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Overview of Rice Policy 2000-2018 in Thailand: A Political Economy Analysis
2019-09-02
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Nipon Poapongsakorn
Thailand Development Research Institute
Email: nipon@tdri.or.th

INTRODUCTION

After the student uprising in 1973 which brought about democratic movements, Thai agricultural policy has shifted from urban-biased policy which aimed at keeping the rice price at low level to support the consumers and workers’ cost of living for industrialization, to producer supported policy (Siamwalla and Poapongsakorn 1995; Poapongsakorn 2010). Table 1.1 is the chronology of events that are related to some important agricultural policies. In the 1980s and 1990s, most policies were aimed at restructuring production system by providing incentives for farmers to grow other crops than those with falling prices, particularly rice and cassava. This is because the 1980s was a period of depressing global commodity price, thanks to the widespread protection and subsidy policies imposed by most developed countries. But after the economic crises and the constitutional reform in 1997, Thai agricultural policy has shifted toward direct subsidy for farmers. Since then the policy has  seesawed, first was the price support and market intervention, changed to the subsidy for smallholders with minimal market intervention,  then back to price support and market intervention for almost three years, and finally switched back to minimum income subsidy with minimal  market intervention.

This paper will provide the overview of the policy seesaws in the 2000-2018 period, emphasizing on the political motivation, underlying forces behind the politics, and its consequences as well as fiscal impacts. Finally the major challenges will be briefly discussed.

 

A Beginning of large-scale agricultural subsidy, price support policy and market intervention

After winning the first election in 2001 under the 1997 newly reformed constitution, the Thaksin government kept its campaign promises by first actively launching the debt moratorium policy for farmers who had debt with the Bank for Agriculture and Agricultural Cooperatives and an implementation of the one-million baht fund for all Tampons (sub-districts) which were two of the Thai Rak Thai Party most attractive policies that helped the party winning the landslide election. The debt moratorium (or forgiveness) policy was in response to the farmers’ sharp falling income caused by the El Niño drought and over-borrowing in the mid-1990s. In response the BAAC was forced to introduce a comprehensive debt-restructuring scheme by giving haircuts for both interest and principal repayment to farmers who could not pay back debt. In addition, it also provided incentive (i.e., lower interest rate) to the farmers who were good debtors so that they did not default on their loans. As a result, less than 30% of the farmer borrowers enrolled in the debt restructuring scheme (see Puntasen, et. al. 2010, and BAAC 2004 for details).

One political consequence is that since then all governments have to implement the debt restructuring programs, particularly the restructuring of informal debts for both the farmers and general public. Perhaps this policy has led to the incidence of over-borrowing by the farmers in the 2010’s period. Figure 2.1 shows that farmers, particularly those at the poorest income quintile group, have higher debt-to-income ratio than those in the higher income group. Although there are several factors causing the over-borrowing behavior, the debt restructuring policy may be one of the most important causes, if not the most important one - a research question that is beyond the scope of this paper. A tentative explanation is that  once the restructuring policy is introduced, farmers (and the debtors) are also provided with short-term soft loans as the working capital for their farm operation. Since the interest rate on the restructuring loans from the state financial institutions (SFIs) are lower than that charged by the informal lenders, and a public expectation that the government will help the poor and indebted farmers, some farmers have incentive to over borrow from every possible channels, but default on the loans from the SFIs which charge the relatively low interest rates. One policy implication is that it is extremely difficult to change such over-borrowing behavior as long as the politicians still ignorantly think that the root cause of the problem is the shark loan informal money lenders, not the government itself.

The first change in the Thaksin’s paddy pledging policy began in the 2001/02 cropping year when the pledging price was increased to market price, with a limit of 350,000 baht for each farmer and a target to purchase 8.7 million tons of paddy from the farmers.  It was not until 2004/05 that the Thaksin government (with a newly appointed Minister of Commerce in November 2003) introduced the first rice price support policy but still retained the name of “paddy pledging policy”[1] which has become one of the popular political policy brand names of the Thai Rak Thai party (which later on changed its name to the Pheu Thai party). The government announced the support price which was 20-30% higher than the expected market price of paddy in the early harvesting month, depending on the type of rice (e.g., Home Mali (jasmine), glutinous or non-glutinous). But there was still a limit that each farmer could sell to the government, i.e., 350,000 baht per farmer. There was also a target which limited the government purchase not to exceed 9 million tons. Yet, the amount of dry-season paddy sold by farmers to the government surged drastically from 0.80-0.86 million tons in 2008-2004 to 2.17 million tons in the dry season of 2005. The share of pledged paddy in total production, thus, jumped from 2.9%-8.2% when the pledged prices were lower than the market prices in 1992-93 to 38% for the 2004/05 wet season paddy and 44.8% for the 2007 dry season paddy (see more details in Poapongsakorn and Charupong 2012, Poapongsakorn and Puntakua 2014; and Charupong 2011) .

