Global rethink on subsidies

MANY countries use subsidies to kick-start new economic initiatives. One example is the global initiative to embrace solar power and renewable energy. Subsidies are also deployed to cope with rising prices, especially food and fuel, or to keep alive sectors that are slipping into inaction and malaise.

Of course, subsidies to a great extent do cushion the impact of inflation, which is often fuelled by high energy prices. We can see this being played out right now as the world oil price stays stubbornly high, hovering around US$100 a barrel. The conflict in Ukraine is much to blame.

There is no denying the fact that many of the initiatives to expand world food production would be challenging without agricultural subsidies. Developed economies, including the EU, United States and Japan, spend large amounts of money to support agriculture.

But subsidy is a double-edged sword. Prudently managed, it can be positive for the economy, but over-subsidization can result in negative repercussions.

I recently read an article in a local newspaper on how agricultural subsidies can harm nature. The article highlighted New Zealand’s experience with its agriculture industry, which was once so heavily subsidised that slaughterhouse workers were earning more than airline pilots.

What disturbed the subsidy watchers was that huge subsidies meant that vast swathes of the country’s marginal land were cleared for grazing, fertiliser was overused, and the sheep population boomed to the point where surplus meat had to be destroyed. It soon became clear that the subsidy programmes had taken a toll on nature, not only polluting rivers but also eroding soils, as revealed in a UN study.

This prompted New Zealand to go for a total revamp in 1984. In a radical shift, the subsidies were either removed or phased out. The outcome was enlightening. Farming became more efficient while harmful practices such as the excessive use of chemical fertilisers decreased. In fact, fertiliser use declined by 50%, according to the report.

While agriculture remains a major source of the country’s planet-warming greenhouse gas emissions, New Zealand is still held up by biodiversity campaigners as a “poster child” for reforming subsidies that harm nature and the environment.

Around the world, it is estimated that government subsidies, which can potentially harm nature, amount to at least US$1.8 trillion each year, or equivalent to 2% of global gross domestic product.

Admittedly, agricultural subsidies, at US$520bil annually, are the largest drivers of ecosystem destruction along with those for fossil fuels at US$640bil.

Agricultural subsidies for industries like meat production and fertilisers are also considered a threat to long-term food security. Methane emissions from subsidised livestock farming are creating climate concerns, as methane is the more potent GHG. What is happening in Brazil, where vast tracts of forest land are being cleared for cattle rearing, has come under close global scrutiny.

Decision-makers are calling for aggressive subsidy reforms to close most of the financing gap for biodiversity protection, which is estimated at US$700bil annually. Analysts say a major reason reform can be so difficult is that many powerful interests are beneficiaries of subsidies.

Research has flagged that agricultural subsidies tend to disproportionately favour large farms at the expense of small farmers.

The experience in New Zealand is a case for us to ponder and re-evaluate our own subsidy schemes. What is clear is that subsidies in energy and agriculture need more diligent study. Their impact on nature and climate deserves scrutiny. Otherwise, we may end up with the negatives outweighing the positives.


Tan Sri Omar Centre for STI Policy

UCSI University

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