It would be wrong to leave the impression that governments in industrial countries are not concerned about the effectiveness of subsidies, and their views about the place of subsidy policy in general economic policy are bound to change in the light of a number of influences to which we must draw attention:
Views on the role of subsidy are bound to be affected by changes in the relative importance attached to different policy objectives.
‘Thatcherism’ is associated with growing emphasis on the responsibility of individuals for their own economic destiny. This is translated into policies which reduce the role of the state as a monopoly supplier of goods and services and with a complementary emphasis on consumer sovereignty on ideological grounds alone (see (b) below).
Models of how the economy works which support selective intervention by subsidies have relied on the proposition that promotion of economic growth and employment is best achieved by subsidising the output of decreasing cost industries. However, as repeatedly emphasised (see Module 9), influential models of the economic process place more emphasis today on promoting competition to achieve the same objectives.
Commenting on the rationale of British government subsidies, two economists of the UK Department of Industry and Trade, have written: ‘policies are … directed more to working with the grain of market forces, and to providing firms with assistance to improve their innovative and competitive capabilities without weakening their commercial responsibility for their own actions and the incentive for them to stand on their own feet’.
Source: Barber and White (1989)
The experiences with subsidies which are demonstrated in the analysis in Sections 6.4 and 6.5 have not been lost on those in charge of overall financial control of government, namely the Ministry of Finance. Given pressure to reduce the role of the state in economic activity and the emphasis on the need to promote competition, the role of subsidies must be called into question. The fact that the principal-agent relationship identified in subsidy policy is characterised by ‘asymmetric information’ problems brings selective aid measures under closer scrutiny from officials in Ministries of Finance.
Much of the comparative information presented in this module is derived from an EC Official Report (see Table 6.1) surveying state aid in member countries. It is a background to the identification of policy measures which were designed to complete the introduction of ‘free and undistorted’ competition by 1992. The achievement of this aim was clearly not fully realised for members continued to subsidise domestic firms competing in the EC with each country bidding against the other. The Commission of the European Communities has difficulty in deciding which subsidy measures should be abolished within the EC and which may be allowed to continue. Nevertheless, state aid in the EC as a percentage of government expenditure fell in the course of the 1990s.
This module illustrates once again to those engaged in developing an effective strategy in industry that, alongside the familiar uncertainties encountered in business forecasting and planning, there are the uncertainties attached to the government's stance on industrial policy. Firms whose entry into a particular line of activity depends on government aid need to be warned by their advisers that there are important set-up costs involved in conforming to government aid conditions, and that these conditions may change quite quickly. Furthermore, the benefits of the aid to the firm vitally depend on a correct appraisal of the aid opportunities open to competitors and particularly overseas competitors whose governments are sympathetic to using aid as a retaliatory device.