The paddy pledging policy resulted in a big increase in the public stock piles of rice which had to be sold. Had the government sold the rice in accountable and transparent way, there would be only some reasonable loss from the farm subsidy and minor operation cost. But the rice auction was plagued by some unusual practices. In one of the biggest rice auctions before the announcement of the new price support policy in 2004/05, one company (with a pseudo name of company A) submitted the bid to buy large quantity of rice a few million tons) at the prices which were much higher than the prevailing market prices as well as the bidding prices of other traders, and thus successfully won the bid. Later on, after the implementation of the 2004/05 new paddy pledging policy with the pledged price higher than the market price, domestic rice price surged. Yet company A asked the state enterprise that was in charge of the rice sale to change the contractual terms, e.g., allowing it to sell rice in the domestic market (instead of the original term of the export market). Later, the company went bankrupt, and its executive was sentenced to the corruption charge (Poapongsakorn, et. al. 2014, and https://www.bangkokpost.com>politics[2] 25 June, 2014).

Why did this happen? The hypothesis is that the government wanted to control the rice trade (which became publicly known in 2012-see below). That is why Company A – whose CEO has close relation with the political leaders – was able to bid for most of the government rice because he might have inside information about the policy change. It did not make sense to offer to buy at the higher than the market price (as reported in the Senate Report in 2012) had the company has no access to the confidential information that the government planned to introduce the price support policy in the coming months.

Perhaps the direct evidence that the government wanted to control (or may be to monopolize) the agricultural trade was the price support policy for longan (again under the misleading name of longan pledging policy) in 2002 to 2004. In this case, only one company was awarded the rights to buy dried longan from the government stockpiles, i.e., See Tur Company in 2002 (50,000 tons), Agro Products Network Company in 2003 (22,000 tons), and Por Heng Company in 2004 (100,000 tons). (www.prachatai.com>journal, 2004-10-11)

The market intervention alone may at most distort the market. The more serious problem is corruption in the process of purchasing and selling longan. Between 2002 and 2003, the amount of dried longan sold to the Farmer Market Organization - a state enterprise under the Ministry of Agriculture and Cooperatives - exceeded the targeted purchase, hence was more than the actual production. For example, the targeted purchase of dried longan in 2005 was 40,000 tons, but the actual purchase was as high as 80,000 tons. In the 2004 scheme, there was 20,000 tons of old stock from the 2002-2003 schemes that were illegally sold to the government. Moreover, about 22,000 tons of the 2002 scheme was declared rotten and was destroyed. So the total cost  of the 2002 scheme was more than 11,243.4 million baht, of which 1,400 million baht was the loss from the rotten dried longan of 22,000 tons (see more details in Singhapreecha and Boonyasiri, 2012; www.mgronline.com , 25 July 2005).

Moreover, the contract with Por Heng Company was revoked because it failed to deliver the contracted quantity of dried longan. The contract required that the company had to deliver 330,000 tons, but it was able to deliver 100,000 tons to the public warehouses.

Although some senior government officers and traders were found guilty of the corruption charges, no high level politicians were charged.

The farmer income guarantee program

After the military coup which toppled the Thaksin government in 2006, the military appointed government did not implement the paddy pledging policy, thanks to the rising world prices of rice. Instead, the Ministry of Commerce tried to sell most of the public stockpiles of rice by using auctions, particularly auction in the now defunct Rice Futures Market. The government rice auction was discontinued after the election in 2008. Though the elected government (led by the Palung Prachachon Party which replaced the Thai Rak Thai Party) re-introduced the paddy pledging policy, the amount purchased by the government was not large because the world price of rice was at the historic highest record in 2008-2009 (see Figure 3.1). Another reason was that the two successive governments were in office for only a year, i.e., January 2008 and December 2008, before the government led party was dissolved by the Constitution court on 2nd December 2008.

After the Parliament voted to approve the new government formed by the Democratic Party coalition, Mr. Abhisit Vejajiva, a young prime minister, introduced a new policy of income guarantee for farmers[3] and a non-market intervention policy in 2009. The objective of the policy is to guarantee the minimum price of paddy for farmers by paying them the difference between the guaranteed price and the market price at the time of harvesting (see details of the schemed in TDRI Report 2009).

Unlike the previous pledging policy, the Abhisit government did not want to intervene in the market by buying and selling rice. So it simply paid farmers the price difference times the quantity of production, which was limited to the ceiling, depending upon the types of rice. For example, the guaranteed price of non-glutinous paddy (white rice) was Baht 10,000 per ton, and the ceiling was 25 tons per household, while the Home Mali (jasmine) paddy price was Baht 15,300 per tons with the ceiling of 14 tons per households (see Table 3.1). The guarantee price is calculated so that farmers received the profit margin of 40% plus the transport subsidy of 200 baht per ton. Farmers were eligible only if they registered with the Department of Agricultural Extension (DOAE) and signed a contract with the BAAC before they planted paddy.

The income guarantee program was also applied to farm households which grew maize and cassava during the 2009/10 and 2010/11 cropping seasons, using the similar principles and implementation procedures (see the guarantee price and subsidy ceiling in Table 3.1).

The policy was very popular among farmers because it was the “first time” that “all farmers” (who registered with the program) received cash subsidy. But its side effect is the “policy competition” in the 2011 election (more discussion in the next part). The number of rice farmers who received cash subsidy was 3.411 million in the first round (wet season) of 2009/10 and 3.786 million in the first round of 2010/11 (Table 3.2) comparing to less than one million farmers under the Thaksin’s price support (paddy pledging) policy in 2004/05, and 0.62 million farmers in 2005/06.

