Thailand’s rice subsidy scheme rotting away

Author: Peter Warr, ANU

Thailand’s rice subsidy scheme has turned into a political and economic disaster. The problem could have been avoided if the government had listened to its own advisors.

Raising the price of rice received by Thailand’s rice farmers was a key promise of the ruling Pheu Thai Party at the 2011 election, targeted at the party’s rural power base in the poorest northern and northeastern regions of the country.

The rice subsidy policy, known domestically as the rice-pledging scheme, had two objectives. First, the price offered to Thai rice farmers was to be raised through direct government purchase to levels about 50 per cent above the prevailing market price. Second, the international price was to be raised by reducing Thai exports. Roughly one half of Thailand’s annual rice crop of 20 million tonnes is normally exported.

When the scheme was outlined in the Pheu Thai Party’s 2011 election platform economists inside and outside the Thai public service pointed to serious flaws.

First, the two halves of the policy were in conflict. A subsidy to domestic producers would be sure to induce increased supply. But if exports were restricted, a gap would exist between total supply and total demand. How was the government to dispose of the additional output in addition to the rice that was no longer being exported? If this rice were sold domestically, the internal price would collapse, defeating the price-supporting objective. If it were sold abroad, the international price would similarly be forced downwards, defeating the second objective.

Second, critics argued, the budgetary cost of the subsidies needed to purchase Thai rice at above the market price could be enormous. If the rice was not sold, as seemed likely, the government would have a huge and expensive stockpile of rice. And the potential for corruption in the purchase, milling, storage and disposal of the rice was significant.

In addition, the government’s direct purchase of rice was sure to destroy the country’s existing, highly efficient private sector rice export marketing industry. And the quality of Thai rice available for export was likely to decline if farmers were offered a subsidy for rice offered for sale regardless of quality because farmers would have an incentive to switch production from premium fragrant rice varieties to lower-cost, higher-yielding varieties less favoured on the international market.

It was also predicted that rice would be smuggled from neighbouring rice-producing countries, especially Cambodia, to take advantage of the above-market prices being offered by the Thai government.

Finally, attempts to manipulate international commodity markets have a long and sobering history of failure. With the partial exception of the OPEC petroleum cartel, supply restrictions are almost always countered by increased supply from other countries.

After two years of the scheme’s operation, all of the above predictions have proven to be correct, on a scale that even the critics did not fully anticipate.

The mountain of rice now in storage and owned by the government exceeds 19 million tonnes, roughly equivalent to a full year’s output. Storage is costly and rice deteriorates in storage, becoming generally unsalable after three years even under ideal conditions. Warehouse facilities are now overflowing and the rice mountain is gradually rotting.

The budgetary cost of the scheme is estimated at THB700 billion (roughly US$22 billion), equivalent to a year of the government’s total investment budget. Only a small fraction of this sum has been recouped by sales.

The withholding of rice from the export market also failed to have any apparent effect on the international price, with exports from Vietnam and India filling the gap, and Thailand slipping from first- to third-largest rice exporter, behind these countries.

Prime Minister Yingluck Shinawatra has now been charged by the National Anti-Corruption Commission with dereliction of duty for ignoring the massive corruption that has allegedly accompanied the scheme. If she is indicted, she will be obliged to step down as prime minister.

Worst of all, from the ruling party’s point of view, the funds needed to pay farmers for the rice purchased from them are no longer available. Farmers are owed arrears of at least THB40 billion (US$1.3 billion) for rice already delivered.

It’s not clear where that money will come from.

The main opposition party, the Democrats, boycotted the recent general elections and while the Pheu Thai Party won a clear majority, many seats could not be filled. This has constitutionally prevented the formation of a new government. As long as this is the case, the government will remain in caretaker mode, with limited powers to borrow money directly. Despite government pressure, even government-owned banks, like the Government Savings Bank, are now refusing to lend money to allow the rice subsidies to be paid to farmers.

In order for a government to be formed, sufficient by-elections must be held to fill empty seats. Opposition groups will no doubt attempt to prevent this. Even if by-elections can be organised in time and a government can be formed — which seems highly unlikely — it is difficult to see how the rice-pledging scheme can continue for a third year.

The vast majority of Thailand’s poor people live in rural areas. But the rice subsidy scheme has failed the very people it was supposed to benefit. The majority of the benefits go to the largest farmers, those who sell the most. Poor farmers have little if any rice to sell after their own consumption requirements are met and receive correspondingly very little benefit from the scheme.

A strong case exists for finding policy instruments that can assist Thailand’s rural poor. But there are better options than the disastrous rice subsidy scheme.

Peter Warr is Head of the Arndt-Corden Department of Economics, John Crawford Professor of Agricultural Economics, and Director of the Poverty Research Centre at the Crawford School of Public Policy, ANU.

SHARE: