The effects of marginal export subsidies / E. Kleiman and J.J. Pincus.

Abstract

The Crawford Committee on structural adjustment recoftmended the introduction of a scheme to expand exports - under which a subsidy is paid on the excess of export revenues over the average of some number of previous years (a moving average base marginal export subsidy or MAMES for short). Schemes of this type exist in other countries - including New Zealand, Pakistan and Singapore. It is shown that such a scheme may introduce a novel element of instability in prices and quantities, producing a regular cycle in exports and in domestic sales and prices. A MAMES-induced cycle is unlikely to be avoided in most Australian manufacturing export industries. The cycle will persist - except under conditions of rapid inflation or rapid productivity growth. The cyclical pattern can be avoided, at some cost to the Treasury, by setting the subsidy base at some fraction of actual past performance. Show more