Total annual subsidy for both the wet and dry-season rice was 47.85 billion baht in 2009/10 and declined to 42.09 billion baht in 2010/11 despite the increase in guarantee prices and subsidy ceilings for 3 types of rice (see Table 3.1).

The policy was financed by three sources (1) passing a royal act to borrow money under the “Strong Thai Project”, (2) annual fiscal budget, and (3) borrowing from BAAC for the dry-season paddy in 2010/11.

The paddy pledging policy for every rice grain

The 2011 election was a fierce competition between the Democratic Party and the Thaksin’s Pheu Thai Party (which replaced the defunct Palung Prachachon Party - dissolved by the constitution court).

Recognizing the popularity of the Democrat’s Farmers’ Income Guarantee Policy, Mr. Thaksin, who is in exile, had to send his younger daughter who had no political experience to run. To win the election, the Pheu Thai Party campaign on a number of populist policies two of which were the Paddy Pledging Policy for every rice grain and the 300 baht minimum wage for workers in all provinces. The first policy was to win the farmers’ votes (the largest voting group) while the second was to attract the 10 million workers in the urban area. The campaign was a “do-or-die” strategy because the Pheu Thai Party wanted to bring back Mr. Thaksin.

The new Paddy Pledging Policy promised to buy non-glutinous paddy at 15,000 baht which was 50% higher than the guaranteed price under the Democrat’s Income Guarantee Policy. But unlike the previous policies, the Pheu Thai Party promised to buy “every grain” of paddy from all farmers, regardless of their production.

Critics argued that the policy would cause heavy fiscal cost and loss. But Mr.Thaksin and his team had a plan to minimize loss or turn the policy into profits. His objective is to have the cake and eat it all, i.e., he wanted to keep the domestic rice price low but to push up the export price[4]. To corner the export market, the government withheld large supplies of rice from the market. To stabilize the domestic rice price, the government must release adequate supply in its stock that meets the daily domestic demand. But to be able to meet both objectives, the government had to depend on a few trusted or connected rice traders.

Since the pledging scheme purchased 52% of total production in five cropping seasons [5],  traders, especially exporters were forced to buy the government rice from a few connected traders who had special privilege to buy rice from the government at unusually low price. These connected traders, thus, made huge economic (see Poapongsakorn and Pantakua, 2014).

To conceal the transactions, the government told the public that it had sold rice to one foreign government through the Government - to - Government (G-to-G) contracts. Later on the Criminal Supreme Court for Persons Holding Political Position ruled that the G-to-G contracts were fake because the claimed G-to-G sales were sold to the Thai connected traders who, in turn, sold them in the domestic market.[6]

The attempt to corner the export market also failed badly. Mr. Thaksin’s believed that, according to his interviews with foreign media (Forbes, 30 October 2012, http://www.forbes.com/sites/timferguson/2012/10/30/qa-thaksin-sits-down-with-forbes/2/), Thailand had the monopolistic power because it is the largest rice exporter with a market share of 25-28%. So by withholding large supplies of rice, the Thai export price would increase, thus wiping out the loss from the high cost of buying paddy at 15,000 baht per ton. But the attempt failed. Though Thai export price increased in the first six months of the policy, after that it went down, thanks to the abolition of Indian ban on non-glutinous rice export and the competition from Vietnam.[7] As a result, Thai rice export fell sharply from its record of 10.67 million tons in 2011 to 6.95 million tons in 2012, and 6.97 million tons in 2013. Among three major types of rice, export of parboiled rice and Hom Mali (jasmine) suffered most (Poapongsakorn and Pantakua 2014). It took the Thai exporters a few years to regain the export markets for Hom Mali rice –Thailand’s most expensive signature rice –after the paddy pledging policy was abolished.

The total costs in five cropping seasons were 984 billion baht (or 41% of the 2013 fiscal budget). The fiscal loss is estimated at 595.37 billion baht in 2014 when the policy was abolished by the military coup. The actual loss reported by the Ministry of Finance was 607.2 billion baht at the end of September 2016,  and increased to 638.2 billion baht in September 2017 (Table 4.1) because of the extra costs of stock, interest on outstanding debt and depreciated value of stockpile. Poapongsakorn and Pantakua, (2014) estimate that the rent obtained by the connected traders was 84.48 billion baht.

The government first estimated that the policy would need only 400 billion baht on the assumption that the policy would by partly financed by revenue from government rice sale. Since the government did not use the fiscal budget, it had to borrow from the money market. Yet by the third cropping season, there was not enough money to purchase rice. So, the government had to borrow 95 billion baht from the BAAC, like all the previous and present governments. The loans are off-budget and contingent liability, which is not immediately included in the public debt, and  thus  not subject to fiscal discipline.

