Subsidy Rent

David Smiley

[Reprinted from Progress, March-April, 2006]

A subsidy is a special payment made by government to a producer or distributor. It is in effect a negative tax, creating a surplus called economic rent. A very costly example, and one that shows up some huge unintended consequences, is that of agricultural support schemes.

So, who pays? Firstly, rich country taxpayers who pay $1 billion a day to support these schemes (Economist, March 12, 2005:71), and consumers who pay more for food. Secondly, everyone in poor countries. 'Farmers in poor countries struggle to compete with heavily-subsidized farmers in Europe and America -- and even see their own market destroyed when food surpluses are dumped. Lost trade costs poor countries an estimated $700 billion each year, says the UN, a figure that dwarfs aid spending' (Economist July 1,2000:50).

So, what is aid worth to the third world? About one twentieth of the value of trade lost by subsidies. And this assumes that aid trickles down to the poor instead of trickling into real estate speculation and trickling out to Swiss bank accounts. To find out why all this happens we should go back to Latin and ask "Cui bono?", who benefits?

And so, who does benefit? "Rich country farm subsidies prevent the poorest countries from selling some of the only goods, other than illegal drugs, that they are able to export, keeping millions of people miserable. Consumers in rich countries pay over the odds for food. And for what? So that a tiny number of fanners and a few large agricultural firms in rich countries can continue to benefit at the expense of the world's poor." (Economist, April 17,2004).