Subsidies or Thailand's Descent Into Egyptification

One of the biggest (fiscal) drags on the Egyptian economy is its continued use of massive subsidies for food and energy. At a touch less than a third of the national budget, it eats up a lot of money arguably better spent elsewhere. Moreover, you can hardly say that these subsidies have bought the country peace as the natives have been restless for years and years now and seemingly enjoy killing each other for the heck of it. Having (temporarily) exhausted Detroitifaction as a metaphor for industrialized countries descending into Hades, let us now talk of something happening in the developing countries. You guessed it--Egyptification.

Unfortunately, there is something of the sort going on right here in Southeast Asia. A few weeks ago I discussed the mounds and mounds of rice being hoarded by the Thai government. Not only is the national purse being hurt by this open-ended commitment to buy these crops at well over market prices, but so much food is simply spoiling away since this massive stockpile cannot be sold without significantly denting prices commanded by rice. Thai PM Yingluck Shinawatra tried to roll back the price at which rice was purchased, but quickly chickened out once rice farmers complained. Since her electoral base lies not among city slickers in Bangkok but rather farmers in rural areas, she knew better than to commit political suicide. No matter how economically ruinous, there is little turning back from rice subsidies.

Almost unbelievably, instead of backing down, Yingluck and Co. are now extending subsidies to include rubber. As one of it not the world's largest producers of natural rubber, Thailand is also buffeted by global price fluctuations of this commodity.

Thailand has offered 30 billion baht ($959 million) in aid to rubber farmers to help offset a plunge in the price of the commodity, the latest in a string of costly populist policies the government has aimed at rural communities. Farmers are welcoming the promised funding, though marches are still planned across the country for Monday aimed at keeping up pressure on Bangkok and to ensure the policy is enacted. 

This effort comes on top of (unsuccessful) initiatives to buoy rubber prices by withdrawing supply alongside other major Asian exporters Indonesia and Malaysia given slack global demand. Having caved in to key constituencies alike rice and rubber farmers, the fear is that the Yingluck government will now be obligated to entertain every other agricultural interest group:

The government is walking a tightrope—providing subsidies and other benefits to farmers as soft commodity prices fall while trying to keep a lid on expenditures, which are nevertheless booming. This week's subsidy offer comes in the wake of an aborted government effort to pull back on its rice subsidization program, which has led to massive stockpiles of the staple grain.

The worry, though, is that withholding money from farmers may risk fueling social unrest in a country prone to political violence. "Now that rice farmers and rubber farmers get subsidies from the government, farmers of other crops will want to have their share," said Aat Pisanwanich, director of the Center for International Trade Studies at Thai Chamber of Commerce University. "The government has to come up with longer-term measures because this subsidy isn't sustainable."

These subsidies tend to be self-perpetuating: once granted, they are hard to rescind--especially in light of the current trend towards softening commodity prices. You wish the Thais well, but I do not see a smooth transition out of these subsidies. Already, Thailand has slipped into recession, and you can only imagine calls for these market-distorting measures to increase from agricultural interests whom the Shinawatras have become exceedingly obsequious towards lest they lose this key constituency.

UPDATE: Not that the rubber farmers are content already as they are out in force to, well, ensure the government buys rubber at uncompetitive prices.