Economic policy, defined as the action taken by government to influence economic activity, presupposes the inability of the market system to fulfil certain economic goals as perceived by decision-makers. As an instrument of economic policy, subsidy can therefore be regarded as a means by which certain economic objectives can be achieved in a cost-effective manner; although in many cases subsidy and other instruments are used in various combinations to achieve specified objectives.
Within a developmental framework subsidy is used (a) to transfer income from one group or sector to another, (b) to promote the adoption of some technology relative to another, (c) to increase the output of certain commodities to which the state accords higher priority, (d) to lower consumer prices by lowering production costs, (e) to raise the income of producers relative to what might have obtained under market conditions, (f) to promote the exploitation of resources where private initiative or private resources are limited, (g) to provide a demonstration effect and so stimulate private investment. And as an instrument of fiscal policy, it is often used for stabilization purposes and the promotion of employment.
Although many other roles can be ascribed to subsidies, the essential economic role can be identified as that of increasing and/or stabilizing income. In many countries of West Africa subsidies to the fishery sector take the form of reduction in input prices, reduction in the price of consumer goods (mainly food), the provision of infrastructure and services such as extension and training.
Adoption of these approaches to the subsidy programme are closely related to the nature of fisheries in these countries. First, a situation may exist where output is growing slowly, for example where the resources of the country are being exploited by fishermen using traditional practices. To increase production to meet the growing demand, a subsidy programme is then undertaken. In another situation, output may be falling as a result of ageing of vessels or rising input prices. An application of subsidy to prevent a decline in national income may then become an imperative policy option. In yet other cases the desire to promote technical progress and thus increase efficiency of resource use may require a subsidy level without which resource underutilization may occur.
As shown in Figure 1, technically an application of a subsidy rate on a fishing input K means a reduction in the market price of that input. Assuming that the input whose price is so subsidized has no alternative use, the subsidy level will have a substitution effect - that is, the substitution of the cheaper input for the more expensive one measured by AB and an income-effect measured by BC which reflects the gains made both from the relative price movement and the increase in output. The extent to which these changes occur will depend first on the price elasticity of demand for the input and the output elasticity with respect to the subsidized input. Although no input price elasticity estimates exist for many of the inputs used in West African fishing, it is obvious that for many of the countries the output elasticity could be positive because of the underdeveloped nature of their fisheries (Mabawonku, 1984). And since inputs which have substitutes are to be price-elastic, theoretically the use of input subsidy as an instrument for increasing fish production is likely to produce positive impact.
Figure 1 Effect of subsidy on the price of K on output (Q)
Input subsidy in this case is defined as a measure taken to reduce input prices (sometimes below market prices where markets for the input already exist) in order to increase the demand for that input or to accelerate the adoption of the use of that input. In West Africa other forms of subsidy include subsidy on interests payable on loans, provision of infrastructure, etc. But however defined, the input subsidy concept covers all of these inasmuch as they reduce the cost which the private entrepreneur has to bear.
To what extent can the subsidy be applied on a continued basis to a resource whose optimum level of exploitation is determined by its regenerative capacity? What should be the optimum level of the subsidy rate both in the short and in the long run that will maximize national income from fisheries?
Assume a yield function defined by R=f (K) and an average cost curve AC1. When a subsidy S is applied to K the average cost is reduced to AC2. Let OA be the amount of effort applied initially. At AC the net benefit to the nation is measured by CD. It is observed however that by applying the subsidy S, effort can be increased by AB in an attempt to “maximize the fishery resources of the country.” At BE the incremental net benefit (NB) is FG, the incremental effort is AB, which increase in effort is associated with an incremental cost of HJ.
Figure 2 Impact of subsidy on resource exploitation
Figure 3 Impact of subsidy on resource exploitation with employment generation as the main objective
From the above therefore these conclusions appear obvious: (a) if the incremental net benefit (ΔNB) is greater than the associated incremental cost, i.e.,ΔNB > ΔAC, the subsidy has had a positive effect on national income and should be continued; (b) if the incremental net benefit is equal to the associated incremental cost, i.e., ΔNB=ΔAC, the subsidy rate is optimal with respect to the resource in question; (c) if the incremental net benefit is less than the associated incremental cost, i.e., ΔNB < ΔAC, then the subsidy has a negative impact and should be withdrawn.1
It is important to note that the reference point for these options is the MEY, the maximum economic yield that can sustain the resource on a continuous basis2. Determining either the maximum economic yield (MEY) or maximum sustainable yield (MSY) in a multi-species fisheries has been a problem in West Africa. Nonetheless, the MEY can be determined from the above exposition by a gradual increase in effort until that point is reached where ΔNB= ΔAC.
