"Repurposing distortive farm subsidies toward climate-smart public goods raises both productivity and food security"

"visible in the agricultural sector where output price controls have been complemented by input (especially fertilizer) subsidies. Yet, such policies can end up reducing productivity, and worsening income inequality (Goyal and Nash 2017). They may lead to inefficient use of subsidized inputs (Jayne, Mason, Burke and Ariga 2016). They can also adversely affect incentives to adopt productivity-raising new technologies. Empirical evidence suggests that market-oriented structural reforms, including the reduction of price controls and their related subsidies, are strongly associated with improved firm-level productivity in EMDEs (Kouame and Tapsoba 2018). Conversely, in the case of petroleum products in the Middle East and North Africa, high subsidies that underpin price controls appear to be associated with lower per capita output growth (Mundaca 2017). • Increased informality. Price controls that distort consumption towards price-controlled goods, can cause chronic shortages of these goods, the formation of parallel markets with higher prices, and substitution towards lower- quality alternatives (Weitzman 1991; Patel and Villar 2016; Fengler 2012; Winkler 2015). Similarly, producers of price-controlled goods may turn to black markets which have elevated transaction costs and lack basic regulation (Murphy, Pierru and Smeers 2019). In addition, the situation encourages SPECIAL FO CUS 1 G LO BAL ECO NO MIC PROSPECTS | J ANUARY 2020 56 production to shift to firms in the informal sector, which avoid regulation (De Soto 2000; World Bank 2019a). • Distorted financial markets. Price controls in the financial sector, such as ceilings on interest rates can distort financial markets (Maimbo and Gallegos 2014). These measures reduce the supply of credit to safer borrowers and small and medium-sized enterprises, increase the level of non-performing loans, reduce competition and innovation in lending markets, and increase informal lending. Moreover, they can exacerbate inequality by limiting the poor’s access to lending. • Increased vulnerability to climate change. Price controls and subsidies on energy products may heighten vulnerability to climate change and inhibit the transition to a climate-resilient, low-carbon economy. Social policy and political economy challenges. The use of price controls combined with large subsidies is an inefficient tool for redistributing domestic income (Devarajan 2013; Coyne and Coyne 2015). These policies tend to be inequitable, as wealthier segments of the population, usually urban consumers, benefit disproportionately given their greater consump- tion of the price-controlled good compared to rural consumers and producers. For example, subsidies and below-market prices for gasoline and liquid natural gas have proven highly regressive, with only a small share of the subsidy benefiting the poorest segments of the population (Baffes et al. 2015; IEG 2008; Coady et al. 2006). Fiscal challenges. Price controls impose an explicit or implicit set of taxes and subsidies that varies over time, and their enforcement may require additional regulations to constrain consumption and production. Typically, a system of price controls on goods ends up as a growing burden on either the fiscal budget and public debt or the profitability of producers (Alleyne 2013; World Bank 2014a). Potential or implicit fiscal costs from price controls can be particularly high in LIC"