With Europe threatening to push the global economy into yet another recession, one would think this would be a time for economies to batten down the hatches, build fiscal and foreign exchange buffers, and brace for the coming storm. Think again. The Thai government, under Prime Minister Yingluck Shinawatra, recently introduced a new rice policy that will hemorrhage public funds at a time when its economy desperately needs to improve its international competitiveness by increasing public investment in education, transport, and energy. Indeed, the new rice policy is muddle-headed in so many ways it is already giving the government a headache—and this is only the beginning.

The new policy, announced last year, guarantees the purchase of rice from farmers at 15,000 baht a ton for white unmilled rice and 20,000 baht for “jasmine” rice. This rate is 50-60 percent above the prevailing market price. Not only does this depart from previous rice-buying schemes in Thailand because of the high price, it also fails to set any limit on government purchases. If anyone is prepared to sell, the government is duty-bound to buy. The policy has made the government the world’s largest rice trader overnight, dealing with virtually the entire marketable surplus of rice in the country.

The initial impact of the policy in 2011 was limited, in large part because that year’s floods wreaked havoc on the rice crop. But this year, rice has flowed into government storage facilities in record amounts, completely overwhelming them. Rice stocks have climbed by 12.5 million tons—well over the amount that Thailand exports in a normal year—and the amount keeps rising.  

Most worrying, there appears to be little prospect of lowering this growing mountain of rice except at a significant loss to the exchequer. The per ton purchase price of Thai rice is almost $200 above equivalent Indian or Vietnamese rice. Add storage, spoilage, and transportation costs, and the gap gets even larger. 

One estimate puts the potential budgetary loss to the government at close to 5 percent of its GDP. This may be an upper-bound estimate, but it gives some sense of the potential scale of this subsidy. The budget allocates about the same amount for all government investments in any year. Some quarters in government are contemplating the possibility of restricting rice production in order to keep fiscal costs manageable. Apart from being an implementation nightmare, introducing production quotas would add yet another layer of distortion to correct a distorted result from a distorted policy. That would be like piling insult on injury.

Rising fiscal costs are only one part of the problem. Corruption is another. Farmers are required to sell their rice to millers who have sufficient local market power to shave the procurement price they offer to farmers, and at the same time receive compensation from the government at the procurement rate. It is hardly surprising that the number of mills in Thailand has increased suddenly. Several members of the ruling Pheu Thai party in parliament are owners of rice mills—which may explain their enthusiastic support for the policy.

The overflow of rice in government storage facilities runs the risk of significant spoilage. Under the scheme, farmers can decide within a year whether they want to repurchase the rice from the government, an option they would be expected to exercise if the market price rises above 15,000 baht a ton. While this is an unlikely prospect, it does force the government to hold on to rice stocks for longer than it would like. The longer the storage, the greater the chance of spoilage.

The government is waiting for the international rice price to rise so it can make a profit. It could be waiting a very long time. Unfortunately for Thailand, other major rice producers—especially India and Vietnam—have had a bumper year in rice production, so international prices are low. In previous years, Thailand accounted for a third of world exports. The withdrawal of Thai rice exports from the market has been a godsend for Vietnamese and Indian rice exporters who would otherwise have had to contend with even lower prices. Now they are laughing all the way to the bank. 

Thai taxpayers, courtesy of the government, are helping boost prices for rice producers in other countries. Moreover, Thai rice exporters are losing their reputation for reliability and Vietnamese and Indian farmers are beginning to grow varieties very similar in quality to their Thai counterparts. This is a recipe for further decline in Thailand’s share in the global rice market.

Rice farmers in neighboring countries have been quick to see the advantage of smuggling their rice into Thailand for final sale to Thai millers at the high procurement price. True, Thai rice is usually superior in quality to what is grown by Cambodia, Laos, Vietnam, and Myanmar, but a common practice is to mix low and high quality rice to boost the sale value.

Some could argue that the fiscal costs of the new rice policy are worth paying because the program helps poor rice farmers. Unfortunately, less than a fifth of the subsidy is estimated to reach poor farmers. The rest helps millers, corrupt bureaucrats, and large farmers who have surplus rice production they can afford to sell. Most small rice farmers are, in fact, net rice consumers—they consume more rice than they produce. Those with a marketable surplus are largely in the higher deciles of the income distribution. The very poor in rural areas are landless and work the land as laborers. Indeed, some rural landowners in Thailand are called “cell-farmers,” referring to a practice of farm owners now living in cities and operating long distance using cell phones.

The reality is that there is virtually no feature of Thailand’s current rice policy that is redeeming and much that is damaging. Many policies can be both populist and supportive of sustained rapid growth in the long run. This is not one of them. Rice is the backbone of the Thai economy. This bad rice policy is being implemented at the country’s peril. 

When the current policy is up for renewal, the country should go back to the rice-pledging scheme operated under previous administrations that provides farmers a guaranteed minimum price slightly below the prevailing market price. While not perfect, this scheme was fiscally sustainable, helped ensure a guaranteed minimum price for farmers, and allowed the Thai rice market to operate in accordance with market forces. 

But this scheme should be used as a stepping stone toward a rice price insurance scheme that would allow farmers to purchase an option for selling at a future price. Such a scheme may take time to flesh out and implement, but it would provide the framework for an enduring approach toward balancing income security for farmers while allowing the Thai rice market to operate in accordance with market forces. 

If the current policy goes unchanged, it will almost definitely come to a sticky end.