Subsidy politics gone haywire: Robbing Peter to pay Paul

Protesters symbolise their poor living conditions during an anti-fuel price hike rally in Jakarta on June 19, 2013.

RELIGION, Karl Marx famously wrote, is the opiate of the masses. He would be surprised how the quest for fairness has now turned subsidies - intended as a tool for equity - into a similarly powerful opiate of the people and an instrument of political power.

But power gained through lavishing subsidies on the electorate comes at a stiff price, as Thailand's populist government is finding out. Incumbent parties facing elections from India to Indonesia will soon learn the same thing as the bill comes due and their citizens wise up.

History is replete with examples of subsidies helping parties to win elections, fuelling corruption and creating great economic distortions.

Whether delivered as price supports to rice farmers in Thailand, cheap petrol to Indonesian consumers or cheap electricity to Delhi residents, subsidies are always offered in the name of a lofty moral and social goal.

Who could oppose shielding poor farmers from market volatility by offering them a minimum price - as the Thai and Indian governments have done?

Can one begrudge ordinary Indonesians, whose country was once an oil exporter, filling their cars with petrol at below market prices? (The subsidy continued long after the country became a net importer of oil, pushing budget deficit to unsustainable levels.)

Price incentives to Thai and Indian farmers have distorted the grain market. By purchasing Thai rice at a higher rate than the world price, the government has not only incurred massive losses but has also been forced to sit on a large stockpile. The World Bank estimates the cost of the Thai price support programme at US$12.2 billion (S$15 billion).

Earlier this month, thousands of protesters in Bangkok disrupted elections to oppose a government which relied on subsidies to win rural votes.

Meanwhile, Thailand's debt ratings have come under threat. In Indonesia, the heavy cost of fuel subsidies has encouraged the growth of fuel imports, worsening the country's current account deficit, which has now reached 3.7 per cent of gross domestic product (GDP).

Under pressure from the International Monetary Fund, both Indonesia and Malaysia (which also offers a generous fuel subsidy) have been forced to cut back subsidies, pushing up the price of petrol at the pump.

As elections approach, Indonesia's President Susilo Bambang Yudhoyono faces the unenviable choice of angering consumers with high prices or producing a huge budgetary hole that will require other painful sacrifices to plug.

India's Congress-led United Progressive Alliance came to rely on subsidies as the main tool to promote "inclusive growth". The slew of transfer programmes - from the right to work and right to food and education to subsidised grain, fuel, fertiliser and gas - has increased the fiscal deficit to more than 6 per cent of GDP.

Not to be outdone, the anti-corruption Aam Aadmi Party (AAP) has offered to halve water and electricity tariffs for Delhi residents on the assumption that suppliers overcharged consumers to that extent. It is a new Robin Hood-like subsidy: Taking money from companies allegedly overcharging consumers and giving it back in the form of lower tariffs.

The problem is that it might take some time for auditors to prove such overcharging actually happened. Meanwhile, the AAP - under pressure to deliver on its electoral promise - may have to resort to robbing Peter to pay Paul. In other words, taking cash from other programmes to cover the shortfall.

The experiences of Thailand, Indonesia and India are only the latest examples of subsidy politics gone haywire. This is not to deny that at a given stage of economic development, consumer subsidies could help bridge gaps and maintain social stability.

But countless studies have shown how subsidies help the rich more than the intended beneficiaries and how politicians turn the handouts into a new opiate. As subsidies rarely come with a sell-by date, they are often ended when economic disaster looms or a wiser electorate refuses to play the game and votes instead for responsible leaders.

The writer is editor-in-chief of YaleGlobal Online, published by the MacMillan Centre, Yale University

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