The senselessness of subsidy
Monday, 9 November 2009
Nizam Ahmad
As a deliberate policy, the Awami government has recently reduced the prices of non-urea fertilisers and fixed the wholesale prices. The government explained that the farmers must benefit with the fall in prices at international levels. However, the price-cut would cost about Taka three thousand that the government describes as subsidy. The government is apparently prepared to give more subsidies despite World Bank's advice to the contrary.
The Awami League pretends to act as the government of rural Bangladesh. Subsidisation, however unreasonable, is their way of showing it. The BNP's charade, in contrast, is to act as the government of the urban elites as they divert more money to textiles or to reducing import duties on automobiles. However, they together, by involving the heavy presence of government, ravage both the rural and urban economies of Bangladesh.
With price-cut of inputs and cheap credits agricultural production would increase but prices will fall and, therefore, the wages of the farmers would also fall. Thus, it is not about improving the living conditions of the farmers but achieving food autarky. In the next elections, Awami League will be able to boast that they had surpassed food production targets of all times, and stopped imports of food. However, as 'unintended consequences' of subsidies, cheaper fertiliser is regularly misused and increases the possibilities of smuggling to neighbouring countries. While fertilisers are smuggled out, medicines, fruits, etc. are smuggled in. The farmers, who receive less money as wages, engage in black marketing. Often imported fertilisers remain dumped as government-appointed dealers have zero-price incentive to collect their allotments.
In response to market demand, informal, voluntary, and complex exchange of goods and services across national boundaries can be healthy for rural economy, but illegal in the eyes of the government. Authorities soon crack down and even kill cross-border traders. In such a hostile environment, the farmers return to farming at low wages but the criminalised gangs take over 'cross-border trading' by lucratively involving the border security guards of the concerned countries.
Higher subsidisation of agriculture will increase the criminalisation of rural Bangladesh, misallocate resources, and hinder rural market stability. Subsidisation means government spending beyond income as it sells below costs. It may appear noble but, no doubt, it is more harmful than good and we need not hear from the World Bank why it is so. No government should implement policies only to defy international organisations or to gain political kudos.
India has massive agricultural subsidisation programmes that began in Nehru's era. This has made the growers critically and permanently dependent on government support. Despite large injection of funds, the Indian farmers are not well off excepting in a few areas like Punjab, but horribly poor and deprived of many basic human needs. Naxalism is on the rise due to rural deprivations and it is the chief headache of the Congress government. In many parts of rural India, suicide by farmers is a permanent feature in spite of cheap loans, subsidisation of inputs, and protection from imports.
The Common Agricultural Policy (CAP) of the European Union that holds a huge budget to subsidise European agriculture is difficult to dismantle as it has powerful groups -- the beneficiaries preventing its dismantling, tooth and nail. The beneficiaries had spread their tentacles with years of subsidisation of EU agriculture. The EU would need another Margaret Thatcher, who ended, without bloodshed, the unionisation and subsidisation of coal in Britain in the 1970s, to abolish the custom of agricultural subsidisation in the EU.
The theory, pursued by many experts, domestic and international, that a government must ensure food security is flawed. Food is essential and man learned first to produce food some 10,000 years before anything else, as weaving clothes. Even ants collect and store food in advance of winter without any ministry of agriculture. By nature, people would ensure their own food security as they ensure the security of other needs, but only if a government ensures individual freedom to 'act' in the market. 'Economics is the study of the man in action', said the Austrian economist Ludwig Von Mises. If government ties us down with numerous regulations and restrictions, we will act wrongfully, unproductively, illegally, or act not at all.
Allowing the spontaneous market to determine food production, to import inputs or to export produce, can begin to enrich the rural folks. Without subsidies, production would fall and prices would rise. This would become the ideal condition for a large resource shift to agriculture, as investors and producers would both be attracted to agricultural production, with higher prices and hence higher profits. With bigger investment, modern management, technology and capital would arrive, and labour skills would improve, productivity would rise, so would wages, and retail prices would stabilise. Without government plans, quality schools and hospitals would pop up in rural areas as the rural economy improves and the demand of vital services increases.
