Hooked on Subsidies: The Case for Reform

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The report Hooked on Subsidies: The Case for Reform examines how subsidies in emerging market and developing economies can either strengthen growth and resilience or entrench inefficiency and inequality. It provides evidence-based analysis and practical guidance to improve transparency, design, and implementation so that subsidies better support fiscal sustainability, productivity, poverty reduction, and job creation.

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The Scale and Stakes of Subsidies in EMDEs

Well-designed subsidies can correct market failures, attract investment, foster innovation, boost growth, reduce poverty, and spur job creation. Yet they can also be costly, inefficient, and unfair. In many emerging markets and developing economies (EMDEs), reported subsidies often fall short of their goals, worsen inequality, and unlevel the playing field.

Today, these countries spend nearly 6.9% of GDP on subsidies—more than they spend on health and education combined. And that doesn’t consider unreported subsidies, which could be even more costly.

Even modest subsidy reform could unlock up to 1.9% of their GDP—fiscal savings that could be reinvested in health, education, and infrastructure, and to stimulate job creation.

This report examines how subsidies are used across EMDEs, assessing their fiscal costs, economic impact, and distributional effects. It provides a practical framework to account for, evaluate, and redesign subsidies so they deliver stronger, fairer outcomes.

The analysis is presented in two parts:

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    Part I | Subsidies Essentials: Accounting, Assessing, and Unlocking Reform

    Part I presents the essentials of subsidy policies. The first chapter examines subsidy accounting, implications for fiscal sustainability, and impacts on macroeconomic stability. The second chapter provides a framework for assessing the costs and benefits of subsidies and for designing, implementing, and reforming them more effectively. The third chapter offers a roadmap to build public and political support for successful subsidy reform.

    DOWNLOAD PART I
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    Part II | Subsidy Reform: Pathways for Enhanced Efficiency and Equity

    Part II looks at the types of subsidies prevalent in EMDEs, applying the framework from Part I to provide actionable insights and reform recommendations. The first chapter focuses on subsidies designed to address market failures, including corporate income tax investment subsidies, research and development subsidies, and subsidies that promote low-carbon technologies. The second chapter explores subsidies intended to reduce poverty and inequality, including value-added tax exemptions and subsidies for water and sanitation services, agriculture, and energy.

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What Does It Take to Reform Subsidies?

The report sets out three policy priorities to make subsidies work better:

  1. First, governments should improve how subsidies are tracked, reported, and evaluated. This includes compiling a comprehensive inventory of subsidies to households and firms, assessing their direct and indirect costs, and measuring their performance.
  2. Second, they should strengthen the design and delivery of subsidies through better targeting, robust monitoring and evaluation, and adaptable program features.
  3. Finally, governments should build political support for subsidy reform with clear and early communications, inclusive stakeholder engagement, and credible, well-calibrated compensation measures.