Policy Traps: Consumer Subsidies in Post-Crisis Argentina

Abstract

Developing countries devote significant resources to lowering consumer prices for basic goods and services such as food and electricity. Theories of the welfare state only partially elucidate why consumer subsidy regimes grow so large and become entrenched. While the welfare state literature stresses how concentrated, organized beneficiary groups push for the expansion and protection of well-known programs such as pensions, the developing world’s consumers are atomized, and subsidies themselves are of low visibility. The size and durability of consumer subsidy regimes stem primarily from political uncertainty and price shocks that provide politicians with strong incentives to avoid blame for repeal. Over time, environmental pressures and fears of political backlash against repeal reinforce one another, increasing the fiscal burden subsidies impose and dramatically raising the political cost of program exit. In this sense, consumer subsidy programs come to form “policy traps”—initially modest policies that quickly grow and become entrenched, thereby greatly reducing politicians’ maneuvering room. We utilize this framework to analyze the meteoric growth and entrenchment of utility subsidies in post-crisis Argentina. In Argentina, subsidies grew despite the private provision of subsidized services—making it difficult for the government to claim credit—even in sectors with weakly organized interests.