Managing the risks of rising government support: a case for policy transparency

Governments generally support the smooth functioning of their domestic economies, through maintaining systems of good governance and the rule of law and ensuring a coherent macroeconomic and structural policy environment. Extraordinary support is sometimes also warranted, as is the case today to mitigate the economic impact of COVID-19. Few would dispute that these are essential roles for governments. But care needs to be taken that well-intentioned support measures do not become entrenched, ineffective and wasteful subsidies. This is a very real risk.

Furthermore, concerns about state capitalism, concentration in digital markets, global trade tensions, and, more recently, reopening of an old debate on the benefits and costs of global value chains, are motivating some governments to consider other forms of support for 'strategic sectors'. If nations try to outbid one another, this can lead to spiraling levels of government support globally. What can be done to prevent a costly and economically destructive outcome?

Lessons from agricultural reform

Agriculture, a 'strategic sector' receiving very high levels of support for decades, has useful insights to offer policy makers - in particular, the importance of policy transparency. The OECD estimates annually the value of agriculture policies across its member countries and a growing number of emerging economies. The stock of policies in place over the past thirty years has fallen in value from a whopping 37% of gross farm receipts to a still significant 18%; during 2017-2019 support provided across the 54 countries monitored totaled USD 708 billion per year (even as six countries implicitly taxed the sector to the tune of USD 89 billion). The flow of new policies introduced since 2017, in contrast, is in the vicinity of just 1% of gross farm receipts.

Policy transparency is crucial

Looking beyond agriculture, policy transparency is woefully lacking. Official trade policy reporting by WTO members lags considerably, with only an estimated 10% of notification commitments being met; initiatives such as the Global Trade Alert aim to fill this gap by systematically reporting trade policy developments in real time. A number of international organisations are investing more today in generating detailed data on government support - from fisheries and fossil fuels to industrial and high tech sectors - but internationally comparable data on government support remain sparse. This has to be a major concern to any government interested in fair competition at home and a level playing field in international markets.

Transparency is not just needed to monitor broad trends, it is also prerequisite to evidence-based policy analysis. The agriculture policy information - by country, by measure, and over time - that underpins the headline numbers above enables highly granular analysis with important insights for governments. For example:

• While food markets have evolved considerably, policy has not; current measures do little to address today's priorities: improved productivity growth, environmental performance, and farm household well-being.
• Instead, much of the current policy set increases the income gap between large and small farmers, imposes a high burden on less well-off consumers, reduces the competitiveness of the domestic food industry, and can harm the environment.
• The opportunity costs of current policies are enormous: within the sector, innovation, environment, and resilience measures are under-resourced, and more broadly, fewer hospitals, schools and roads can be built and maintained.
• High support distorts farm production decisions and trade flows, disadvantaging developing country farmers unable to compete with subsidized production on international markets.

With few exceptions, such highly granular analysis of the impacts of government support on other economic sectors and on global markets is simply not available. While government support that is well-targeted and time-limited can contribute effectively to sustainable growth and better jobs, poorly designed support measures can impose unnecessary costs on producers and consumers. And some new forms of support being discussed today - financial subsidies, tax concessions, increased tariffs, and discriminatory regulations that favor domestic suppliers - can be expected to impose very high costs on both the country providing them and the global economy.

For import competing sectors, the bulk of the extra cost will be borne by domestic firms and households that pay the higher prices that come with reduced access to globally competitive suppliers; for export competing sectors, support can act as an implicit export subsidy, enabling firms otherwise unable to do so to access global markets, to the detriment of more competitive firms located elsewhere.

Without full transparency across both the stock and flow of government support policies, and subsequent analysis to distinguish 'good subsidies' from 'bad subsidies', governments are simply not able to make well-informed decisions. Facts matter, but a shared understanding of the facts matters more; neither is possible without much greater policy transparency.

Ken Ash is an Independent Consultant, IIT Visiting Fellow, and former OECD Director of Trade and Agriculture.

The views expressed here are the author’s, and may not necessarily represent the views of the Institute for International Trade.