Subsidies in Depth

Subsidy characteristics vary somewhat by the type of resource being subsidized, but mostly by the mechanism of subsidization.  A series of more detailed pages provide an introduction to common mechanisms of support around the world. 

  • Loans and Insurance Programs.  Loan and loan guarantee programs operate by shifting financial risks from the private entity to the public sector.  Insurance subsidies do the same thing, though with operating or accident risks rather than financial ones.  Neither actually reduce or eliminate the risks of the subsidized enterprise; they merely shift these risks to other parties.  This is most often the taxpayer, but sometimes the population surrounding the facility as well.
  • Grants.  Grants and other direct support to favored activities are among the easiest subsidies to spot and value.  They are merely the tip of the subsidy iceberg however, and studies that report only grants as though they represent total subsidies should be viewed with caution.
  • Research and development support.  Normally a form of grant, research and development support also sometimes takes the form of tax breaks.  Distortions rise as subsidies support R&D that is close to commercialization rather than basic science; or from selection bias where available funds are doled out based on political power rather than technological promise.
  • Government-owned enterprises.  Governments around the world own very large and complicated enterprises involved in many natural resource areas.  Activities are not always as obvious as national oil companies; oil stockpiling services such as the US Strategic Petroleum Reserve, uranium enrichment, and engineering service companies also count.  Books of accounts are often murky, operating revenues insufficient, and return on large amounts of taxpayer capital non-existent.
  • Tax subsidies.  Special exemptions to baseline tax rules are common at all levels of government throughout much of the world.  While efforts to provide at least some visibility on the revenues being lost through these special rulings have been ongoing, there remain many governmental units that still provide no information at all on who is getting the special deals and how much they are worth. 
  • Energy security.  Though not really a mechanism of subsidization, energy security is a common "buzz word" used to justify a wide array of government subsidy programs.
  • Natural resource leasing.  In many countries, natural resource endowments comprise the largest source of potential wealth available.  Poor transparency on leasing practices and extraction-related revenues is quite common, and often deliberate as it allows powerful groups to extract the wealth for their own benefit.

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