Book review by Srikanth Venugopal (Engineering)- "Perverse Subsidies" by the International Institute for Sustainable Development
The following is a book review of a 1998 publication by the International Institute for Sustainable Development (IISD). The book is entitled "Perverse Subsidies - Tax's Undercutting Our Economies and Environments Alike." Norman Myers, a honorary visiting fellow of Green College, Oxford University, U.K., is the author and Jennifer Kent, the research associate, is named as a co-author.
Background
Subsidies in general play an important role in our economies and environments alike. They have been in use for hundreds of years as a tool to stimulate economic growth and well being. A leading analyst points out how both the economy and environment are mutually inclusive, "All economic decisions have an environmental consequence, just as all environmental decisions have economic consequences. (MacNeill, 1994)" This statement is intuitive knowledge for the modern reader, and can be equated to Newton's third law of physics which states, every action has an equal and opposite reaction. Hence, understanding how subsidies affect our environment plays a vital role in moving towards sustainable development and global sustainability.
A Summary of the Book
Myers and Kent have undertaken a research initiative that aims to quantify the global contribution to perverse subsidies. A subsidy is defined by the authors as "a form of government support to an economic sector (or institution, business, individual), generally with the aim of promoting an activity that the government considers beneficial to the economy overall and to society at large." Perverse subsidies, therefore, are funds going into an activity that promotes undesirable results to both the economy and towards overall social well being. The book and its conclusions are a result of a review of over 700 references on the issue of subsidies, environmental externalities and economic policy. Over all the book is very well written and brings forward very good data and arguments to supports its findings and recommendations.
The research concludes that governments around the world annually spend approximately two trillion dollars annually on subsidies towards agriculture, fossil fuels/nuclear energy, road transportation, water and fisheries. Of the subsidies that are employed, $1.4 trillion are perverse subsidies and over $700 million are documented and quantified environmental externalities. The major findings from the book are as follows:
This book is broken into three parts. Part one forms a conceptual background for the reader. It defines subsidies and the various types that may be employed. It also defines what perverse subsidies are and puts forward arguments to support the case. Environmental externalities are discussed at length with respect to their role in quantifying perverse subsidies. The research methodology is also presented in this section. Part two of the book presents the major findings of the research effort. The findings are broken down into the principal sectors of the world economy. These sectors are; agricultural, fossil fuel/nuclear energy, road transportation, water, and fisheries. Part three of the book discusses the role of policy to alleviate the harmful effects of perverse subsidies. Detailed reference and appendices are included at the end.
Noted Strengths and Weaknesses of the Book
Overall the book has more strengths than weaknesses. It is a very well written and documented study. The following is a summary of major strengths and weaknesses.
Strength - A Comprehensive Executive Summary
The executive summary of the book is very well written. It covers the issue being presented (i.e. perverse subsidies), the uncertainty in the numbers generated, the chief findings with supporting arguments, and options for tackling perverse subsidies. It is written in a fashion where a non-economist can easily understand the topics discussed and results presented. One can read the executive summary and come away with a clear understanding.
Strength - Structured and Transparent Approach to Research and Reporting
Early in the book, the author clearly outlines the scope of the research and how it was conducted. This type of transparency is quite important given the nature of the study - as the title indicates, this book states findings from a study that reveals underlying inefficiencies in economic policies. Hence, this type of study will be scrutinized by many levels of government and special interest lobby groups. A varied source of information has been researched and used in this study. That is, it has used peer-reviewed information presented by educational institutions, environmental agencies, to studies released by organizations such as the World Bank, World Trade Organization, OECD and the United Nations. The author states that efforts have been made to present an objective and non-biased study to the audience. The findings from the study, part two of the book, is also presented in a clear and structured manner. A similar format discusses the various sectors of world economies, which enables the reader to observe, contrast and compare information in an effective manner. Over all, the findings of the study are presented any individual can read the book and find the information easily comprehensible.
Strength - Not All Subsidies Are Bad
In part one of the book considerable effort is put forth in clarifying the terms "subsidy" and "perverse" subsidy. The various types of subsidies that are used and their various uses are also outlined. Most importantly, it is explained that subsidies usually have a negative connotation associated with it, but this is not necessarily true. The author does emphasize that not all subsidise are "bad"; they can be useful and productive for an economy and environment, if administered properly. The example that is noted in the book is a temporary subsidy for green products and green energy options until they are able to obtain a strong presence in the market place.
Strength - References and Information Boxes
One the strengths of this book is how well it is referenced. The references sited are very useful for research in the area of trade, environmental externalities, environmental accounting and economic policy. The information boxes that are presented are extremely useful. They cite very good examples and add to the clarity to which concepts are explained.
Strength - Conceptual Background for Non-economists
Part one of the book, The Conceptual Background, is a very good reference material for the reader to become familiar with the issues surrounding subsidies and how perverse ones hurt the economy and the environment. This portion would be most helpful for the non-economist reader.
Strength - Policy, Good Examples
A very important part of the book, if not the most important, is part three, Policy. This part of the book identifies steps policy makers can take to level the playing field and remove perverse subsidies. A number of different tools are highlighted in this section. Along with these tools, a number of 'real life' examples are stated that demonstrate how perverse subsidies can be removed without hurting the economy and at the same time benefiting the environment. An example of this can be found in New Zealand. The New Zealand government removed subsidies for their farmers. This action actually created a healthier farm economy for New Zealand while minimizing the environmental impacts.
Weakness - Fossil Fuel/Nuclear Energy Externalities Not Quantified
One of the glaring weaknesses in the book is the gap in quantifying environmental externalities associated with fossil fuel/nuclear energy sector. Because of this shortfall, the estimates made on perverse subsidies become a conservative figure. Perhaps more effort and resources should have been put toward this initiative. This is one piece of information that would have really gelled the entire study. However, because of this missing piece, the study appears in complete. This is quite ironic, because, the section on fossil fuel/nuclear energy is the most comprehensive chapter in the book.
Weakness - American Bashing
Because the United States is a world economic and political power, the author has devoted considerable time addressing the impact of the United States in each section. However, due to the nature of the study, many of the findings are negative and may be viewed as "American Bashing" by some readers. One way to avoid this would be to have combined all of North America into one group. Readers from the United States would better receive this approach.
Weakness - Environmental Externalities
Although this book is well referenced, one of its shortfalls is how environmental externalities are handled. Not enough detail is presented on how environmental externalities are quantified. There are a few examples sited in the appendices, however this is not sufficient. It would improve the book to add some more detail on how environmental externalities were quantified.
Conclusion
This book is a very comprehensive presentation of the research project undertaken by Norman Myers and Jennifer Kent. It is well referenced and cited with very good examples that are aimed for a general audience. It has found that nearly $2 trillion are spent annually by the world governments on subsidies and at nearly $1.5 trillion are perverse subsidies. That is, subsidies hurt the economy and the environment. However, one of the shortcomings of the study is that it fails to quantify the environmental externalities associated with the fossil fuel/nuclear energy industry.