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Subsidies and soft loans: facts and fallacies Subsidies and soft loans: facts and fallacies
by Joseph Gatt
2021-11-16 10:00:09
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In many countries, notably France and former French colonies, I hear a lot of businesses saying things like “we need the government to help us” or “our business needs subsidies” or “our businesses needs soft loans.”

So here are the facts and fallacies.

loa00001_400Fallacy: subsidies help increase production

Fact: a lot of the subsidies go to new technologies but also training in the new technologies, hiring new staff, and other expenses.

In the case of agriculture, production depends on many factors, including weather factors and the overall economic health of the nation.

In the case of industry, production depends widely on the necessity of the product and the overall consumer demand of the product.

So subsidies won't always increase production. And even if subsidies do increase production that does not guarantee the product will sell.

Fallacy: the government should build electricity, water, gas and transportation facilities for farmers and small industries.

Fact: the government should connect cities and provide citizens access to electricity and gas and water.

BUT, if farmers want special treatment when it comes to specialized electricity, water or energy, in my opinion, they should deal with electric companies, gas companies and water companies directly. Electricity, water and gas companies should have tailor-made products for farmers and industry where they provide paid services, including electricity installation and water installation.

So if you're a farmer and a factory and that you need more water or gas, you should go to the water company, not to the mayor's office.

Fallacy: The government should help failing farmers and factories by giving them a lifeline in the form of soft loans or subsidies, because “the country needs farmers and factories.”

Fact: Farmers and factories should provide a product that is in demand among clients. The ecosystem should take supply and demand into account.

Example: In Algeria and Egypt, most fruits and vegetables are imported, despite being produced locally. It's sad, because import businessmen make a lot of money, and local farmers struggle to compete with imported agricultural products.

BUT, the agricultural products ecosystem is horrible. It's basically farmer to vegetable peddler to home consumer and nothing else. That's a poor ecosystem.

In an ideal ecosystem, farmers should be able to sell their produce to consumer-oriented vegetable markets, but also to factories and industries, to pharmaceutical companies, to food processing and agro-business factories, to packaged food companies, to supermarkets, to restaurants, to luxury restaurants and hotels etc. etc.

So if I'm a Korean farmer, I'm probably going to sign deals with a few agro-industrial giants, a few supermarkets, and a few luxury hotels, and maybe the rest will go to vegetable peddlers.

But in Egypt and Algeria, 100% of my production goes to vegetable peddlers, and vegetable peddlers tend to prefer the imported stuff, because the vegetable looks “prettier” and sells better, and lasts longer than the local stuff.

Fallacy: the government should save industries and farms from bankruptcy

Fact: If industry and farms have trouble selling their stuff, you need to take stock. How bad is their product? Or how much demand is there for the product?

Sometimes it's just the quality that's horrible and no one would dare even touch the product. It's like the product has COVID. People don't wanna touch it.

Other times, the product is beautiful, as in jewelry or handicrafts or clothing, but it's too “traditional”, and hey, if you walk in the streets of Cairo or Tunis, people don't wear Berber jewelry and nomadic outfits. People wear the normal stuff, silver earrings and shirts and jeans.

So if their stuff doesn't sell, subsidies won't help the product sell better.

Fallacy: The government should give subsidies and loans so people can start businesses.

Fact: How do you become good at making money? By having lots of experience making money!

Yet, in France, and in former French colonies, the government or banks loan money to people to start businesses, when they've never earned a penny doing anything their entire life! How could that go wrong?

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