Poapongsakorn and Pantakua (2014) summarize the key policy and execution mistakes. The policy mistakes were (1) setting the pledging price above the world rice price despite the fact that Thailand is a rice exporting country, and the promise to purchase total paddy production, and (2) the attempt to corner the export market in order to increase the export price. Four execution mistakes included a failure of not requiring the operating agencies to prepare the consolidated financial accounts, intention to withhold the information on government rice trade and the vulnerability to systemic corruption at all stages of intervention, particularly the secret rice sale to a few connected traders, and last but not least, the failure to pay more than one million farmers who sold their paddy to the government because the government ran out of liquidity despite the fact that there was a sign of the financing problems many months before. [8]

Back to the maximum acreage subsidy and no market intervention

The disastrous paddy pledging policy was one of the factors that brought about political protest and a few months of turmoil until the military decided to stage a military coup on 22nd May 2014. In addition to the corruption charge against the politicians and connected rice traders, the most serious mistake was the government failure to pay 100 billion baht to more than one million farmers before the government decided to dissolve the parliament.[9]

Rice policy

The military government immediately abolished the policy, used fiscal budget and donation money from the public, as well as borrowed money to pay 1.52 million farmers. Total payment was 191,582 million baht (see Table 5.1). Moreover, the government appointed a team to count, inspect and grade the government rice stockpiles throughout the country. According to the official accounting report, there were 18.7 million tons of rice in August 2014. The stockpiles were classified by grades (pass, A, B and C), types (non-glutinous white rice, glutinous rice, Hom Mali or jasmine, broken rice). Later the stockpiles were also classified into (a) suitable for human consumption, (b) suitable for animal feed, and (c) unsuitable for human consumption and animal feed , but can be used as inputs to produce electricity in biomass plants.

Therefore, the first and most important policy of the Prayut government was to sell all the rice stockpiles in two to three years by the transparent auction. It took the Department of Foreign Trade about 3.5 years to sell 16.84 million tons, in which all of the edible rice was sold out. As of 30 September 2018, there were about 0.2 million tons left in the warehouses-most of which are non-edible rice. As a result, the rice export price began to increase in 2018 after all of the edible rice in the stockpile was sold out. This is because rice traders consider the Thai government rice stockpile as the liquid stock. As long as the government holds some large enough stock, traders are not willing to buy Thai rice at higher price which will prompt the government to sell more rice from its stock, thus depressing the market price.

It should be noted that all of the Government – to - Government (G-to-G) rice sale is handled by the Thai Rice Exporter Association (TREA), which in turn, allocates the quotas to its members. Thus, the rent is shared between the rice exporter and TREA.

The military government led by Prime Minister Prayut Chan-o-cha, a coup leader, introduced an integrated rice policy, which includes the short-term subsidy and long-term policies (Table 5.2). The short-term policies consist of (a) a flat-rate subsidy for farmers, (b) the traditional paddy pledging measure aimed at delaying paddy sale by the farmers, (c) the subsidy for farmer organizations to stock paddy and delay selling paddy at the beginning of harvest, and (d) the soft loans for rice millers to stock paddy and rice.

The production cost subsidy for the farmers amount to 1,000 baht per rai for the maximum of 15 rais in 2014/15, 800 baht/ rais for maximum of 15 rais in 2016/17, 1,200 Baht and maximum 10 rais in 2017/18, and  1,500 baht/rai  12 rais in 2018/19 cropping season. The policy was first called a cost reduction subsidy[10] but was changed to a harvesting subsidy in the last two years. Since 2016/17, all farmers who are entitled to the subsidy must register with the DOAE. The number of registered rice farmers increased from 3.5 million households in 2016/17 to 4.2 million households in 2018/19, according to the DOAE report.

In addition, the government has also re-introduced the traditional paddy pledging for farmers and farmer organizations to delay rice sale in the first three months of harvesting by providing the soft loan at 90% of the market value and the storage subsidy of 1,500 baht per rai for the maximum of 12 rais. Farmer organizations also receive the similar subsidy to delay selling paddy in the early harvesting seasons. Finally, the millers receive the interest subsidy of 3% for the loan to purchase of paddy. Despite all kinds of subsidy, the government does not directly intervene in the rice markets. The last two subsidy programs – the storage subsidy for farmers and farmer organizations and interest subsidy for millers’ storage cost - may have some minimal distortionary impact on the market.[11]

Like previous governments, the Prayut government has re-introduced the debt restructuring subsidy under the new policy of “Providing Liquidity for Smallholders to Reduce their Debt”. The small farmers are the clients of BAAC. The cost of interest subsidy was 2,060 million baht in 2017/18 and 9,283 million baht in 2018/19 fiscal year (Krung Thep Turakit newspaper, 5 December 2018:5) The government used the central budget (which is under the authorization of the prime minister) to finance the schemes. It should be noted that such debt restructuring policy has an unintended effect of inducing farmers to over-borrow.

The government, with the initiation by the Ministry of Commerce, has introduced the long-term “Integrated  Rice Policy”[12] with four main objectives, i.e., (a) production planning integration of four ministries that is in line with the demand driven estimate (the production targets and estimated demand for rice are shown in Table 5.3), (b) increasing productivity by promoting the large-scale  farms and use of innovation (e.g., precision agriculture), (c) increasing value of rice by various measures (e.g., promoting organic rice production, adopting GAP and rice production system using Q mark) and (d) providing soft loans for rice farmers in unsuitable areas to diversify to other agricultural products, i.e., maize, pulses, cattle, mixed farming, and crop rotation by providing incentives for rice farmers to grow soybean and maize as the second crop after the wet-season rice, (e) crop insurance and compensation for crop loss due to disaster  (see Figure 5.1).

