Subsidies

Political unrest in Thailand has rarely been out of the international press in the last few years. The bombing of the Erawan shrine in Bangkok last year, near a railway enclosure and timed to the commuter rush hour, was a particularly gruesome event and may have been driven by the deep political tensions between different interests in Thai politics. 

Whatever the immediate causes of that tragedy are, political turmoil in Thailand, like elsewhere, has many links to the economic rent, and who captures it.

Buying the election

In a bid to win the 2011 elections, the eventual winner, Yingluck Shinawatra (sister of the former prime minister who was ousted in a 2006 coup and faced charges of corruption) made promises to initiate a rice buying program. This scheme would see the government pay rice farmers a 50% premium over the market rate for their produce, which it would then stockpile; as the major global exporter, controlling 30% of the market, Thailand would then artificially restrict supply, thus driving global prices up and the government could then sell its stockpile into a rising market (to recoup its initial outlay). 

Needless to say, this proved to be an electoral ace in a country where around 40% of the population works on the land and, of these mostly, in growing rice. The rural poor promptly voted Shinawatra in. 

As a means of using public funds to buy an election, this is as blatant as it gets.

But it further exacerbated tensions between the urban populations who tend to vote for the parties opposing the Shinawatras (and who pay for such programs through taxes). 

Land always takes the gains. This being an immutable law of economics, it shows further the folly of the scheme in the first place: Not only do subsidies distort markets and provide improper signals to producers and consumers, they also, ultimately, fail to help the intended beneficiaries as well.

What happened after the scheme was started is of particular interest to those with Geoist views: land always takes the gains. This being an immutable law of economics, it shows further the folly of the scheme in the first place: Not only do subsidies distort markets and provide improper signals to producers and consumers, they also, ultimately, fail to help the intended beneficiaries as well (and in this case, they caused them harm as I will explain below).

The scheme was designed to buy the votes of the rural poor, many of whom rented patches of land to grow rice and then sell them to the government at the fixed price. But as soon as the scheme started, the rents that farmers had to pay—many of whom are tenants working on the land—shot up.

A local paper reported in 2013:

After the government announced the rice-pledging scheme with a price of Bt15,000 per tonne [around $400 USD], land rent shot up [by] Bt1,500 [$40 USD, or 10%] per rai per season [1 rai = 1600 sq. m]. 

So the farmers were no better off from the inflated prices set by the government. The landowners took the gains in the form of higher rents.

The landowners took the gains in the form of higher rents. This had other (predictable) consequences: farmers were encouraged to overproduce rice to maximize their income, bringing marginal land into production. This reduced the overall quality of rice; purchasers started to have concerns about the quality of Thai rice and this reduced demand for Thai rice and shifted it other countries.

And it had other (predictable) consequences: farmers were encouraged to overproduce rice to maximize their income, bringing marginal land into production. This reduced the overall quality of rice; purchasers started to have concerns about the quality of Thai rice and this reduced demand for Thai rice and shifted it other countries. (Remember, the government was counting on this demand to keep prices high so that they could eliminate the stockpile at elevated prices). There were the usual frauds: imports from lower cost countries (e.g. Myanmar) into Thailand illegally to take advantage of the mark up.

Production expanded so much that after just one year, the government was sitting on a mountain of 17m tonnes of rice—or fully half of total global imports for a year.

And then there were the really nasty consequences.

Environmental destruction

Having to pay higher rents, farmers were forced to use any means necessary to improve yields. 

So they resorted to fertilizers. A local paper reported that

…despite the hike in costs, farmers…were happy to pay the rent, but invest even more in chemicals with the hope of increasing productivity….At least seven kinds of fertilizer and pesticides [were] used with each crop. (emphasis added)

The farmer who was interviewed for the story had to stop farming because he was “critically hospitalized” three times after using so much fertilizer. These chemicals are highly toxic and banned in many countries. Their use is regulated by several UN environmental treaties and serious consideration is being given to further bans because many in use are associated with birth defects in children, cancer and a host of other health issues.

Such chemicals also reduce the soil’s fertility over time, harm wildlife and run off into streams where they affect ecosystems and get into the food chain. In other words, they have consequences that extend well beyond the rice growing regions.

It’s a form of ecocide.

However, once the scheme was started it soon turned out a loss. High prices and shifting demand encouraged producers in other countries to grow more price, particularly in India. As a result, the Indian government removed its rice export ban and suddenly Indian imports flooded the market, driving prices down. 

So the Thai government had to liquidate its stocks at a loss (or not sell at all and fund the scheme by issuing bonds).

The chart below shows the fall in the price of rise after 2012.

Global Rice Prices, U.S. per metric ton, June 2010 - December 2013

But starting a scheme like this is much easier than ending it. The government tried to cut the premium it paid in 2012 after recording a $4.4 billion loss (around 2% of GDP), but had to reverse course after protests from its core voter base.

They needed the inflated price to be able to cover their costs (including rent) at least in the short term.

Further tensions with opposition parties, civil disobedience, fighting in the streets, a mass parliamentary resignation, a boycotted election and a coup d’etat have all taken place in the last couple of years.

Finally, the Prime Minister Shinawatra was impeached and removed from office on corruption charges on the grounds that, despite all the evidence to the contrary, the government had persisted with a scheme that ended up costing the taxpayer around $15 billion. It became so expensive that the government could not afford to pay farmers what they are owed—creating political protests from their former supporters.

This is yet another example of how a failure to understand the structure of the economy and to design policies in accordance with it can create such catastrophic consequences. Whether it be environmental degradation, rising inequality, or economic anxiety much of it comes down to the same root cause: the unequal distribution of economic rent.

This is yet another example of how a failure to understand the structure of the economy and to design policies in accordance with it can create such catastrophic consequences. Whether it be environmental degradation, rising inequality, or economic anxiety much of it comes down to the same root cause: the unequal distribution of economic rent. At Ascendant Strategy, of which I’m a director, we advise investors on how to make better investment decisions on the basis of our unique research into how the appropriation of economic rent affects the market. This allows investors to make wiser choices to safeguard—and grow—their investment portfolio.

© Text Copyright Akhil Patel rights reserved.
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