eliminating incentives for corruption and simultaneously improve efficiency. The need for price flexibility applies also to those prices which have a direct bearing on the macroeconomic environment, such as the exchange rate and interest rates. The past several decades are littered with examples of countries unwilling to adjust official exchange rates, notwithstanding evidence of overvaluation and the development of often large-scale parallel (i.e., black) exchange rate markets. Such overvaluation impeded the development of the tradable sectors in many countries and contributed to the weakening of these countries’ balance of payments, impairing their ability to import much-needed machinery and adopt new technologies from abroad.

# **_Mindless subsidies_**

Subsidies are another example of the way in which government policy can distort incentives and create opportunities for corruption. While there may be instances in which governments will want to support certain vulnerable groups within the population through the provision of welltargeted income support, in practice governments provide much of their subsidies irrespective of the level of income of the recipient. For example, according to an IMF study (2013), consumer subsidies for petroleum products, electricity, natural gas and coal, factoring in the cost of negative externalities from energy consumption, amount to some $1.9 trillion per year, equivalent to about 2.5 percent of global GDP or 8 percent of total government revenues. The study notes that the benefits of gasoline subsidies are the most regressively distributed, with over 60 percent of total benefits accruing to the richest 20 percent of households. For diesel and liquefied petroleum gas (LPG), respectively, 42 percent and 54 percent of benefits go to these income groups. The authors argue further that “removing these subsidies could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand” (p. 1).

More importantly, for the purposes of our discussion here, subsidies often lead to smuggling, to shortages, to the emergence of black markets and corruption. The mechanisms are generally trivially simple: to take an example: substantial subsidies on LPG in Bolivia lead to a thriving smuggling business on the border with Peru, as Bolivians respond to the incentives provided by a three-to-one price difference between the two markets. Putting aside the issue of the opportunity cost associated with wasteful consumer subsidies (how many schools could be built with the cost of one year’s LPG subsidy?), and the environmental implications associated with high (and often wasteful) consumption because of artificially low prices, subsidies can often put the government at the center of corruption-generating schemes, hardly a desirable outcome. Initially intended to cushion the impact of high international prices, subsidies mainly help to boost consumption, to weaken the budget, distort incentives and in many countries end up perverting public policy. Because subsidies accustom the public to low prices, governments are often unwilling to eliminate them because of (at times violent) public protest and riots. They, therefore, have a tendency to become entrenched and greatly diminish the ability of the government to spend in more productive areas.

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