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close this bookUsed Clothes as Development Aid: The Political Economy of Rags (SIDA)
close this folderPart II-B: Analysis of the effects of subsidizing used-clothes imports
close this folderChapter 9: Alternative costs and best use of cash and clothes
View the document(introduction...)
View the documentThe cost of the freight subsidy
View the documentThe alternative cost of the freight subsidy: Cash
View the documentBest use of the cash
View the documentBest use of the clothes
View the documentSituations where freight subsidies would be warranted: Catastrophes, no supply
View the documentConclusions

Conclusions

Subsidies generally help less than they cost, and may in fact cause harm, although they may be necessary in responding to catastrophes

What do we conclude from this theoretical exercise with regard to freight subsidies? We conclude that subsidies help LDCs get imports at lower prices, which suggests that they are welfare-enhancing. Secondly, however, we note that the aggregate welfare gain is less than the cost of the freight subsidy. It would therefore be better to use the money for direct transfers, or for more efficient projects. This applies even in the case where there is no domestic clothing industry that is negatively affected. And it may actually be easier to target the impact of other types of interventions on the poor.

Moreover, if there are positive externalities associated with domestic clothes production, then the effect of a used-clothes freight subsidy on this sector will tend to negate the welfare gain of the transfer itself, unless the unemployed resources find as good a use in other industries. However, they may be transferred to sectors with less positive external effects, or - if factor markets are less than fully functioning - they may even remain unemployed, and then the negative effect is compounded.

The policy conclusion that can be drawn from this theoretical review is thus that, under normal circumstances, Sida should cease giving freight subsidies for used-clothes exports: This is a costly way to help the poor; the money can be put to better use. The only time where such subsidies might be warranted is in catastrophes, where markets collapse, and the population requires transfers in kind. Freight subsidies should thus only be used within the framework of catastrophe aid.