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Are subsidies correctly targeted?

There is a strong feeling amongst us the "post-independence" generation of Africa that the development models implemented in Africa are designed to keep the continent. The evidence is strong to support this assertion. I mean capitalism in its rawest form is the exploitation of the poor by the rich.

Some very clever economists who, after the uprising of the poor in Europe to displace monarchies in the 19th century, cleverly exported exploitation to continue this very Darwinian economic system. I hope the reader is not mistaken by may tone, I am a strong believer in capitalism as the best and fairest form of economic organisation so far. I just do not believe it is sustainable in its form as competition is not encouraged globally. Subsidies in wealthier economies ensure the domination of the poorer areas of the world even if we may have a competitive advantage.

It is no secret that if the World Trade Organisation worked properly, Technology would come from Asia, Capital would come from the west and world food production would come from mush of the developing world. Now I cannot unpack the nature of global subsidies in one blog, but I will focus on the subsidies in the third world which are hindering development (note I talk often about Africa as that is what I know).

I am irked, to say the least, that most economic blueprints are targeted at subsidising large corporate investors at the expense of locals. the assumptions that are key in proposing these subsidies are flawed and will continue to keep much of the continent in poverty. Let me highlight some of the flawed assumptions and tell you the reason why they are flawed.

Assumption 1 : We need to give subsidies to attract meaningful investment. While it is true that investment will go where there is the highest return, but what use is the investment if it doesn't meaningfully improve lives? These large corporates do not really reduce unemployment as they will hire modest numbers directly. They will try and keep suppliers from their home country who they have a long relationship and will leave as soon as the subsidy runs out. Think I am lying? look at Anglo American corporation in Zambia. They got Konkola copper mine (KCM) for pennies (if the deal was good government would have released the details of it to gain political mileage) and then left as soon as they thought the price of copper was going to fall. What really have these investors given to Zambia except good GDP numbers?

Government gets very little in the way of tax/ royalties from the mines. the number of people they employ as a percentage of the adult population is negligible and all the money they make is kept offshore so the local banking system cannot create a multiplier effect from the excess cash from the mines.

Assumption 2: Capital intensive operations would not be possible in these economies without the subsidies. If we are truly capitalist creatures and this is the most efficient way to operate, if this is a reason to subsidise investors then their business model is not viable. nuff said. the argument goes on.

Lets get to the root of this, the case at hand is not specific to Zambia alone. The development and economic planners follow this route as it makes sense for the next elections FDI in Africa cannot be the silver bullet that saves our economies especially when operating profit and cash is starved from the local economy. Essentially economic indicators in Africa represent a false measure of economic performance as there is exclusion in the market.

Indicators to be used to measure economic performance should be :
1. stock of broad money in the financial system
2. access of the population to financial services
3. rate of formal employment - registration of tax paying individuals contributing to the economy
4. percentage contribution of corporate tax to the fiscus
5. access of all areas of the country to basic infrastructure (water, power etc)

Just a thought!


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