Of subsidizing building materials as a development strategy

The Macro and micro-economic dynamics corner

Of subsidizing building materials as a development strategy

Greenwell Matchaya, PhD**

**The author is an Economist, with expertise in macro and micro economic policy analysis

 For feedback send views to matchayag@yahoo.co.uk

Now that the campaign period is over (or is it not?) it is useful to switch modes from that excitement to doing the real activities that will lead to achievement of the aspirations that we collectively have as a nation. It is important to discuss real issues collectively and in an honest manner for the benefit of the nation. In this short note, we examine the subsidization of building materials which the current government maybe about to start considering for implementation as a development policy.   The DPP which is the ruling party for the current government states in their manifesto that

Housing: The DPP government will introduce and implement a subsidy on cement and iron sheets to empower the poor in Malawi to build and own decent houses.

The above appears to be a noble ambition and indeed given the levels of standards of living enjoyed by an average person in the country, one would argue that a common person needs proper housing, proper quantities and qualities of food as well as access to medicine, education and security. When thinking about this of course some important questions that spring to mind are as follow:

1)      Does the government have to subsidize medicine, housing, food and security for its people?

2)      If the answer to the previous question is yes, then, does Malawi government have the capacity to subsidize all the above?

3)      If the answer is no to the preceding question, then, what should be considered immediately worthwhile to receive subsidies?

4)      Are subsidies in our economy’s context good anyway?

Because initial endowments of capital and other productive resources are unevenly distributed across the general population and markets are unable to distribute these fairly, absence of state intervention in some of the markets for goods and services may yield perpetual inequalities and poverty among the general population over time. For example because poverty is rampant in rural areas farmers face tight liquidity constraints and cant readily use markets to change their situation, such that a subsidy of some sort could be useful in ameliorating the effects of their financial situation. Generally speaking therefore a subsidy on health, education, and agriculture can be rationalized based on the foregoing reasoning.

A subsidy on health and education can be viewed as a direct investment in the economy’s factors of production especially human capital because a sick population cannot be productive and neither can, an ignorant society be productive. Where feasible therefore, public investments in education and health of the sort discussed herein can translate in even further increased private sector investments and can shift the production function higher implying an increase in production through productivity gains attributable to improvements in human capital.

If well implemented, a subsidy in the agricultural sector directly improves agricultural outcomes especially in the short run and if well augmented with other development policies, it could shift the production curve of the agricultural sector permanently, in the long-run. A farmer that receives a subsidy of say 2 bags of fertilizer and a packet of transgenic technology for argument’s sake in essence receives circa MK30,000.000 as a subsidy. Assuming a subsidy is paralleled by improvements in water, pesticide, market and other macroeconomic policies, the said farmer can not only increase production, but may in some cases emerge from a subsistence producer to a commercial one. At that point the benefits of the subsidy are not localized to the recipient of the subsidy, but can also spill-over to the general population through taxation and other direct and indirect means. In other words, a subsidy that was provided to the farmer as MK 30,000 at the end of the year may turn out to be either less than MK30,000 in which case the government has gained, or just slightly more than the initial MK30,000, in which case the net subsidy in a two-year period has decreased. This is so because the subsidy was on a direct productive asset. In fact if the subsidy on this farmer was well organized such that he would in turn sell his excess output upon value addition, he would perhaps just get enough to purchase his input without a subsidy over time. If you aggregate this across all the recipient households, other factors changing at the same rate, you can have a society with better agricultural and national outcomes than a case where producers’ ability is locked in poverty.

For the building subsidy program though, when the government gives building materials to a recipient, it  does so hoping that he/she will build his/her house, sleep in a better than thatched and muddy traditional house and he will be happier. Extending the hypothesis to production is possible but the inter-linkages are obviously remote and loose unlike in the fertilizer or education case. Sleeping in an iron-sheet house is a good development but does not per se directly impact on production whether in the agricultural, tourism, mining, or other sectors. Furthermore, if you subsidize iron sheets, you need to give the recipient more as an individual. Assuming iron sheets cost about MK4000 per sheet and assuming that a recipient needs at least 30 ie 120mk for a small house (as iron sheets budget alone), the obvious implication is that it will cost more. If you add the cost of cement as a second level of subsidy coming to the same person, and assuming one needs more than 10 bags (each costing circa MK6500) per house, clearly, we are talking of much more. Although we won’t need other materials every year,  this cost can be considered a sunk cost in that it cannot, by any means be redeemed owing to the nature of the good under subsidy. Again, the fact that one doesn’t need a subsidy for building materials every year cannot be taken as a valid argument against a subsidy on fertilizer or seeds because the latter don’t have to be subsidized every year if the design of the program takes into account value chain development all the way to the market.  Not all farmers have to receive a subsidy each year and indeed some farmers have to graduate from the program over time.

Another important dimension to consider in the contexts of a subsidy for building materials is that while the very nature of agriculture can qualify it for a quasi-public good (given its non-rivalrous and non-excludable spillover effects),  building materials are highly private. It is common knowledge that subsidizing private consumption crowds out private investments and may have more negative aftermaths on the economy than we may assume, so it is important to plan it rigorously. Other interesting questions that I think people would start asking at the advent of this policy are:  In what way is the previous policy of building houses for the poor and providing them with long term assets then different from the policy in subject? Secondly, in what way will sustainability be built into its implementation strategy? i.e. who will be funding this annually? Are we relying on distributing money raised through taxing rural farmers from the agricultural fertile lands of Malawi etc to finance all that? How will the poor be defined and how will targeting be planned to prevent leakages and capture by elites?

Based on the above quick thoughts on this proposed policy, one would argue that proper thinking has to be done by the proponents and those who will implement it to ensure that the attainment of the goals for which it was conceived do not conflict with the economy’s ability to attain its other equally important higher level outcomes of improved quality of living across the general population. In the absence of further details on how the policy will be implemented, one has little latitude but to conclude that it is a potentially immiserizing policy when aggregated into a national picture. Given that Malawi is facing liquidity problems, it would be useful to subsidize productive assets. For example if we were manufacturing cement and iron sheets, a subsidy on their exports, and distribution would be applauded. Malawi’s problems are in mining, retarded agricultural growth, under-developed tourism, low human capital of high quality and poor entrepreneurial skills. Some sort of a subsidy where markets have failed, in the areas of health, education (formal or informal), agricultural production, processing and marketing, mining, tourism and  ICT, which are the backbone of our economy now and in future wold appear to be justified  The governments of today and tomorrow ought to be pushing ideas in these areas to the limit if we are ever to enjoy better standards of living as a nation now and in the near future.

**The author is an Economist, with expertise in macro and micro economic policy analysis for both developed and developing countries

 For feedback send views to matchayag@yahoo.co.uk