Subsidies as a Social Safety Net: Effectiveness and Challenges

Many governments use price and tax subsidization to meet social protection objectives in lieu of, or in addition to, direct income transfers. Such subsidies may be perceived as influencing behavior to further other socially desirable policies. For example, the price response induced by lowering the price of schooling or key food items will both lower the cost of living for the beneficiaries and also increase the investment in education or health more than a similar income transfer would achieve. Governments may also choose price subsidies because they are easier to administer than income transfers. In many cases they may also be politically more tractable. The most common form of price subsidy is a direct, untargeted subsidy. However, various other means may be used to deliver price subsidies as well. Untargeted indirect price subsidies, exemptions on value added or other sales taxes, dual exchange rates, export taxes, producer quotas, subsidies on transport and storage, and domestic sales of a commodity below international opportunity cost are all forms of subsidization. While such subsidies do lead to increased consumption towards a commodity in keeping with policy objectives, they usually also distort production incentives. Subsidies on goods available in a rationed amount are a less costly alternative to open ended subsidies on the entire supply of a good. The incidences of benefits from a general price subsidy are proportional to purchases and can be deduced from a survey of expenditures. For many commodities, including most grains commonly consumed, wealthier households receive larger transfers in absolute terms, yet the amount of transfer a poor household receives will be a larger share of its budget. Some goods, such as meat, are inappropriate vehicles for redistribution since subsides on them will not only accrue mainly to the rich they will actually increase inequality in welfare. On the other hand, some governments have chosen to subsidize goods for which consumption declines as incomes increase. These are termed selftargeted commodities. There is substantial evidence that food subsides do affect nutrient consumption in a manner different than income transfers. The reduced price will have a direct influence on purchases of commodities with general subsidies and for rations that exceed the amount normally purchased. But even in the case of quotas and food stamps there is evidence that the presence of food related transfers encourages increased consumption, possibly due to changes in the share of resources controlled by women. Successfully implementing subsidy programs presents many administrative challenges. Among the most critical is limiting the sale of subsidized commodities in the higher priced general market. Substantial leakages have been documented recently in several countries. Technology such as optically scanned smart cards can provide costeffective monitoring mechanisms, and is equally suitable for use with rations and in twotier price systems, but may be less appropriate for poor communities without sources of power for scanning devices. Reforms that separate the government’s role as financier from the market’s role of providing services have the potential to be the most effective. If, in addition, governments recognize that food policy objectives are often achieved more effectively by delivering income support without any direct or indirect ties to food commodities, reforms can be separated from the consumption of a given commodity or use of a given market channel. This increased flexibility often allows for better targeting as well as an increased likelihood that the transfers will result in the poorest beneficiaries being lifted out of poverty. The nature and timing of subsidy reforms depend on many factors, including the interplay of diverse interests expressed by local groups and international agencies. Balancing the different interests is not easy, but country experiences suggest several factors contribute to public acceptance of reforms, including advanced publicity, introducing credible safety nets policies to protect the vulnerable, and implementing reforms during periods of favorable international commodity prices.