Export Subsidies as Industrial Policy: the Case of the 19th Century Sugar Industry - Lidia Smitkova

Speaker: Lidia Smitkova, University of Oxford

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: Can export subsidies spur technological upgrading? What are their welfare implications? We build a model in which firms select into exporting and can pay to upgrade technology. An export subsidy can induce upgrading by increasing exporters' scale, making upgrading worthwhile. Despite this, we show that an export subsidy is not generally welfare-improving.  Absent spillovers -- whereby social benefits from upgrading exceed private -- adoption is efficient. With spillovers, welfare effect comprises: (i) a positive term from moving the adopter share toward the social optimum, and (ii) a negative term from misallocation via excess exports. We test the model using a natural experiment in the nineteenth-century Austro-Hungarian beet-sugar industry: an 1864 consumption-tax reform unintentionally created a 10% export subsidy as the industry transitioned to new sugar-extraction technology. Newly digitized factory-level data show that the subsidy reallocated production toward high-export-access regions, whose factories adopted frontier technology earlier. Complementary evidence from France documents positive local spillovers. Calibrating the model to Austro-Hungarian data, we find that the subsidy increased adoption, but welfare loss from misallocation outweighed the gains from upgrading.