Those in the urban areas will instinctively ensure their own supply of food when prices stay high by investing in rural properties or productively using their ancestral assets in villages. The rural and the urban economies would at once connect and become economically interdependent. The connection today between the villages and towns is one-sided. We have rickshaw-pullers, the garment workers and the hawkers from the rural areas crowding the cities. The urbanites visit their villages during holidays and hardly ever to sell or buy something. They rather visit government offices to court favours. Dhaka's mad rush, the traffic jams and the flooding of rickshaws are there because the movement of people is strictly one-sided -- from the rural areas to the urban areas. Without subsidisations, we, from the urban areas, would create vested interests in villages to ensure our food security if markets are perceived to be volatile.
The market, as Dr. Frederick Hayek, the legendary free market philosopher, describes, is a great 'discovery process' of trials, errors, and self-reliance. Any person who relies on himself is more happy, proud, virtuous, and confident than those who rely on handouts from government offices. A farmer in Bangladesh is typically dependent on government promises but least on himself. To the farmer, a government is a replacement of the old powerful landlords. While interacting with officials, he is timid and without confidence. He is gullible and unhappy as a person. These mental and psychological conditions are just as bad as his living conditions are as a farmer.
Man is the greatest creation, the wisest, and no government should doubt his potential and creative ability, however lowly or humble he may be, to feed himself and his family if he can live peacefully in a community. The government should not intervene in our food security but in securing peace. If a government can provide security, property rights, market freedom and takes the economic 'back seat', the whole nation could become hyper productive. Bangladesh government should realise that we have crossed many decades and understand why price controls, handouts or subsidisation never work but for the short run.
We cannot follow the subsidisation programmes of the US, EU or India to justify or insist our own. It is clear that any government intervention helps to promote and protect the few but the vast majority suffers with distorted market signs. People are unable to follow market trends or to detect opportunities due to interferences by the government. Therefore, all that we have learnt in four decades of independent Bangladesh, is how and when to crowd political offices for favours or to become a politician as only power politics ensures speedy wealth but for those who can master the art of pleasing the powerful. The Awami government must scale down subsidisation of agriculture and boost market liberalisation, rural and urban, if the development of Bangladesh is their honest political commitment.
The writer is the Director, Liberal Bangla UK
As a deliberate policy, the Awami government has recently reduced the prices of non-urea fertilisers and fixed the wholesale prices. The government explained that the farmers must benefit with the fall in prices at international levels. However, the price-cut would cost about Taka three thousand that the government describes as subsidy. The government is apparently prepared to give more subsidies despite World Bank's advice to the contrary.
The Awami League pretends to act as the government of rural Bangladesh. Subsidisation, however unreasonable, is their way of showing it. The BNP's charade, in contrast, is to act as the government of the urban elites as they divert more money to textiles or to reducing import duties on automobiles. However, they together, by involving the heavy presence of government, ravage both the rural and urban economies of Bangladesh.
With price-cut of inputs and cheap credits agricultural production would increase but prices will fall and, therefore, the wages of the farmers would also fall. Thus, it is not about improving the living conditions of the farmers but achieving food autarky. In the next elections, Awami League will be able to boast that they had surpassed food production targets of all times, and stopped imports of food. However, as 'unintended consequences' of subsidies, cheaper fertiliser is regularly misused and increases the possibilities of smuggling to neighbouring countries. While fertilisers are smuggled out, medicines, fruits, etc. are smuggled in. The farmers, who receive less money as wages, engage in black marketing. Often imported fertilisers remain dumped as government-appointed dealers have zero-price incentive to collect their allotments.
In response to market demand, informal, voluntary, and complex exchange of goods and services across national boundaries can be healthy for rural economy, but illegal in the eyes of the government. Authorities soon crack down and even kill cross-border traders. In such a hostile environment, the farmers return to farming at low wages but the criminalised gangs take over 'cross-border trading' by lucratively involving the border security guards of the concerned countries.
Higher subsidisation of agriculture will increase the criminalisation of rural Bangladesh, misallocate resources, and hinder rural market stability. Subsidisation means government spending beyond income as it sells below costs. It may appear noble but, no doubt, it is more harmful than good and we need not hear from the World Bank why it is so. No government should implement policies only to defy international organisations or to gain political kudos.
