Cropping reliance on subsidies

Cropping reliance on subsidies

The country must not repeat the mistakes of the rice-pledging scheme, experts warn.

The old saying "when you put the first button on wrong, the following buttons and the whole shirt will be wrong" seems to be the best way to describe the Yingluck Shinawatra government's rice-pledging scheme that has caused the country a very high price. In fact, it is the biggest loss of government subsidies in Thailand's history.

It was obvious from the start that the scheme was terribly wrong: the motives behind the policy, the policy itself and its implementation. It was vindicated by the disastrous financial and political fallout.

Under the scheme, the government spent a total of 985 billion baht to buy 54.4 million tonnes of paddy. Based on a study by the Thailand Development Research Institute (TDRI), the current total financial loss incurred by the scheme stands at 660 billion baht, assuming a price of 7,500-8,000 baht a tonne of the total 17.45 million tonnes of rice now sitting in warehouses. That amount of money would be enough to construct an irrigation system throughout the Northeast.

The figure is estimated to rise to 7.7 billion baht if it takes five years to sell all the stored rice and hit 1 trillion baht if it take 10 years.

The TDRI study also estimates damages caused by fraud from the scheme account for 109 billion baht, with 45 billion baht from graft from government-to-government deals, 21.5 billion from selling rice to close allies and 34.4 billion from missing rice. 

The study also suggests the scheme has pushed 57% of farmers to increase the use of chemical substances, fertiliser and water, and 42% of rice millers to expand their capacity to 100 million tonnes even though the country annually produces 31-32 million tonnes of paddy.

It will take more than a strong dose of effort and willingness for the incumbent government and even the next one to clean up the mess. But the damage will continue. Rice farmers, so seduced by the populist policy, have become addicted to government subsidies and too weak to stand on their own two feet.

Based on the TDRI survey of rice farmers, despite the hefty financial loss and fraud, 61% of farmers are still pleading for the next pledging scheme while 16% call for the scheme but at a lower pledging price.

Rice experts and academics want populist policies stopped, the law amended and measures put in place to prevent politicians from using such policies to win votes, and limit possible damage. Farmers must be strengthened and the agricultural sector must be led towards sustainability.

"The key problem is that the majority of farmers and the media are trapped with pledging or other subsidy policies," says Ammar Siamwalla, a distinguished economist at the TDRI.

"The majority of people think all farmers are poor and not capable of helping themselves and so they always need government aid. In fact, not all farmers are poor and most rice produced comes from medium to large farms. Such a fixation is wrong and must be fixed," he says.

Account for stock and loss

Based on TDRI data, there are 17.45 million tonnes of milled rice in warehouses, with 14% classified as good quality, 80% substandard, 6% rotten and 0.67% missing. 

To manage such a massive quantity, Nipon Puapongsakorn, a rice expert at the TDRI, suggests the government throw away low quality and rotten grain and investigate cases of missing and subpar rice. 

For the 80% of substandard rice, he suggests the government donate 50% of it to the World Food Programme and reprocess the rest to be edible and sold. "This will ease the government's burden and lower domestic price pressure. Rice traders say the market price will be affected, probably down by US$30-50 a tonne, if the inventory is sold on the market," Mr Nipon says.

After the figures of realised loss and contingent debt are found, with an estimated total of 540-750 billion baht, the government may issue government bonds with clear plans for both principal and interest payment and payment periods in order to restore investors' confidence.

Prevent future damages

To prevent history from repeating itself, rice experts and economists suggest that the constitution, election law and budget law on populist policies be amended. The election law should stipulate that a party or a politician using a populist policy for their campaign must clearly state the benefits and costs of the entire policy. 

The elected government must inform parliament of the source of funding of its populist policy and ways to seek revenue to compensate such expenditure. The government needs to propose the budget act for such projects to parliament on a yearly basis so that it must be included in the government's annual budget. This will create fiscal discipline and transparency. 

Mr Nipon also suggests the accounting of all subsidy projects be done and presented to parliament at the end of every fiscal year so that all expenditure, income, profit and loss of the projects are known.

The information act should also be amended to require the government to disclose information of all populist policies and market intervention so the public can monitor them.

An act limiting market intervention should be added to ensure that government interference will not damage competitiveness. For instance, there should be an act limiting the government's price intervention in the rice market to not more than 5-10% of total domestic consumption.

Legislation limiting the subsidy budget for agricultural products in order to prevent possible risks from falling prices of produce must also be put in place.

Stop intervention and subsidies

The first task is for the government to stop intervening in the market. Market intervention should only aim at boosting market competition.

"The government should definitely not interfere in the price of export products or perishable produce," says Mr Ammar. Whenever prices go up after market intervention, the government should stop intervening right away, he adds.

Luck Wajananawat, president of the state-owned Bank for Agriculture and Agricultural Cooperatives, agrees, calling for the government to let the market mechanism work freely. "I don't want rice-pledging or price guarantee programmes as they are unnecessary," Mr Luck says. 

The government spends 1.3 trillion baht annually supporting the agricultural sector. Of the total, agricultural loans account for 1.17 trillion baht, financial subsidies 71.3 billion baht and water irrigation 37.2 billion baht. Loans to rice farmers represent almost half the total of agricultural loans.

Medhi Krongkaew, a former national anti-corruption commissioner and an economist at the National Institute of Development Administration, says any kind of subsidy will distort farmers' behaviour and the use of natural resources. "They also create agricultural surplus as farmers always jump into products that are subsidised."

Lower costs and raise yield

Educating farmers in order to bring down production costs and increase crop yields are vital, say experts.

"Agricultural literacy will enable crop growers to know how to grow their crops and manage their farms better. And that will help reform and boost the entire agricultural sector," says Mr Nipon.

One wise way to trim production costs is to use tailor-made fertiliser. This can "cut production costs by 20-30%".

Additionally, when market mechanism works freely without government intervention, the number of farmers will be cut down to only the strong and profitable.

"This is one way to restructure the agricultural sector. The number of farmers will be automatically reduced, meaning each will hold a larger piece of land and generate higher income per person. This will simultaneously reduce production amounts," says Mr Nipon.

Meanwhile, it is necessary for the government to prepare training and job creation programmes for farmers who decide to grow other crops, seek more profitable jobs or leave the profession, he says.

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