Officials in developing countries have criticised the global subsidies race as a risk to their national economies, arguing their governments’ inability to offer large financial incentives makes it more difficult for them to spur investment and diversify trade. 

Speaking at the OECD’s Sustainable Investment Days event on November 6, government representatives from Africa and Asia said multi-billion dollar financial incentives being rolled out by advanced economies with deep pockets creates risks for their local economics. 

“We aren’t going to be able to successfully enter the global race on subsidies to the bottom,” said Mzukisi Qobo, South Africa’s ambassador and permanent representative to the World Trade Organization. He gave the example of its automotive industry, which contributes 4.3% to national gross domestic product (GDP) and is Africa’s biggest. 

Last year, the government adopted a strategy to pivot the industry from combustion engines to electric vehicles (EV), but he said it is constrained by its inability to match the fiscal outlays made under programmes like the US’s Inflation Reduction Act (IRA).

“The IRA, EU responses, and what China is doing will have an effect on our ability to attract investment into the EV sector,” he said. “This raises questions about whether we can actually break through and build a viable EV sector …  the subsidies race targeted at EVs does throttle countries such as ours.” 

Since the US kicked off the subsidies race by approving the $369bn IRA in August 2022, it has been followed by the EU’s Net-Zero Industry Act, Canada’s record-breaking EV incentives, Japan’s $19.2bn-worth of hydrogen subsidies, the A$22.7bn ($15.1bn) Future Made in Australia plan, and South Korea’s $29bn in battery support. 

Subsidies aiming to develop local critical mineral industries, which are required for EV batteries, are another area hitting Africa’s prospects. The continent has vast reserves of cobalt, copper and lithium, but advanced economy incentives potentially divert foreign direct investment (FDI) that could help Africa move up the critical minerals value chain. 

Roslyn Ng’eno, senior investment expert at the African Continental Free Trade Area Secretariat, said these policies are an economic hit for the many African countries where mining is a key contributor to their GDP. 

There is “great” concern among African countries and businesses about the rise of subsidies globally, she added, because they allow for imports that are cheaper than what can be produced locally, which challenges efforts to diversify intra-African trade and expand local manufacturing capacity. 

African leaders are also worried about diverting FDI. “Within the continent, we are looking to attract investors. But we don’t have the muscle in terms of finances to provide subsidies,” said Ms Ng’eno. “So investors will naturally look at a region where they are given subsidies.”

Asian government speakers echoed African representatives’ claims. “Developed countries can subsidise their industry, but cannot [create] unfair competition to developing countries [which] don’t have the resources to subsidise,” Nguyen Anh Tuan, deputy director of Vietnam's Foreign Investment Agency, said.

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‘Can’t just throw money everywhere’

Instead of being opposed to all types of advanced economy industrial policies, speakers stressed they were concerned primarily by ‘beggar-thy-neighbour’ subsidies, which come at the expense of other nations. “[Policies] that turn out to be more about protectionism and harmful competition will have a very negative impact on the global economy and especially on developing economies,” Yasser Sobhi, Egypt’s deputy minister of finance for fiscal policies, said. 

The government, which took office in July, is supporting select sectors that are big contributors to the economy through outcomes-based programmes with clear fiscal ceilings. For example, it has recently announced a E£50 ($1bn) initiative to spur more hotel development. “But for a country like Egypt that has very limited fiscal space, I don’t think there will be a lot of these initiatives,” he added.   

Mr Qobo agreed some developing countries might find fiscal space to support important sectors. “[But] you can’t just throw money everywhere in the way that’s happening in other economies and hope to succeed,” he added.

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