Where employment generation is the main objective of government, the decision rule somehow changes. In this instance, the resource is exploited up to the point where incremental net benefit is zero (that is, where the average cost is exactly equal to the average yield valued at constant prices). As shown in Figure 3, application of subsidy will lead to increased effort and an amount equal to the subsidy rate multiplied by the rate of tariff, while the effective subsidy rate will be lower than the nominal rate by the same amount. And since the government raises revenue through the tariff, the transfer to the fishermen will be the difference between government subsidy expenditure and the revenue accruing from the import tax (Mabawonku and Olomola, 1986). If the subsidy is applied directly to the CIF cost of the input, then the effective rate will equal the nominal rate.
As mentioned earlier different forms of subsidies exist among the countries of West Africa. A common feature is that they can be classified essentially as input price reduction types. Also, as will be examined later under country case studies, the distinction between subsidy for development and subsidy for modernization is not as precise as has been expected. What is essential at this point is the quantification of what constitutes a subsidy element. In some countries inputs are purchased by the government or a parastatal entity without duty and distributed to the fishermen at subsidized prices. In others, fishing inputs to be distributed are bought through tenders on the open market at prices which include the CIF, tariff and wholesale margin before they are sold to the beneficiaries at reduced prices. In yet others, subsidy is applied only to the fuel used by the fishermen and remains the same irrespective of the quantity purchased. Cases also exist
where, either in addition to the above or in various combinations, investment loans are given at interest rates lower than those obtained in the commercial banks. For purposes of analysis, it is necessary to develop a framework for quantifying each of these cases.
Case 1 - Tariff and subsidy: The imposition of a tariff on fishing materials increases the cost of the input. If a subsidy is then applied, the effective subsidy rate s' may be lower than the nominal subsidy as obtained in government accounts. If a 50% subsidy is applied to the price with tariff, the subsidized price will be higher than where no tariff has been included by exploitation beyond the level necessary to sustain the resource. Even without the subsidy, maximization of employment has increased application of effort from the MSY at E to A. With subsidy on inputs, employment is further increased by AD while revenue declines by FG.
In using subsidy for employment generation two aspects have to be considered. First, it is necessary that the rate of change in Maximum Social Yield (MScY) be equal to the subsidy rate, that is
If the rate of change in MScY is less than the subsidy rate, the goal of employment generation will be defeated as the fishery will be characterized by underutilized capacity or over-investment. Second, the benefit of such a policy lies in the ability of a resource, once exploited beyond its maximum sustainable yield, to regenerate itself. If the resource is capable of regenerating itself over the medium term, increased employment generation within the short term may be desirable. If not, then the subsidy programme will generate a negative impact such as to render the entire financial support unproductive.
Case 2 - Subsidy on interest rates: In Nigeria and The Gambia fishermen and fishing companies can obtain loans from government-supported financial institutions at interest rates lower than those obtained in commercial banks. Just as the interest rates for agricultural and fishery loans are administered so also are rates obtainable in commercial banks subject to Central Bank directives. A free market interest rate does not exist in many countries in Africa. What can be used as a proxy to free market rates is the rate charged in the informal sector. But because of low volume of transactions this again does not reflect the opportunity cost of capital.
For the purposes of this study, it will be assumed that commercial bank rates reflect the rate of preference of the society as determined by the various Central Banks. To compute the amount of transfer payments to fisheries through loans granted at subsidized rates the following equation is applied:
$ = P (1 + r) - P (1 + r)
where $s is the amount of subsidy, P is the amount of loan granted, r is the commercial rate of lending and r the subsidized interest rate.
A more complicated case exists where the subsidized inputs are sold to
fishermen on credit at subsidized interest rates. Let Ps be the amount
expended on the subsidized input and 
be the subsidized rate of interest.
The value of the subsidy so given will be equal to
$ = (Pc - Ps (1 + r - )
where Pc is the value of the input at market prices and r, as stated above.
Case 3 - Provision of infrastructure: In all the four countries covered in this study, fuel depots, refrigerated vehicles and cold rooms are provided by the government and made available to fishermen groups without any charge. Although those inputs do not enter directly into the output-effort equation, they nevertheless enhance the value of the product and by changing the product form generate additional benefit to the users.
Valuation of these inputs in the absence of any comparable services in the private sector becomes extremely difficult. It is even more difficult when the capacity utilization rate is unknown, that is, whether they are being fully utilized or not. A short-cut approach is to calculate the “rental cost” of the infrastructure defined as:
where 
is the annual rental cost, V is the acquisition cost, r the rate of
interest and n the lifespan of the infrastructure.
In many cases the infrastructure is provided through grants or aid. The implication of this is that had the money been raised in the domestic capital market the value of the rate of interest r could have been different from that obtained when the infrastructure was being constructed. This is equally true for cases like in Nigeria where the infrastructure provided was financed by budgetary allocations.
In section 1.2 the incremental net benefit that is associated with a unit of subsidy was discussed. This incremental net benefit can be regarded as a measure of the direct benefit of any subsidy programme. It can be measured either in terms of the incremental fish production or in value terms by multiplying the incremental fish output by their prices. In multispecies fishery where a fishing unit lands various species of fish no single price exists by which all the species can be valued since consumer preferences vary from one species to another. Rather the quantity of each species landed has to be valued by its own real price. Available information in the study areas does not indicate clearly which price is used in valuation of landings nor does the statistical method currently in use in the region give a clear definition of which price to use in valuation computations.
