Work with governments to address subsidy and tax policy

September 24, 2017
(Photo by Quang Nguyen Van/iDE)
Toward Global Scale

Once government officials become aware of the opportunities that market building provides, they start to be advocates within the system to encourage changes to subsidy policies and taxation.

There is no such thing as a truly free market. Even in places where no government intervention (e.g., regulations, tariffs) exists, market actors may be penalized because of differences in bargaining power or information asymmetry. This can be especially true for poor consumers, whose purchasing power is limited by their extremely small budgets and lack the time and resources necessary to research or obtain a lower-price option.

Advocates for a market-based approach to alleviating poverty, such as iDE, believe that addressing these barriers to a free market is exactly the path to prosperity for the millions living on less than two dollars a day. And one of the best ways to do so is by partnering with governments to help level the playing field and enable the poor to participate in the economy.

The role of subsidies in a market economy

Unfortunately, for years government leaders thought their role in addressing the needs of the poor was to subsidize or give away livelihood improvements. The problem begins when subsidies are expanded to services or items that form the basis for small businesses. If the government provides products and services for free or subsidized, no private business can compete. Not all subsidies are bad, however. After building business models to sell drip irrigation in multiple regions on multiple continents, iDE concludes that some form of subsidy is required to make the technology affordable for smallholder farmers.

READ MORE: Some subsidy is necessary to kick-start a market

Unintended consequences in tax policy

Another major market action by governments is in the application of tax policy, often used to protect local manufacturing or production by leveling tariffs on foreign products. On the surface, it would seem that protectionist tax policies would be good for local farmers and manufacturers (i.e., ensuring they were not undercut in the market by cheaper foreign goods) and that free trade agreements favored large, well-established global businesses already working at scale. However, government legislation is rarely subtle and what starts with good intentions may actually wreak havoc in other parts of the market.

For example, as iDE began promoting low-cost drip irrigation kits in the Kyrgyzstan market, we discovered that the kits, imported from India, faced high import duties even though there were no drip-kits manufactured or available locally. The kits, sized for small-scale farms, had been designated as a household plastic good, thus falling in the same category as plastic food storage (i.e., Tupperware), plastic dining and cooking utensils, and small household goods (e.g., waste bins, buckets).

Case Study: Government of Honduras

In Honduras, continued drought has caused the government to take a more active role in the promotion of efficient water use and water access for irrigation. Typically, these government schemes source products through larger commercial actors who distribute them to smallholder farmers without any training and after sales services, resulting in low adoption and use rates among farmers. However, when the Ministry of Agriculture teamed up with iDE, farmers received training as an embedded service along with the product, which was offered as part of a substantial supply chain with other products they needed and wanted. iDE also was able to identify local, young women and men who received training not only on conservation agriculture and drip irrigation, but also on rainwater harvesting and the use of clean irrigation solutions, such as photovoltaic solar pumps.

Case Study: Government of Vietnam

In Vietnam, iDE partnered with local unions to demonstrate the power of irrigation technology to transform smallholder agriculture. When we first began working with the Farmers Union, they were considered to be a weak organization that received little to no recognition from the provincial or federal government. The Farmers Union was able to help us promote MIT directly to farmers through their network, and once the uptake produced results, officials took notice. The Farmers Union received funding to expand their programs, and hosted multiple visits by highly elected officials eager to learn about what had happened. Once stakeholders in power are aware of the opportunities that MIT provides, they begin to advocate within the system to change subsidy policies and taxation. The challenge remains getting their attention, allowing the necessary time to engage in proper demonstrations and constructive discussions. Vietnam proved that this is possible by beginning locally.

Case Study: Nicaragua

While we welcome the government as partners to achieve iDE’s global mission, we recognize that sometimes governments are wary of foreign entities. Because of the wide variety of NGOs, with competing agendas, approaches, and methodologies, public officials can become confused and take an active dislike to working with these organizations. This was the case in Nicaragua, where the government adds layers of regulation and requirements on non-profits who seek work in that country. That’s one of the reasons we formed a for-profit social enterprise there. iDEal Tecnologías has demonstrated to the Nicaraguan government the power of private enterprise to spur innovation and change, and the government is more inclined to work with us because iDEal is a locally-based company that hires Nicaraguan nationals and contributes directly to the Nicaraguan economy.

Partnering for prosperity and progress

When governments work with development funders and implementers to build a resilient and sustainable market that provides increased incomes and improved livelihoods over time, they become the strongest partners for accelerating change. Local provincial governments, in particular, often play an effective role in scaling up project interventions through their established networks and government-led/funded programs.

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