposing financial discipline is not alone enough to establish an incentive-based economy.  

In this author's opinion, some shock therapy methods employed by State Minister Dervis, based on the conditions in Turkey, is the right path to follow. Even though smarter, a gradual reform of any kind can only be afforded or endured during times of political stability, such as the reforms of Ataturk which span over a decade-. When Gorbachev attempted to follow in the foot­steps of president Reagan in this country and prime minister Thatcher in England with new economical approaches and reforms, the lack of the same said political stability in the former Soviet Union laid the grounds for his downfall.

After all is said and done though, one citizen such as this one can't help but wonder. If as World Bank asserts that any sus­tained development must be accompanied by inflation under 40% to serve as a tool for a strong economy which will entail the political will for reforms of any kind, how will Turkey ever get there to even contemplate reform on such things as subsi­dies? Who all have been the responsible parties accountable for desiccating of Turkish econo­my for the last 64 years? Why should the descendants of people who fell in Gallipoli, the Balkans, and Sakarya wait in 5:00 AM bread lines in Ankara? Is this what they deserve?