The end of export subsidies 2

(Conclusion)

Against the onslaught of globalization and the advance of juggernauts of the corporate world aggressively establishing beachheads in far and distant developing and underdeveloped economies, there not so much to spread investments but rather to achieve economies, widen margins, exploit the cheapest labor, the lowest tax regimes and the most vulnerable markets, in the light of the initiative to scrap protectionist export subsidies, it initially makes sense to buck these moves. 

Hamburger chains were not set up China to raise cattle and process beef. They were set up to sell burgers. Toy companies did not tap locals to design Barbie Dolls. They were established to exploit sweatshop women and children labor, thinking these as relatively cheaper inputs so that they might resell the final chinky-eyed plastic to the same, after these were rebranded stateside. They did not invest in our neck of the woods in high-technology manufacturing. They simply wanted to outsource the routine and simplified so that the final product might carry the more prolific profits. The largest profits do not redound to the business-process telephone operator. They are earned by the conglomerate selling the final product.

More than our neighbors, the Philippines has welcomed them in near-embarrassing degrees even where we, as compared to command economies like Vietnam and China, Muslim cultures such as Indonesia’s, and small, albeit effective and productive, populations like those in Singapore, have been the perennial last choice where direct foreign investments (FDIs) are concerned.

There is really nothing different between the Aquino administration and the rest of Asia. Just take away reason and accountability, and in their place, add bungling inexperience and fuzzy myopia.

Myopia is a natural tendency, as the global economies have become more sophisticated, if not labyrinthian. Given that export subsidies are spread out across the board and might be granted to enterprises regardless of nationality, through the establishment of economic zones and other subsidy modes, it might likewise happen that the beneficiaries might be corporations set up to exploit both cheaper inputs and national incentives where the greater and more prolific productivities lie elsewhere down the value chain in economies other than those that need productivity the most. In other words, subsidies could very well benefit developed economies more than they do hosts.

It is easy to defend a protectionist strategy before the constituents of an economy struggling for economic equity and faced with increasing costs of imported raw materials and the most dreaded volatile and ever escalating petroleum prices. Subsidies play to political constituents and the motherhood rhetoric is warm and fuzzy.

Let us, however, analyze deeper and reveal the endemic downsides to a host economy regardless of the attendant politics.

One, subsidies increase the domestic prices of goods and services exported. As volumes are dedicated for the export markets, these, in turn, lower volumes available for the local market, and the gradual unavailability of consumer surpluses worsens domestic well-being for consumers in the host economy.

Two, these subsidies benefit host economy producers, thus, increasing production surplus and output, giving direct employment a kick and helping increase the remuneration of fixed costs. Corporate welfare is temporarily increased, as the increase in profits likewise leads to higher tax takes that are plowed back as subsidies.

To understand the full impact that, at first blush, seems beneficial, it is important to shift analytical perspectives to the exporting state funding these subsidies.

As the subsidies are paid by the state, these come out of the government budget – in the case of the Philippines, a coffer already afflicted with a fiscal deficit characterized by poor collections. This implies either reallocations from programmed expenditures or direct transfers to favored industries resulting in increased taxes and government debt.

Either way the public loses out in favor of inequitable favoritism. At the end of the day, there is no free lunch. None at all.