Table 5.2 lists the number of rice projects in four categories, i.e., short-term cash subsidy and soft loans, the long-term restructuring projects and other rice integrated policy measures. It should be noted that the restructuring projects and integrated rice policy measures that were implemented during the 2014-2018 period were not of the same type, but changed according to situation. Thus they are not actually long-term policy.  There are two sources of finance, i.e., annual fiscal budget and BAAC (which provides soft loans to both the government, farmers, farmer organizations and millers. Total budget fluctuated between 116.6 billion baht in 2015 to 268 billion baht in 2014. All of the restructuring projects and other rice integrated projects, which were proposed by the Ministry of Agriculture and Agricultural Cooperatives (MOAC) were financed by regular fiscal budget. On the other hand,   BAAC financed all of the short-term cash subsidy for farmers, and soft loan projects for farmers, farmer organizations, and millers. It should also be noted that BAAC has not only financed the short-term subsidy projects for rice. The Prayut government, like the previous governments, asked the BAAC to finance most of its subsidized policies, hence relying on the off-budget approach (see details in Table 5.4) because the regular fiscal budget was too small. It should be note that Table 5.4 includes all short-term subsidy and soft loans provided by BAAC to all types of farmers, i.e., rice, rubber, cassava, sugar cane and perennial trees, as well as large-scale farms. Yet most finance went to rice farmers.

 

 

Source: Rice Department.

The following are some observations on the Prayut agricultural policy.

First, the government has introduced both long-term integrated rice policy and the short-term subsidy policy.  According to the government document (Department of Internal Trade and Rice Department), the former is demand-driven and covers all stages of rice value chain (see details in Figure 5.1 and Table 5.2). But it could be argued that the policy may be more driven by water availability for dry season rice and rice price than the demand per se. Table 5.4 shows that the 2017 targeted dry-season rice area (8.01 million rais) was much smaller than that (12.2 million rais)  in 2018, thanks to the droughts in 2016-17. Thus total annual targeted rice area and production increased from 66.69 million rais and 29.5 million paddy tons in 2017 to 70.42 million rais and 33.422 million tons, respectively in 2018. Most of the increase in targeted production is attributed to the higher production of second-season (or dry season) crop which jumped from 5.16 million tons in 2017 to 8.084 million tons in 2018, thanks to the higher stock of irrigated water in the reservoirs. The estimated rice demand was 29.5 million tons in 2017 and 30.42 million tons in 2018 (National Rice Policy and Management Committee on 20 November 2018).

Second, some policy objectives, or at least their priority, changed overtime. For example, an objective of reducing rice land in the unsuitable areas was one of the top policy objectives in 2016 when rice price was low. But in 2018 when rice price was higher, its importance declined and the objective was hidden as one of the small projects.

Third, perhaps the most crucial problem is policy contradiction. While one of the long-term objectives of the integrated rice policy is to reduce rice production in the unsuitable agro-climatic areas, the short-term policy measures are to provide many kinds of subsidy for rice farmers. They include the cost subsidy (for planting and harvesting), the storage subsidy, the disaster compensation, and the premium subsidy for those who buy crop insurance (based on disaster caused by floods, droughts and pest[13]). Hence, the short-term subsidies are in conflict with the long-term objectives since farmers have no incentive to restructure their production. Moreover the government still does not have political will to charge the farmers for the use of scarce irrigated water. Since rice is the most water-intensive crop, the short-run subsidy will increase water uses, which in turn will result in future water shortage and conflicts.

Fourth, the integrated rice policy has become a pretext for government agencies to request more budget for all kinds of projects in the name of integrated rice policy, while in fact they may not be consistent with the policy objectives.  Examples are the fertilizers and pesticides control program, infrastructural stimulus package, etc. (see Table 5.2)

Fifth, there has been no systematic evaluation of the outcome of the policies. There are only the report on activities and output of the policies by individual government agencies. Moreover there were no consolidated financial statements of all government agencies that have implemented the policies. Therefore, it is not only difficult but may also be impossible to assess the success, failure and cost effectiveness of the policy.

CONCLUSION

This paper provides a brief overview of the agricultural policies which seesawed in the last 20 years. Unlike the previous two decades, the policies in the 2000s and 2010s focused on farmer subsidy in response to the low rice prices. Yet there are two major policy differences between the Thaksin and Yingluck governments in 2002-2006, and 2011-2014, respectively, and the Apisith and Prayut governments in 2008-2011 and 2014-present, respectively. The former intervened heavily in both the domestic and export markets, while the latter did not. Moreover the fiscal cost of the Yingluck’s paddy pledging policy amounted to 638 billion baht plus the damage to the export markets and public costs of prosecuting the wrongdoers in the courts.