For purposes of economic analysis distinction has also to be made between traded and non-traded fish types. For traded fish types the correct valuation should be (a) for exports, FOB price and (b) for non-exports, the import parity price. For non-traded species, the correct price should be the “farm gate” prices, that is, the price obtained at the landing site.
It is not always true that what is observed as the incremental net benefit is due to the subsidy per se. First, subsidy itself has a demonstration effect. A group of fishermen may obtain new techniques of fishing through a development project. The gains in productivity may attract the attention of other fishing units outside the project. Second, prices of fish may be rising due to changes in taste such as to attract other “nonproject” participating fishermen to invest in the new technique. In both cases, increase in output is recorded, part of which cannot be ascribed to the subsidy alone.
Figure 4 Illustration of changes in output
This is illustrated in Figure 4. At T* the total benefit due to the subsidy granted is AC. But due to demonstration and other exogenous effects, output was rising by itself and at T* it was AB. The percentage of the benefit that should be ascribed to the project can be measured as AC - AB/AC (Mabawonku, 1986b).
Apart from demonstration effects other indirect benefits of fisheries subsidy that can be quantitatively measured include the increase (or decrease) in activities related to the fishing industry. This is illustrated in Figure 5.
Increase in output resulting from the subsidy generates such indirect benefits as increased activities among the firms supplying inputs or servicing the fishing industry. For example, additional employment is generated not only in the marketing of outboard engines but also in the establishment of engine repair workshops, boatbuilding yards and so on. Also among fish wholesalers and retailers increased activities can be recorded. By increasing the purchasing power of both the fishermen and others in related services, the demand for industrial goods is increased. Also increase in fish output, by lowering food prices, helps to alleviate the nutritional problem of the country and to raise the real purchasing power of the population.
Another element of indirect benefit is the rate of increase in technology transfer. Fishermen in the region have been known to quickly adopt new fishing practices and have invested large sums of money even without government support in an attempt to take advantage of new fishing methods and gear.
Figure 5 Some indirect benefits of fishery subsidy
This leads finally to the distribution of the benefit among the population. In the first instance, a subsidy is a transfer payment from the government to a group of beneficiaries. The benefit arising from the subsidy is as a result of the fact that the transfer is for investment purposes rather than for consumption. This means that such benefits which are derived cannot be completely appropriated by the beneficiaries. Moreover, the resources exploited by the fishermen are “common property” which belong to every member of the society.
Redistribution of benefit from both the subsidy and the common property is often determined by the prevailing laws of the country or by the objectives which the country wants to achieve. In Nigeria, for example, the huge amount allocated to the agricultural sector during the mid-seventies and early eighties had explicitly stated objectives of recycling the petroleum earnings in order to achieve balanced growth and to achieve food self-sufficiency. In this case issues of distribution of benefits appear not to arise inasmuch as every sector of the economy took part in the transfer exercise.
While empirically possible, quantifying the benefits accruing to third parties may be an academic exercise when the objectives of the state are not clearly announced. However, secondary beneficiaries may include the government through either taxation on fishing inputs, personal or income tax, company tax, interest rate payments that the fishing industry has to pay. Benefits to consumers can be measured by the percentage reduction in fish prices. And since the direct beneficiaries make purchases in the local market, their expenditure on such purchases can be used as a proxy for that part of the benefit that is redistributed in the economy. Of equal importance is the percentage of benefits reinvested or saved by the direct beneficiaries. Any increase in reinvestment of the direct benefit reduces the demand for loanable funds while an increase in the propensity to save will raise the level of investment funds available for other activities.
In general, measuring the costs and benefits in an economy where there is high interdependence among the various components of the system is a tricky business. It requires information about the entire economic, political, legal and social systems in the country. This goes far beyond the purpose for which this study is designed.
In empirically analysing the effect of subsidy on the fisheries of West Africa a number of problems have to be clearly indicated. First, there is the lack of adequate data and where information does exist its reliability is sometimes questionable. Existing forms of data collection are limited to collecting information on landings, species identification and abundance, import and export. These are not sufficient for analysis of developmental issues. For example, there are no statistics on fishermen's operating costs, profits, retail margin, etc., in the countries included in the study.
Third, the terms of reference of the study took no cognizance of the peculiarities of the West African sub-region inasmuch as they fail to cover the activities of foreign fleets and the role of donor agencies in the region.
In this study, “shore based” prices (equivalent of farm gate prices) are used to quantify the value of landings. While the effect of inflation on price is appreciated there is a normalizing effect since inflation also affected the prices on input. No allowance is made for operating costs in the absence of such data. Rather, gross revenue is used as a measure of benefits. This does not necessarily lead to an overestimation since the value of purchased inputs other than the ones which attracted subsidy appears negligible (Mabawonku, 1978).
