Economic Research and Perspectives

Economic Research and Perspectives

Reducing Subsidies on Basic Goods and Trade Model

Authors
Ali raispour 1
Mohsen Zayanderoodi 2
Mohammad Reza Safavi Gerdini 3
1 Assistant Professor, Faculty of Literature and Humanities, Islamic Azad University, Kerman Branch, Iran
2 Associate Professor, Faculty of Literature and Humanities, Islamic Azad University, Kerman Branch, Iran
3 Ph. D. Student of International Economics, Faculty of Literature and Humanities Islamic Azad University, Kerman Branch, Iran
10.48311/ecor.2025.13661
Abstract
Subsidies for essential goods can have both direct and indirect effects on trade. On one hand, subsidies can increase demand for essential goods, which can benefit domestic producers and exporters of these goods. On the other hand, subsidies can lower the production costs of goods and enhance the competitiveness of domestic products in global markets. However, subsidies for essential goods may also lead to an increase in imports of these goods and a decrease in domestic production, which can have negative effects on the country's trade balance. Since the targeted subsidy policy has significant effects on the comparative advantage of produced goods and consequently on sustainable growth and development, it is very important and necessary to examine the effects of this policy on trade patterns. This study investigates the effects of removing subsidies on essential goods on Iran's trade pattern using the GTAP model. The results indicate that reducing subsidies paid to domestic firms leads to an increase in the exports of their produced goods. Considering the economic results of this research, it is recommended that subsidies paid to the consumption inputs of domestic firms be gradually removed to positively impact Iran's trade balance while avoiding a sudden and significant decline in economic welfare.

Aim and Introduction

In most world economies, governments have been proposed as a complementary institution and are bound to interfere in the economy. The degree of government involvement in any economy depends on the political and economic system in that country. One of the government's intervention tools is subsidy payments considered as financial aids aiming at transferring government resources to buyers and sellers. Therefore, one of the most well-known ways of transferring income to vulnerable groups is subsidy payment. This tool has a long history in different economies. In general, subsidies can be divided into four categories: a) based on the government's goals, which include economic subsidies, development subsidies, social subsidies, political subsidies, and cultural subsidies; b) Based on the stages of the goods, which include consumption subsidies, production subsidies, distribution subsidies, service subsidies, export subsidies, and import reduction subsidies and currency savings; c) Based on the classification of the subsidy itself, which includes direct subsidy and indirect subsidy; and d) based on the reflection of its costs, which includes hidden subsidies and open subsidies. Also, regarding the methods of applying subsidies, it should be noted that subsidies in the consumption sector are mainly paid in cash, goods, general prices and coupons. On the other hand, the payment of subsidy will disrupt the price system and lead to deviation in production and investment.

Since governments dependent heavily on oil revenues usually seek to pay subsidies in general, they normally encounter many problems including waste of resources, increase in consumption, smuggling, lack of efficient allocation of resources and reduction of efficiency in the economy. This happens because the price of subsidized goods is not realistic. For this purpose, Iran and other developing economies are seeking to apply the policy of targeting subsidies. One of the results of policies targeting subsidies is the realization of prices, which will improve the performance of producers and choose an optimal production process.

Since targeting subsidies has significant effects on the relative advantage of manufactured goods and subsequent sustainable growth and development, therefore, it is crucially important and essential to investigate the effects of this policy on the business model.

A review of the experimental studies conducted inside the country indicates that the effect of reducing (eliminating) the subsidy of basic goods (Sections 25-22 in the software package of the Global Trade Analysis Project) on the trade pattern has not been investigated so far.

In this regard, the aim of the current research is to investigate the effects of reducing (eliminating) subsidies for basic goods (sections 22-25 in the software package of the Global Trade Analysis Project) on Iran's trade using the GTAP model.

Methodology

The Global Trade Analysis Project model is one of the types of Computable General Equilibrium (CGE) models, the software related to it (GEMPACK, RunGTAP) and the database are provided to the researchers by its designers.

In the current research, the data has been gathered in the form of four sectors (dairy, rice, sugar and other foods) and two regions (Iran and other parts of the world) and the analysis has been done in two scenarios which are designed as follows:

1) 50% reduction in the subsidy paid to the firm's consumption-domestic goods.

2) 100% reduction in the subsidy paid to the firm's consumption-domestic goods.

Findings

The results showed that in both scenarios, the economic welfare of Iran and the rest of the world decreased and increased, respectively, and the intensity of these changes is greater in the second scenario (removal of basic commodity subsidies). The share of resource allocation efficiency and term of trade and savings-investment relationship in reducing economic welfare is higher in the second scenario. The highest decrease in economic welfare in the first and second scenario is related to sector 25 and the lowest decrease in economic well-being in both scenarios is related to sector 22.

Reducing the subsidy paid on the firm's consumption-domestic goods in these sectors will increase the export of these goods. The most positive changes in Iran's trade balance in the first scenario (50% reduction in subsidies) are related to sector 25 and equal to 48.4 million dollars, and the most negative trade balance of Iran in the second scenario (complete elimination of subsidies) is related to sector 25 and equal to 7.96 has been negative. In total, the reduction of subsidies for basic goods simultaneously in all 4 sectors has led to positive changes in Iran's trade balance.

Discussion and Conclusion

According to the economic results of this research, it is recommended to gradually remove the subsidy paid to the firm's consumption domestic goods so that, while having a positive effect on the changes in Iran's trade balance, the economic welfare does not face a large and one-time decline
Keywords
Basic Goods Subsidy
Trade Model
Global Trade Analysis Project

Subjects

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