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Subsidies and other incentives of trading of goods

  Subsidies and other incentives One of the most delicate questions in any country’s trade and development strategies concerns the role of t...


Subsidies and other incentives One of the most delicate questions in any country’s trade and development strategies concerns the role of the State in providing aid to local producers. This issue goes to the heart of the question of whether development will be state-directed or market-driven. And while there is on the one hand a strong argument to be made for Government to assist private industry in overcoming structural impediments, especially in the case of infant industries, there are also legitimate concerns to be raised over the capacity of the Government to pick winners and losers. A State that does not aid industry at all may be thought derelict in its duties, but one that intervenes too vigorously might run the risks of jamming market signals or degenerating into corruption. Even countries that generally favour a laissez faire approach to economic development may find room for incentive programmes. 

Consider the cases of Panama and the Dominican Republic, both of which have strategies that generally put the market before the State in the pursuit of trade and development. Government support programmes “are highly important to promote competitiveness, exports and attract investment”, according to the TPF for Panama, and “assistance is also relevant for the establishment of industries and manufactures outside of the interoceanic area”. That report urged that instruments be used “to strengthen local industrial areas and to economically revitalize the west and east zones of the country” in order to “generate a demand for locally produced supplies with quality specifications and may promote technology transfer”. In Panama, the investment promotion agency Proinvex was created in 2009 to manage a one-stop-shop-integrated information system that allows investors to easily identify all the instruments available to support foreign direct investment.

 The TPF argues that this institution requires more human and financial resources, and that trade and investment promotion would benefit from a clear plan that defines operational priorities in line with the long-term development goals of the country. The report further argued that the Authority for Consumer Protection and Competition should receive increased attention and a more prominent role. Two notes of caution nonetheless arise whenever considering programmes that extend incentives to producers. One concerns the budgetary impact that incentives might have. Budgets are tight in all countries, especially poorer countries, and any programmes that involve either the appropriation of funds or the forgiveness of taxes (internal or external) need to be approached with caution. Export subsidies in particular raise concerns over equity and effectiveness. While it might at first appear justified for the Government in a developing country to offer such subsidies as a means of overcoming the structural disadvantages under which their producers must operate, these payments might alternatively be considered a mechanism by which funds are transferred from the taxpayers in developing countries to the consumers in other (usually richer) countries. That is a transaction that may be difficult to justify from the standpoint of distributive justice. Promote the rule of law at the national and international levels and ensure equal access to justice for all. Substantially reduce corruption and bribery in all their forms. Develop effective, accountable and transparent institutions at all levels. Ensure responsive, inclusive, participatory and representative decision-making at all levels. Four of the 12 targets under Sustainable Development Goal 16: Promote just, peaceful and inclusive societies PEACE, JUSTICE AND STRONG INSTITUTIONS Concerns also arise over the potential abuse of such programmes, especially those that involve a high degree of governmental discretion in their allocation. The institutions that administer these funds need to operate objectively, and not play favourites, but this can be problematic if the country in question encounters problems in the rule of law. Here it may be appropriate to repeat the observation that “the State that governs least governs best,” insofar as corruption begins with opportunity. Those countries in which the State intervenes heavily in the economy, whether through taxes and tariffs or through subsidies and other incentives, are also the ones in which unscrupulous persons may perceive the greatest advantages in exercising undue influence on public officials. The aim might variously be to avoid tariffs or taxes, or evade some regulation, or win a procurement contract, or obtain access to a subsidy, with favours in these areas being rewarded through some form of bribery to the administering officials. Corruption and arbitrary government are self-inflicted wounds that III. INSTRUMENTS OF TRADE POLICY 29 prevent countries from achieving their full potential. On average, incomes in those countries that are perceived to be the least corrupt are 16 times higher than they are in the most corrupt countries.10 These observations point to the need to put adequate safeguards in place so as to ensure that state intervention in the economy is not too expensive, stifling or subject to abuse. As discussed in the TPF for Jamaica, it is important not to offer too wide and overlapping an array of incentives. In addition to free zones, Jamaica provides incentives that variously offer waivers or moratoriums on taxes and tariffs, accelerated depreciation and other forms of preferential tax treatment. The country also has special incentives in place for the tourism, information and communications technology, and film sectors. The TPF proposed that these programmes be rationalized. And while the TPF for Panama observed that logistic and financial support might be provided in order to facilitate exporters’ participation in trade fairs and similar initiatives, it argued that this should be done only to the extent that it does not introduce market distortions. The TPF for Algeria stressed the importance of fighting corruption and argued that better use of computer controls could help to identify any customs agents that might be abusing their authority.

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