Some subsidies aimed at helping the poor end up benefiting the rich, particularly in the rural sector and in basic public services, experts explained at an IDB seminar.

Many subsidies aimed at helping the underprivileged benefit the rich instead of the poor, according to professor Ramon Lopez from the University of Maryland’s Agricultural and Resource Economics Department. And he has 15 years of empirical data in 10 countries in Latin America and the Caribbean to prove it.

According to his study, presented at IDB headquarters, some 45 percent of rural public expenditure in the region between 1985 and 2000 was spent on non-social subsidies, imposing a dramatic cost in efficiency, social equity and environmental decay in rural areas.

At a recent IDB seminar, Lopez explained that non-social subsidies are more harmful than initially acknowledged. “Spending a significant share of government resources in these subsidies negatively impacts agricultural income, and induces an excessive reliance on land expansion for agricultural growth, thus exacerbating the negative effects of agriculture on natural forests and reducing the income of the rural poor,” Lopez noted.

It matters how public money is spent, Lopez added. Most subsidies have less positive impact than investing in public goods and some even have a negative effect. His data provide evidence in favor of public expenditure for roads, agricultural research and education. Those public goods support and promote private investment in the long run, while boosting social equity and poverty reduction.

“To improve governments’ performances,” he said, “we should try to transfer subsidies into public goods.” Lopez’s data show that countries spending relatively more on public goods grow faster, boost rural employment, expand at a slower rate along the agricultural frontier, and have less rural poverty.

IDB water and sanitation specialist Guillermo Yepes made comments about subsidies in public services. For Ecuador and Peru, for example, he showed evidence that cross-subsidies (providing water and sanitation at below the cost prices in lower-income households, with others paying above production costs) end up helping the rich instead of the poor. The poorest households are not connected to the water and sanitation systems, so they don’t benefit from the intended subsidies. And the money spent on subsidizing well-to-do households could have been spent in providing the service for the poorest.

The solution to this apparent paradox, according to Yepes, requires a reform in the tariff system for public services, in a way that takes into account both social goals and financial viability.