Yingluck's Misguided Rice Policy

The ability of Southeast Asian nations to screw up the one grains market for which they are a key part of international trade seems to know no bounds.

Three years ago it was the Philippines and Vietnam which together conjured up a crisis, one by exaggerating the amount of rice it needed to buy and Vietnam by limiting exports to keep local prices low, thus driving international ones to crisis levels, particularly for the poor in import-dependent countries.

Now we have the new Thai government pledging to go ahead with an election-campaign plan to buy rice from farmers at some 40 percent above the current market price. This has then been seized upon by the news agency Bloomberg to forecast that global rice prices will rise by 22 percent (a curiously precise figure) by year-end having already spurted since Prime Minister Yingluck Shinawatra’s announcement.

The theories behind all this are twofold, neither of which make much sense. First, it assumes that because the US crop is smaller this year, availability on world markets will be reduced. But in fact the global supply is forecast to rise by about 1 percent and may even be better as weather conditions in major growing countries such as India, Pakistan, Indonesia and Philippines have been at least normal, output in Vietnam and Thailand is stable and Burma’s exportable surplus may rise as a result of market forces being given slightly more freedom to reward production. India is definitely in a position to export more.

The second part of the argument is that Thailand will not be able to sell much of its rice because it will not be able to compete in price with other suppliers. This is nonsense. If Thailand holds supplies off the world market and stockpiles them, it will surely drive up global prices, perhaps to the level now promised by the government. But such a policy will not only infuriate countries which count on Thailand as a major farm exporter wedded to open trade in grains.

The policy can be expected to leave Thailand, the world’s biggest rice exporter ever since 1932, at 9.03 million metric tons in 2009, sitting on a stockpile which will then overhang the market while other exporters gain from Thailand’s actions. At some point Thai rice must find a market. If the government chooses to subsidize production generally that is its concern – but will surely be a dead weight on the budget.

For sure, Thai farmers have had a raw deal compared with the country’s urban population. But that is almost inevitable given the generally lower productivity of farming compared with manufacturing. But in the Thai case the situation is aggravated by the especially low productivity of Thailand’s rice fields compared with most of its neighbors including the Philippines, China and Indonesia.

It is anyway foolish of any Thai government to want to encourage rice as an export product given the low returns to labor and given that the farm labor force is ageing rapidly as the (dwindling) number of young people find life easier in the cities. For sure, helping poor farmers has huge political benefits for Thaksin but Yingluck must know that this is a short term measure which does nothing to bring about a sustained narrowing of the rural-urban income gap. Nor does it do anything for farmers growing other field crops which in aggregate are more important than rice – corn, tapioca and sugar.