While the IMF has slowly been scaling back its criticisms of governments and taking a more proactive approach in the post-recession period, one program has drawn their ire nonetheless. For the last three years Thailand has supported a large-scale rice program that has cost the government billions of dollars and resulted in millions of tons of rice sitting unused in government storage facilities.
Subsidy originated with new Prime Minister
The rice purchasing program was launched by Prime Minister Yingluck Shinawatra when she took office in 2011. The political motivations at the time were clear – the program would help her party shore up support among rural farmers. While Ms. Shinawatra came into power with a sizable majority, tensions arose concerning her brother, Thaksin Shinawatra, a former prime minister who fled the country amid charges of corruption.
The program works by buying unmilled rice from Thai farmers, who make up approximately 2/3rds of the Thai population, at about twice the market rate. Obviously, such a program can buy a lot of votes among farmers, and indeed Yingluck won by one of the widest margins in history.
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According to Yingluck’s administration, the subsidy program helps to alleviate inequality and poverty, while also stimulating the local economy. Critics charge, however, that the program is far too expensive, discourages a competitive economy, and rewards the wrong behaviors.
The program is estimated to cost of the country as much as $13.5 billion, though the government claims the total cost has been lower. Analysts have noted, however, that as currently designed, the program will likely cost some $8.6 billion dollars in 2014. Still, the Thai government under Yingluck has decreased its public debt from about 45% of the GDP to just over 40%, suggesting that the country’s finances are still on solid footing.
What might be worse than the financial impact is the economic impact of overproduction. The current subsidy program encourages farmers to grow as much rice as possible and currently production has far exceeded the country’s demand for rice. Meanwhile, rice prices are so low world-wide that it makes exports difficult. Further, many countries could respond to rice dumping, if the Thai government went that route, by erecting trade barriers.
As a result, unneeded rice has been piling up in the government’s storage facilities. The subsidy is effectively encouraging farmers not to diversify their crops or to contribute productively to the economy. Instead, they are growing more rice than is needed, and said rice is essentially being thrown away or being sold at a loss in government-to-government brokered deals.
IMF concerned that subsidy is a drag on economy
Now, the IMF is recommending that the Thai government scale down its subsidy program. If anything, the IMF argues, the Thai government should focus on targeted cash transfers, which could be used to help struggling farmers, but would also allow the market to function. For now, Yingluck’s government seems intent on going forward with the current rice program. After the 2015 election, however, attitudes might change.