The interesting questions are why do all governments have to provide the costly subsidy and what are the consequences on the future of Thai agriculture and government debt? There are at least three reasons for the popularity and prevalence of agricultural subsidy policy, i.e., farmers being the largest group of voters, the ease and availability of subsidy financing, and the failure of professionals and government agencies to respond to the farmers’ needs and problems.

First, farmers, particularly rice farmers, are the largest group of voters. While agricultural employment accounts for 38 % of all employed persons, its GDP share is only 8 % in 2017. Thus per capita agricultural income is much lower than the non-agriculture, and the 2010-14 trend was not narrowing, comparing to Malaysia and Vietnam (see Table 6.1). No government can afford not helping the farmers when the rice price declines. To make thing worse, the Thai public tend to favor the subsidy for the farmers as shown by a recent poll, i.e., 57% of the sample is in favor of the policy. This is probably because of the misconception that most, if not all, farmers are poor. But according to Poapongsakorn, et. al., 2016, only 2.16 million rice farm households (and 2.9 million farm households) were in the poorest 20% income quintile (for all types of households), while there were as many as 1.5 million rice households (and 2 million farm households) in the top 20 % income quintile, and the rest (2.55 million rice farms and 3.51 farm households) were in the middle income class in 2011.

One of the unintended and perhaps undesirable consequences is that farmers will not have incentive to restructure their production system by adapting to the market mechanism as long as they expect the government to bail them out by various kinds of subsidy. The future of Thai agriculture looks really bleak.

Second, in addition to the fiscal budget, most subsidy programs can be easily financed using the BAAC’s fund because the Minister of Finance is its chairman[14]. Most of the liquidity used to finance are not loans to the government but are advanced by the Bank and debited to the Bank’s Public Sector Agreement account which is separated from the Bank’s normal transactions. All the government has to do is to ask the Bank’s board to approve the use of Bank’s liquidity or to borrow money with the government guarantee. Such financing methods are contingent liability but are not defined as the public debt until the day the government decides to allocate the fiscal budget to pay some of the accumulated liability. Moreover, since there is no consolidated account of total expenditure spent by all related government agencies, there is a high risk of fiscal crisis in the future. The Finance Ministry’s claim that the fiscal position is of no worry because the public debt is still 50% of GDP - way below the threshold of 60% -  is an underestimate of the actual public debt that includes all contingent liability.

Third, one of the reasons the governments have to resort to populist policies may be the institutional weakness in policy determination and implementation process and failure of professionals and government agencies to respond to the farmers’ needs and problems.

All of the national agricultural committees – rice, rubber, cassava, palm oil, dairy milk, etc.- are political bodies that respond mainly to the price fluctuation with minimum attention to long-term issues. As shown in Table 5.2, the rice integrated policy, which was initiated by the MOC and approved by the National Committee of Rice Policy and Management, contains no rice research agenda, despite the fact that R&D is the most effective means to get out of the current trap of stagnant yield, and to develop new rice varieties with the grain physical quality and cooking eating quality that are demanded by the markets, particularly the health conscious consumers.[15]

To make matter worse, every time there is a change in the ministers, policy will change. Therefore, the government officers spend most of their time and resources reacting to the short-term issues ordered by the prime minister and ministers, resulting in less time and resources to carry out the policies and missions that are stipulated in the law. In addition, the senior government officers have strong incentives to carry out the short-term populist policies, thanks to the rapid promotion for those who actively carry out the policy implementation. But the stick may be stronger, if not so strong as the incentive, because any senior officers who fail to implement the policies will be sidelined.  It should also be noted that both the politicians and high ranking-government officers have no incentive to carry out some of the functions stipulated in the law. For example, one of the serious problem is the excessive use of irrigated water for rice production which always result in water conflicts and unnecessary damage to rice production. Yet the minister and RID do not dare imposing water charge on farmers’ use of irrigated water according to the Royal Irrigation Act because of the risk of farmer protest.

Another major concern is the declining in the capacity of professional technocrats and government agencies to respond to the farmers’ needs and problems. Three examples can illustrate the problems. Since the mid-1990s, the public agricultural research intensity has sharply declined (see Figure 6.1) and there are evidence that there is the shortage of high potential young agricultural researchers to replace the retirees (Pongthep, 2011), due to the problems of incentive and unstable sources of fund for agricultural research. That partly explains why RD fails to introduce new rice varieties that meet the farmers’ needs as well as the consumers’ demand. The extension services have also drastically weakened in recent years mainly due to the weak capacity of extension officers because most officers have to spend most of their time and resources to implement the short-term subsidy policies. The DOAE officers spend most of their time in registration of farmers every year, despite the availability of digital technology which can save the time and cost of registration. Moreover, most of the centrally dictated policies do not take into account the fact that agriculture and problems are area- specific. This is because most government policies are designed to be uniformly implemented throughout the country, the so-called the one size-fits-all policy. For these reasons most extension officers, particularly the young generation, are not so capable as the NGOs and the private sector extension staff. The last example of weak capacity is the production forecast of key agricultural crops. The forecast methods are out of date (the so-called econometric model which is more appropriate for a medium-term forecast, but not an crop forecast which must rely on bio-physical and satellite images[16], and the results are so unreliable that the private sector has to carry out its own ad hoc survey. As a result, sometimes the wrong forecasts resulted in wild price speculation, e.g., the sharp decline in the price of Hom Mali rice from 700 USD per ton to 450 USD per ton in the early harvesting months in 2016.

