Evaluating the Case for Export Subsidies

Abstract

With import-substitution policies discredited, many have argued for interventions on behalf of export interests. But aren't arguments for export subsidies as flawed as arguments for import substitution? Now that import-substitution policies have failed and been discredited, there has been a shift in favor of interventions on behalf of export interests. Panagariya argues that close scrutiny reveals these arguments to be as flawed as the old arguments for import substitution. Among other things, Panagariya concludes that:

Under perfect competition, a country trying to retaliate against a trading partner's export subsidies by instituting its own export subsidies will only hurt itself.

The argument that export subsidies may be useful for neutralizing import tariffs is spurious. In most practical situations, this is not possible. Removal of tariffs is a far superior policy.

In principle a case can be made for protecting infant export industries in the presence of externalities. But the empirical relevance of externalities remains as illusory for export industries as it was for import-substituting industries.

Adverse selection and moral hazard can lead to the thinning of the market for credit insurance but that is not a case for government intervention.

India's experience shows export subsidies to have little impact on exports. Brazil and Mexico`s experience shows export subsidies to be a costly instrument of export diversification.

Those who argue that pro-export interventions were important in East Asia have not provided convincing evidence of a causal relationship between the interventions and growth.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to explore conceptual and practical issues in the export policies of developing countries.