Credibility and the Cost of Export Subsidies

IMF Working Papers, December 1, 1991

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Recurring balance of payments crises in countries that pursued import substitution led some to establish a variety of export incentives, in particular subsidies, to revive and re-orient their economies.
Exporters are likely to be uncertain of the government’s commitment to export promotion because of the years of neglect.
The paper analyzes the issue of the credibility of export subsidies and suggests that a government is able to convince exporters of its commitment only at a cost, which reduces the attractiveness of promoting exports by means of subsidies.

The central analytical focus is on the credibility of export subsidies: uncertainty about government commitment reduces the effectiveness of subsidies.
A government can build credibility with exporters, but only by incurring costs; these credibility costs diminish the appeal of export subsidies as a policy tool.
The study frames export promotion through subsidies against the background of import substitution strategies and recurring balance of payments crises.

Policymakers should account for the credibility costs associated with export subsidies when designing export promotion programs.
The reduced attractiveness of subsidies, once credibility costs are considered, suggests the need to evaluate alternative measures for re-orienting economies away from import substitution toward sustainable export growth.
Any export-promotion strategy should consider historical neglect of exporters and incorporate mechanisms to signal credible, sustained commitment.