Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Don't Use Subsidies to Solve Poverty

Written by johnleemk on 4:24:03 pm Jul 7, 2007.

One reason often cited for the usage of a subsidy is to protect the poor. We subsidise agriculture for the sake of "poor" farmers (in reality the beneficiaries are often quite well off, especially in countries which can afford this policy) and so the poor can afford food.

These subsidies are well-intentioned. Nobody can question the fact that it is good to help the poor, though people can often disagree about how this ought to be done.

One camp argues that the government should not be responsible for helping the needy, that a social welfare net is completely unnecessary. I think, however, that this point of view is sadly mistaken.

I think the government does have a role to play in addressing the problem of poverty, mainly by giving the poor the opportunities they need to break out of the poverty cycle.

The government's role is to be an enabler, to create social mobility, to give those with a limited range of choices and opportunities a greater range of such options.

From this point of view, however, subsidising something for the sake of aiding the impoverished is completely ridiculous. If you subsidise something, you are basically giving people money that can only be spent on that thing, and nothing else.

For example, let's say the government decides to subsidise computers by $1,000 because having a computer helps you learn and communicate with others. This is the equivalent of giving everyone $1,000 but telling them they can only spend it on a computer.

There are two defects here. The first is, this takes no account of your income — even Bill Gates and Steve Jobs get that extra $1,000 for their next computer. This is surely inefficient since that $1,000 could have been spent by the government on something else; Gates and Jobs don't need that money.

The second defect is that this destroys the element of choice. What if the poor person's first priority is not reading Wikipedia or downloading pornography, but simply surviving, buying food and putting a roof over their children's heads? How does this $1,000 which can only be spent on a computer purchase help this poor person who doesn't need a computer?

The individual knows their needs best, but the government is unable to fulfill their needs and give them the opportunities they need, because the government has substituted its priorities for the individual's.

You could argue that the subsidy gives the poor who buy a computer an additional $1,000 they could spend on something else, but this does not avoid the problem that has been brought up — the subsidy only really helps those who already plan to buy a computer in the first place.

What the government ought to do is simple — if it wants to help the poor, it should not bother with subsidising particular goods and distorting the market system in the process. Individuals' choices should not be tampered with or hampered by government intervention except to correct problems like externalities — one area where subsidies (known as Pigovian subsidies when correcting externalities) truly come into their own.

Instead, in the example given, the government should just give every poor person $1,000 and let them spend it however they like. Those who need a computer will buy a computer; those who need food will buy food; those who need to go to night school will go to night school. An efficient result is attained.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

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