The rice subsidy policy, known domestically as the rice-pledging scheme, had two objectives. First, the price offered to Thai rice farmers was to be raised through direct government purchase to levels about 50 per cent above the prevailing market price. Second, the international price was to be raised by reducing Thai exports. Roughly one half of Thailand’s annual rice crop of 20 million tonnes is normally exported.
When the scheme was outlined in the Pheu Thai Party’s 2011 election platform economists inside and outside the Thai public service pointed to serious flaws.
First, the two halves of the policy were in conflict. A subsidy to domestic producers would be sure to induce increased supply. But if exports were restricted, a gap would exist between total supply and total demand. How was the government to dispose of the additional output in addition to the rice that was no longer being exported? If this rice were sold domestically, the internal price would collapse, defeating the price-supporting objective. If it were sold abroad, the international price would similarly be forced downwards, defeating the second objective.
Second, critics argued, the budgetary cost of the subsidies needed to purchase Thai rice at above the market price could be enormous. If the rice was not sold, as seemed likely, the government would have a huge and expensive stockpile of rice. And the potential for corruption in the purchase, milling, storage and disposal of the rice was significant.
In addition, the government’s direct purchase of rice was sure to destroy the country’s existing, highly efficient private sector rice export marketing industry. And the quality of Thai rice available for export was likely to decline if farmers were offered a subsidy for rice offered for sale regardless of quality because farmers would have an incentive to switch production from premium fragrant rice varieties to lower-cost, higher-yielding varieties less favoured on the international market.
It was also predicted that rice would be smuggled from neighbouring rice-producing countries, especially Cambodia, to take advantage of the above-market prices being offered by the Thai government.
Finally, attempts to manipulate international commodity markets have a long and sobering history of failure. With the partial exception of the OPEC petroleum cartel, supply restrictions are almost always countered by increased supply from other countries.