The Importance of the Subsidies - Research Paper Example

In Less Developed Countries subsidies are provided by the government for the trading of different goods and services and can be categorized as energy or fuel subsidies, agricultural subsidies, and educational subsidies. However, the World Bank and the IMF has stated that subsidies act as barriers to investment in developing country by foreign and international companies. This in turn proves unbeneficial for the country’s long-term development. It is in the country’s own interest in its development that the government should abolish subsidies and promote perfect competition. This paper aims at examining the relationship between subsidies and economic growth in the context of developing countries.

• Statement and rationale

In this paper, we shall focus on the subsidies provided by the governments of the less developed countries (LDCs) and developing countries.

Subsidies are financial assistance provided by the government of a country to some of its domestic firms or a specific industry or sector (Schaffer, Agusti & Earle 374). The governments of different countries allocate subsidies to their industries with a variety of objectives both in direct and indirect forms. However, the central purpose of levying a subsidy is to keep the price below the level normally determined by the market forces in the sector in which the subsidy is provided and accelerate the course of development in the entire nation (Moltke, McKee & Morgan 23). In particular, subsidies are provided to those industries or sectors which are lagging behind the other sectors in the economy in terms of performance or are not being able to perform up the expected level.

Research questions

Following are the research questions that will be analyzed in the research study:

Do subsidies result in increasing the overall economic development and growth in developing countries?

What is the importance of subsidies for developing countries?

How do subsidies impact government spending and the Federal budget?

How do subsidies influence the operations of international companies in these developing countries?

• Significance

The results will depict the relationship between subsidies provided by governments and the economic development of developing countries.

2. Literature review

The subject of the impact of subsidies on developing countries is quite researched. Before going into the details of my research work I shall review some of the existing literature on this topic in this section. Peacock elaborates in his paper the role of subsidies is important in the overall welfare of the economy (Peacock 323-335). Although the elimination of subsidies on necessary goods, such as agricultural products, medicines, and other items related to the health sector and petroleum products, is a key policy prescription for the developing countries by the World Bank, no persuasive theory has been developed supporting this policy. Amegashie states in this context that the governments of the developing countries should exercise caution in following a process of removing subsidies since it might give rise to agitation on part of the citizens (Amegashie 7-15). Thus, the research will try to explore the effects and side effects of such a system.

3. Research Methodology

The study employs secondary sources. The research will employ a Qualitative method and analysis with a case study-based approach. A small case study of Malawi is taken here. The findings are reached with the help of a literature review analysis.

4. Conclusion

From the discussion, one may conclude that subsidies are required not only to bring growth in terms of higher output but also to support the poorer section of the population to help them maintain a basic standard of living.