India has massive agricultural subsidisation programmes that began in Nehru's era. This has made the growers critically and permanently dependent on government support. Despite large injection of funds, the Indian farmers are not well off excepting in a few areas like Punjab, but horribly poor and deprived of many basic human needs. Naxalism is on the rise due to rural deprivations and it is the chief headache of the Congress government. In many parts of rural India, suicide by farmers is a permanent feature in spite of cheap loans, subsidisation of inputs, and protection from imports.
The Common Agricultural Policy (CAP) of the European Union that holds a huge budget to subsidise European agriculture is difficult to dismantle as it has powerful groups -- the beneficiaries preventing its dismantling, tooth and nail. The beneficiaries had spread their tentacles with years of subsidisation of EU agriculture. The EU would need another Margaret Thatcher, who ended, without bloodshed, the unionisation and subsidisation of coal in Britain in the 1970s, to abolish the custom of agricultural subsidisation in the EU.
The theory, pursued by many experts, domestic and international, that a government must ensure food security is flawed. Food is essential and man learned first to produce food some 10,000 years before anything else, as weaving clothes. Even ants collect and store food in advance of winter without any ministry of agriculture. By nature, people would ensure their own food security as they ensure the security of other needs, but only if a government ensures individual freedom to 'act' in the market. 'Economics is the study of the man in action', said the Austrian economist Ludwig Von Mises. If government ties us down with numerous regulations and restrictions, we will act wrongfully, unproductively, illegally, or act not at all.
Allowing the spontaneous market to determine food production, to import inputs or to export produce, can begin to enrich the rural folks. Without subsidies, production would fall and prices would rise. This would become the ideal condition for a large resource shift to agriculture, as investors and producers would both be attracted to agricultural production, with higher prices and hence higher profits. With bigger investment, modern management, technology and capital would arrive, and labour skills would improve, productivity would rise, so would wages, and retail prices would stabilise. Without government plans, quality schools and hospitals would pop up in rural areas as the rural economy improves and the demand of vital services increases.
Those in the urban areas will instinctively ensure their own supply of food when prices stay high by investing in rural properties or productively using their ancestral assets in villages. The rural and the urban economies would at once connect and become economically interdependent. The connection today between the villages and towns is one-sided. We have rickshaw-pullers, the garment workers and the hawkers from the rural areas crowding the cities. The urbanites visit their villages during holidays and hardly ever to sell or buy something. They rather visit government offices to court favours. Dhaka's mad rush, the traffic jams and the flooding of rickshaws are there because the movement of people is strictly one-sided -- from the rural areas to the urban areas. Without subsidisations, we, from the urban areas, would create vested interests in villages to ensure our food security if markets are perceived to be volatile.
The market, as Dr. Frederick Hayek, the legendary free market philosopher, describes, is a great 'discovery process' of trials, errors, and self-reliance. Any person who relies on himself is more happy, proud, virtuous, and confident than those who rely on handouts from government offices. A farmer in Bangladesh is typically dependent on government promises but least on himself. To the farmer, a government is a replacement of the old powerful landlords. While interacting with officials, he is timid and without confidence. He is gullible and unhappy as a person. These mental and psychological conditions are just as bad as his living conditions are as a farmer.
Man is the greatest creation, the wisest, and no government should doubt his potential and creative ability, however lowly or humble he may be, to feed himself and his family if he can live peacefully in a community. The government should not intervene in our food security but in securing peace. If a government can provide security, property rights, market freedom and takes the economic 'back seat', the whole nation could become hyper productive. Bangladesh government should realise that we have crossed many decades and understand why price controls, handouts or subsidisation never work but for the short run.
We cannot follow the subsidisation programmes of the US, EU or India to justify or insist our own. It is clear that any government intervention helps to promote and protect the few but the vast majority suffers with distorted market signs. People are unable to follow market trends or to detect opportunities due to interferences by the government. Therefore, all that we have learnt in four decades of independent Bangladesh, is how and when to crowd political offices for favours or to become a politician as only power politics ensures speedy wealth but for those who can master the art of pleasing the powerful. The Awami government must scale down subsidisation of agriculture and boost market liberalisation, rural and urban, if the development of Bangladesh is their honest political commitment.
The writer is the Director, Liberal Bangla UK