By Claire McNear, on 21 March 2014
By Alia MD Saleh
Populist centric policy is not always a wise choice. A case in point is Thailand. The government’s rice guarantee scheme was the brainchild of Thaksin Shinawatra, the former prime minister of Thailand, who was ousted in 2006 on corruption charges and is now in self-exile for fear of retribution. The hugely expensive government programme guarantees payment to farmers for their entire rice crop, a major component of the economy in the world’s largest rice exporter.
The policy now looks like something of a catastrophe for the Thai government, but has nonetheless been retained by Thaksin’s sister, Yingluck Shinawatra, the current prime minister, who won the office in 2011 in large part as the result of her promise to continue the scheme. The rice guarantee scheme has resulted in a game of tug of war between Thailand’s rural poor, who are predominantly pro-government and support the policy, and the middle and upper classes, who argue that Yingluck Shinawatra’s governing Pheu Thai party is mismanaging the country’s finances.
Two-fifths of Thais work in agriculture and most of them are rice farmers. The BBC reported that, prior to the government’s price scheme, rice farmers had long been plagued by low incomes despite high productivity, as dishonest rice millers routinely made allegations that the quality of rice being sold to them was substandard, forcing farmers to accept lower prices than they deserved. The government intervened with its price guarantee scheme for farmers. Eradicating poverty is a worthy cause, especially if it spurs domestic growth – but if the policy was enacted in good conscience, what went wrong?
The Shinawatra government’s mistake seems to have been twofold: it improperly gauged global rice demand, and it failed to anticipate the result the policy would have on farmers. The government offered a price guarantee 50 to 60 percent higher than the market price at 15,000 baht (about $500) per tonne, which prompted farmers to increase their production – and this ignores whether there was any justification for government intervention in a large and robust industry in the first place.
Who was meant to benefit from the policy? It’s not a stretch to think that the outcome intended here by the governing party was future votes for the Pheu Thai party. It’s these votes that lofted Thaksin’s party back into power in 2007 after being ousted by the Thai army the year before, and it’s these votes that paved the way for Yingluck to come into office. Critics were swift to point out early on that the programme would be costly, but advocates in the Prime Minister’s circle assured the public that they would have leverage in bringing down global prices by virtue of being the world’s biggest rice exporter.
It was simple enough, they thought. Reduce the supply of rice in the global market, keep those supplies in stockpiles, and sit back and wait for a spike in the price of rice before selling the surplus to make a profit, which would in turn offset the cost of the scheme. Unfortunately, it turns out to have been more complicated than they thought. The Thai government seems to have overlooked India and Vietnam in the global scheme of rice production: The Economist reported recently that amidst the debacle, India and Vietnam have surpassed Thailand as the biggest international rice exporters, leaving Thailand with a still-accumulating rice stockpile it has not been able to sell.
Exacerbating the dire situation is the collapse of various deals to sell portions of the rice surplus, most recently with China’s withdrawal from a plan that would have seen 1.2 million tonnes sold. The Thai government has been forced to stockpile more than 18 million tonnes of rice, which is equivalent to half the annual global trade, and the amount is increasing. The rice guarantee scheme cost the Thai government $12.5 billion in the first year alone, and is expected to rise to 4% of the annual GDP. Bear in mind that the payments to farmers are not the only cost the government incurs, as stockpiling comes with administrative and logistical costs, including the need for new warehouses for storage. It would seem that the Thai government might have to sell the rice at a loss if it is looking to reduce its immense stockpile. But doing so would also dent its burgeoning public debt and would not bode well for its economic growth.
What the government seems so far to have ignored is the darker side of welfare support: its tendency to breed dependency. Massive upheaval occurred when Prime Minister Shinawatra tried to reduce the price guarantee from 15,000 to 13,500 baht in her effort to curb government spending on the scheme. The Pheu Thai party, whose base supporters have been built through populist measures, had to backpedal on its plan. It seems the government is increasingly hard-pressed to come up with the funds to pay off the farmers, who are disgruntled over the lack of the promised payment for their crops. The policy is now at the centre of a battle between the current government and the opposition over who might best govern Thailand, with intermittent violence as tensions in the nation rise.
So is the rice guarantee policy worth maintaining? The answer seems to be obviously not, particularly given that the issue is only escalating as the stockpiles and government expenditures grow: the Prime Minister was summoned last month by the National Anti-Corruption Commission for questioning over charges of negligence and corruption stemming from the scheme.