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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?
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