Should governments stop subsidies to private goods? Evidence from rural Latin America

This paper empirically documents the effects of subsidizing private goods to the detriment of the government's supply of public goods. We use a new data set from the rural sector in fifteen Latin American countries over the period 1985–2001 collected using a methodology that allows us to separate government subsidies to private goods from expenditures in the provision of public goods. The econometric evidence shows that the government's decision to subsidize either private or public goods has dramatic consequences for economic development. Reducing the share of subsidies to private goods (or, equivalently, increasing the share of public goods) in the government's budget has, ceteris paribus, a large and significant positive impact on rural per capita income, reduces certain undesirable environmental effects associated with output expansion, and contributes to poverty reduction.