Thailand's Rice Subsidy Trap

The Thai government is riding a subsidy tiger it appears unable to dismount politically. It has caved in to the rice farmer lobby and restored the support price for rice to Bt15,000 a tonne (US$484) soon after announcing a cut to Bt 12,000.

The reversal of policy came after a cabinet reshuffle and bore the fingerprints of and bore the fingerprints of exiled former Prime Minister Thaksin Shinawatra who had encouraged his sister to institute this massive rice farmer subsidy last year.

The move is expected to buy some political space for Yingluck Shinawatra, whose administration has been under fire on various fronts. The support of the so-called pledging price for rice delivered to warehouses appears to be popular, and not just among farmers.

However, the cost to the nation of supporting a price which is roughly 30 percent above the world market price will have to be paid by the people at large. At one level it may be seen as a necessary form of income re-distribution away from Bangkok and the cities toward the countryside.

However in the process it raises several other issues. One is that it benefits only rice farmers, not farmers of other crops, many of whom are found in the poorer provinces of the northeast and far south. Second is the wisdom of providing a subsidy for a major export crop, which can only depress global prices and sustain Thai production at a higher level than its unimpressive farm productivity performance justify.

There is scant sign that the subsidy is doing anything beyond support consumption by the beneficiaries rather than invest in raising productivity so that rice farmers could earn a decent income without subsidy.

The cost to the government so far has been put at Bt146 billion to date but the actual losses are said to be hard to calculate because of the lack of reliable information about the true size and quality of stocks, and prices at which the government has sold rice in government-to-government deals.

Unwillingness to sell rice at a loss is natural but accounts for the fact that Thailand has now fallen behind Vietnam and India in volume exports and is likely to have to also face increased competition from a Myanmar whose farmers will likely respond to freer market and access to inputs and boost production as the Vietnamese previously.

With income levels in Thailand being so much higher than Vietnam, India or Myanmar, Thailand desperately needs a farm productivity boost if its taxpayers are not to be saddled with permanent subsidies for rice farmers, which detract from its ability to raise investment and consumption benefitting the population at large.

Given Thailand's regressive tax system with heavy reliance on value-added tax rather than income taxes, the so-called populist policies only benefit a minority of the populace. But that has not been widely recognized so selective handouts are still good politics.

This is not a problem unique to Thailand. But because of Thailand's open and fairly democratic system of government the farmers have a stronger voice than their equivalents in China. Relatively, the income gaps between urban and rural appear narrower in Thailand - partly a result of Thaksin's recognition of rural voting power.

But if both countries continue to urbanize they also need to show gains in rural productivity if income gaps are not to continue to widen or subsidies to farmers constitute a permanent drag on the economy - as has been the case for decades in Europe and Japan.

Thailand in fact has more opportunity than China to increase land productivity which for rice is well below that of Indonesia as well as China. Although Thailand has been very successful as a processor of higher-value agricultural products such as fruits and as an exporter of chickens and other downstream products, much of its agriculture remains inefficient.

The earlier decision to cut the pledging price from Bt15,000 to Bt12,000 was a belated recognition by Yingluck's ministers of the immediate burden on the budget and the long-term threat to public finances. Indeed, the day before the reversal Finance Minister Kittiratt na-Ranong said there was no prospect of doing so as a subsidy of Bt70-80 billion a year was the maximum the government could bear.

Increasing the subsidy again comes at a time when the government has well-advanced plans for massive spending on urban transport and flood control schemes which are likely to be huge sources of corruption.

Nor is the rice subsidy Yingluck's only costly and dubious populist measure. Another was a subsidy for first time car buyers - hardly an obvious target for income distribution and one which can only exacerbate urban traffic problems and the fuel import bill.

At the same time the overall economic outlook is becoming cloudy with the decline in commodity prices, lower growth in China, volatility in the baht exchange rate and worries over sudden increases in corporate debt fuelled by high-profile and high-priced takeovers - CP Group of Siam Makro and Charoen Sirivadhanabhakti of Thai Beverage purchase of Fraser & Neave in Singapore.

There is no immediate cause for alarm either with the budget or the balance of payments - the current account is still marginally positive. But with the import component of capital investment high and rising as emphasis shifts from buildings to machinery and export prices weakening, the external outlook is less than rosy despite the continued rise in tourism and some gains from Myanmar's progress.

In short, Thailand is not headed for crisis nor does it show any sign of escaping the "middle income trap" by investing in the future rather than subsidizing present consumption.