Pledging scheme: Thai rice on brink of the abyss

Politically, the rationale behind the policy is understandable, albeit not substantive. If 40 per cent of the Thai population works in the agricultural sector, a policy that pushes prices for their crops higher should help them economically, and that translates into more votes for the sitting government. This reasoning is itself faulty on two counts: first, out of 3.7 million households in the agricultural sector, only 1.1 million are involved in rice farming. plus the difference in the sizes of their farms is wide. Second, the unrealistically high price set by the government will eventually inflict more pain and harm upon the rice farmers than any transient good they may be getting at present – if they are genuinely getting the intended benefits. 
A more onerous question that no supporters of the programme want to address is why some rice farmers are poor in the first place.  It is a cop-out to simply point the finger at the “usual” suspects, namely the middlemen, the millers, or the traders, who are always accused of stomping mercilessly upon the less savvy, defenceless prey. These people may be part of the problem, but they are not the cause of many rice farmers’ abject poverty. Years of misguided government policies laced with addictive “quick fixes” fed to rice farmers have put them where they are today. Why hasn’t a well thought-out land redistribution policy been implemented?  Why hasn’t there been a continuous training programme on sustainable farming and best practices that will lift farmers out of poverty in a lasting manner?  Why haven’t enough people dug up the corrupt tradition of government officials that allows so many cases of exploitation of the farmers to continue?  Why haven’t we asked ourselves why, after years and years of forgiveness of farmers’ debts, they continue to sink deeper into debt?
Populist policies cannot hurt politicians. For the Pheu Thai Party, the rice pledging policy could mean a clean sweep in the Central Plains, which represent the weakest link for a party that already has control of the North and Northeast. Political domination of the Central region is the ideal end result, upon which billions of baht of taxpayers’ money is being lavished, putting the country’s economy at risk in a time of global economic turmoil.
Such spending will reach Bt1 trillion if the policy continues until next year. More grave still is the imminent collapse of the market mechanism in the rice industry as the result of the pledging policy.
Economics 101 teaches us that in a free-market economy, the market mechanism produces the best distribution of goods and services.  The forces of supply and demand determine the price of the goods and the quantity exchange in any given market. The market mechanism functions as the “invisible hand” that brings about economic efficiency, the lack of which is called “market failure”.
There is also a group of “public hand” economists which argues that government intervention in the market mechanism is justified as a rent seeker, ie, one who uses his resources to transfer income from one sector to another. They argue the government may be brought into the market system whenever someone or some group can benefit, even if efficiency is not served. However, they also acknowledge that focus must be put on how the government’s investment moves and if it’s based upon self-interested politicians or voters.
On the subject of Thailand’s rice policy, many will agree that raising the price of rice is a good thing as long as it is not so high that Thailand prices itself out of the market completely. Unfortunately, that is increasingly the case.
The price of rice set forth by the Thai government is about 40-50 per cent above the world price. In a direct correlation, in the last 12 months, Thai rice exports were down 45 per cent. Do some fact-checking and you find that during the same period, no government-to-government shipping of rice has ever come to pass. Not to Indonesia, nor the Philippines, nor Bangladesh.  As for China and the Ivory Coast, there was about 200,000 tonnes or less shipped by private companies to the two destinations. Whether these shipments were part of government-to-government transactions is hard to tell, but the quantity falls far short of those announced by the Thai government.
Thailand produces over 34 million tonnes of rice per year and in 2010 exported over 7 million tonnes.  In 2011, the volume of export went down to 3.9 million tonnes and the unsold rice is sitting in silos across the country. Assuming (if such insanity is permitted to prevail) that in the second and third year, the government can still find space to hold the unsold rice, and that the government budget deficit grows unchecked, the question that will loom larger is what will happen to the Thai market mechanism and the rice industry? What will happen to the rice-farming households? Will they – can they – keep producing rice that fewer and fewer people in the world want to buy?
The government may be hoping to position Thailand as head of the rice cartel by withholding supplies and pushing the world rice price higher.  But can’t it see that even the oil cartel does not work for Saudi Arabia if it charges twice as much as others for its sweet crude? Can’t they realise that at the end of the day, the government will face a triple crisis – in cash flow, storage, and the collapse of the Thai rice market mechanism and the rice private sector that has made Thai rice a hot commodity in the world.
Thailand could only redeem itself for its policy if a total calamity in the major rice-producing countries such as Vietnam and India wiped out at least 20 million tonnes of rice from the world market. But given the current world surplus, that chance is slim.
A rich country like the United States may pay its farmers not to grow rice to sustain the price, and tomorrow may never die for James Bond. But poor Thai farmers won’t know what to do or who they can turn to when the sky falls, as their government’s policy has completely destroyed the very mechanism that has successfully sold their crops all these years.