Finally there has never been an evaluation of the cost effectiveness and outcome of the agricultural policies.

Three major challenges to the future of Thai agriculture

The first policy challenge is how to contain the size of subsidy to the level that can maintain fiscal discipline with minimum damage and market distortion and at the same time introduce the policy that provides incentives for farmers to restructure their production system according to the changes in the markets. 

The second challenge is a need to restructure Thai agricultural system to cope with the declining comparative advantage as well as to strengthen the capacity of all relevant stakeholders to adapt to various external shocks, including climate change and technological disruption.  Past experience has consistently shown that the markets are the most effective mechanism which provides both incentives and competitive pressure for farmers and all agents in the food value chain to adapt and adjust to the external shocks. Yet the current integrated rice policy has a serious weakness because it is dominated by a belief that the government subsidy and policy measures will be able to encourage farmers to adopt large-scale farm by forming farmer groups and to diversify towards certain types of crops. It ignores the price mechanisms, incentives and opportunity costs of farmers, and the importance of providing knowledge and appropriate technologies for the farmers.   However, sometimes there are market failure and imperfections. Therefore there is a policy need to complement the market institution. For example, there is an urgent need to reform the public research and extension system because research and technology are public goods.

Last but not least, even if the agricultural restructuring policy is successful, it will not be able to substantially reduce, let alone eliminate, the income per capita gap between agriculture and non-agriculture as long as the agricultural employment share is almost three times as high as its GDP share. What Thailand needs is the structural transformation that moves large excess supply of agricultural labor into the non-agricultural sector which has higher productivity. This requires a proactive rural-urban development policy, decentralization policy and aggressive improvement of education quality and enhancement of labor skills and knowledge.

The answer to the above challenges depends on both the research institutes to produce evidence-based research that are policy relevant, and the government to strengthen governance and maintain accountability of the political system, and initiate an  institutional reform of policy determination and implementation process as well as capacity enhancement of public organizations.

REFERENCES

Bank for Agriculture and Agricultural Cooperative (BAAC). 2004. A Review of a Project on Debt Moratorium and Debt Burden Reduction for Smallholders in three years. Bangkok: BAAC. (Thai)

Charupong, Jitrakorn. 2011. Impact of Government Rice Stock Measures and Impact on Thai Rice Price and Export. MA Thesis. Faculty of Economics, Thammasat University, Bangkok. (Thai).

https://www.prachatai.com>journal. “Cracking the longan corruption movement…”   2004-10-11.

https://www.mgronline.com>local>detail. Disclosing Corruption in the 2002 LonganPledging Scheme.” 25 July 2005.

https://www.bangkokpost.com>politics “Rice tycoon convicted of embezzling.” 25 June,2014.

https://www.forbes.com/sites/timferguson/2012/10/30/qa-thaksin-sits-down-with-forbes/2/

https://www.ryt9.com>tag. “The cabinet has approved rubber subsidy.” Retrieved on 6December 2018

Krung Thep Turakit newspaper, 5 December 2018:5

Poapongsakorn, Nipon.  2010.”The political economy of Thailand’s rice price and export policies in 2007-08.” In The Rice Crisis-Markets, Policies and Food Security., edited by Davod Dawe. London, Washington, DC: Earthscan. 191-218.

Poapongsakorn, Nipon and Jitrakorn Jarupong. 2012. Rent Seeking Activities and the Political Economy of the Paddy Pledging Market Intervention Measures. Bangkok: National Anti-Corruption Commission.

Poapongsakorn, Nipon and Kamphol Puntakua 2014 “Assessing the Thai Paddy Pledging Policy: Its Performance and Social Costs.” With Kamphol Puntakua. World Food Policy. Fall 2014, vol. 1, No. 2.

Poapongsakorn, Nipon, et. al., 2014. Corruption in Agriculture: A Case of Paddy Pledging Policy.  A research report for the Thai research Fund. Bangkok.

Pongthep, Akrathanakul. 2011. A Proposal on Agricultural Research System and Education. Bangkok: Center for Agricultural Biotechnology, Kasetsart University.

Puntasen, Apichai, et. al.  2010. An Evaluation of the Debt Rehabilitation and Moratorium for Poor Smallholders. Bangkok: BAAC.

Ramsay, Ansil. 1987). “The Political Economy of Sugar in Thailand.”  Pacific Affairs. Vol. 60, No. 2 (Summer, 1987), pp. 248-270.

Siamwalla, Ammar. 1975. “A history of rice policies in Thailand.” Food Research Institute Studies. Vol. 14, No. 3.

Siamwalla, Ammar. 1987. “The farmers’ Aid Fund Act of 1974: Its genesis and aftermath.” A paper prepared for the EDI/KDI Seminar on Economic Policy Change and Governmental Process. Organized by the Economic Development Institute of theWorld Bank and Korea Development Institute. Seoul, South Korea. November 9-13.

Siamwalla, Ammar and Nipon Poapongsakorn. 1995. “Agriculture and macroeconomic policies: A Thai case studies.” FAO expert on consultation on Monitoring the Impact of Structural Adjustment Programme on the Agricultural Sector. Phuket, Thailand.

Singhapreecha, Jaruek and Isriya Boonyasiri. 2012. The Political Economy of the Longan Market Intervention Measures. Bangkok: National Anti-Corruption Commission.

Thailand Development Research Institute (TDRI). 1995. “Agricultural Diversification / Restructuring of Agricultural Production Systems.” By Nipon Poapongsakorn, Ammar Siamwalla, Boonjit Titapiwatanakun, Prayong Netayarak and Pattamawadee Suzuki.  A research prepared for the Food and Agriculture Organization United Nations.  TDRI.  August 1995. (English).


[1] The original and genuine paddy pledging policy was introduced in 1981/82. But the most effective one was in 1990 when farmers were all owed to keep the pledged paddy in their own barn house. The policy aims at providing subsidize non-recourse loan to delay selling there produce in the early harvesting month when rice price is low (see Table 1.1).

[2] A court sentenced a rice trading tycoon for embezzling state rice in 2007.

[3] The policy was first conceptualized by Prof. Ammar Siamwalla at Thailand Development Research Institute as the rice price option. It was worked out in details by Nipon Poapongsakorn also at TDRI (see a TDRI report in 2009).

[4] According to the official document, two of the policy objectives were to regulate the supply of rice and maintain (domestic retail) price stability.

[5] Total government purchase of dry-season paddy was almost 100%, while a significant supply of wet-season paddy was kept by farmers for own consumption and seed saving. Yet significant supply of wet-season paddy was sold to rice mills in the remote areas where there were no mills that were eligible as the participating mills under the policy.

[6] The Criminal Supreme Court also ruled, in a separate but related case, that the prime minister is guilty of refraining from performing duties, i.e., failure to getting rid of corruption in government’s rice sale.

[7] See more discussion of impact of government rice stockpile on price of rice in part 5 below.

[8] In fact the government could have passed a special law to borrow money before it decided to dissolve the parliament in December 2016.

[9] According to the constitution, once the parliament is dissolved, the acting government cannot borrow money which will  create the financial burden for the next government.

[10] In 2015/16 the subsidy was based on paddy production (in tons) but changed to rais later.

[11] It should be noted that military used to use unconventional and unnecessary measures to inspect the rice stock of millers in 2016/17 when the price of Hom Mali (jasmine) rice was exceptionally low in the first two months of the 2016/17 harvest,.

[12] Perhaps a more appropriate name should be the comprehensive rice policy covering all stages of value chain.

[13] The payout depends on the announcement by the provincial governor (through the recommendation of the Department of Public Disaster Prevention and Mitigation (Ministry of Interior) and the Department of Agricultural Extension) that the districts are declared as the disaster area. Legally the process of declaration and compensation takes three months. But in tice, it usually takes more than 6-10 months. For example, the precipitation deficit during the planting season between mid June and July 2018 affected 1.51 million rais in 11 provinces. By 19 November 2018, only 18 farmers in one province had received the compensation, and 4 provinces with affected areas of 0.599 million rais were not yet declared as the disaster areas, hence 49,622 farmers would not be entitled to the compensation until the governors declared that they are disaster areas. (Data presented by the DOAE during the National Rice Policy and Administration Committee on 20 November 2018.)

[14] Two examples of BAAC financing will give a better understanding of how the governments finance the subsidy programs with minimum impact of public debt. The first one is the direct subsidy for the farmers, say a cash payment of 1,500 baht/ rais for the maximum of 12 rais. The BAAC will use its liquidity to pay the farmers and charge the government the cost of the money (at FDR+1%) and the administration cost. Then the government will instruct the Budget Bureau to allocate fiscal budget to pay BAAC every year until the debt and interests are fully paid. Only the annual budget that are allocated to pay BAAC is counted as the public debt. The second example is the soft loans to the millers and farmer organizations. The BAAC will charge the interest rate of MLR+1%. The cost to the government is the interest subsidy, say 3% of the loans, and the administration cost. The loans to the millers and farmer organizations are not government’s debt. The cost of bad loans is also borne by BAAC. That is why in the past the government had to use public money to help increase the Bank’s capital when its capital adequacy is below the required level and the Bank is at risk. 

[15] For example, in the recent years Vietnam has been able to export up to a few million tons of low amylose (soft) rice to China because Chinese consumers prefer such rice. Its FOB price is 500 USD per ton, comparing to FOB price of 450 USD for the high amylose Thai rice. There are several constraints to promote the production of low amylose rice varieties, such as RD21 and RD77. First the RD has only limited supply of extension seeds. Secondly most Thai farmers grow high amylose rice because of its popularity among Thai consumers. So rice millers do not want to buy the low amylose rice because the market is still very small and do not want to pay higher price. These constraints reflect the fact that the Thai public research system as well as the extension system have not been designed to adapt to the changing pattern of world demand for rice.

[16] The best examples of crop forecast is that by USDA (see https : //www.USDA.GOU)

Date submitted: January 31, 2019
Reviewed, edited and uploaded: September 2, 2019

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