India, Poland Good Examples of What Not to Do

India and Poland recently made world news with protests in both countries over
food prices. Both nations, though publicly committing themselves to move away
from socialist-style economies continue to heavily subsidize agriculture as
well as set prices for food.

In Poland, farmers held strikes and set up roadblocks to demand higher prices
for food. Poland is reforming and privatizing is state-run enterprises as it
heads toward European Union membership. Unfortunately, decades of communist
mismanagement of the agricultural sector mean Polish farmers aren’t even
close to being competitive with other European growers, and they fear being
put out of business by cheaper imports from other EU nations.

The farmers solution? Force Polish government (and thereby consumers) to purchase
food from farmers at an extremely high price in order to protect Polish farmers
from competition. The Polish government seems likely to go along with this nonsense.

This is a disastrous policy for several reasons. First, contrary to the Associated
Press’ Andrzej Stylinski who wrote the protests “illustrate that
many are worried about tougher competition that threatens living standards,”
if allowed to flourish agricultural competition will enhance Polish living standards.
Although farmers will experience some short-term financial problems, this would
be more than made up by the benefits to the entire nation of lower food prices.

Second, such subsidies have proven to be long-term albatrosses around the
neck of consumers wherever they have been implemented. The political pressure
which creates them also makes it very difficult to ever remove them, and as
a result once large subsidies are in place the impetus to modernize and become
competitive is lost. Even in the United States, which has a comparatively free
market system, agricultural subsidies passed under emergency conditions or to
address very specific, short-term problems have remained in place decades after
they served any purpose other than enhancing farmers’ bottom lines at
the expense of consumers.

India has a similar problem – after protests it announced it was lowering
announced price hikes on wheat and rice available at government-run ration stores
that serve over 300 million poor Indians. The government buys commodities such
as wheat and rice and then turns around and sells the commodities at a much
lower price in the stores.

Again, such subsidies distort the information that agricultural markets need
to operate efficiently. Since neither the farmers nor the consumers receive
or pay market prices, the farmers have no incentive to be more competitive and
consumers have no incentive to seek out more competitive producers.

The result of such systems can be seen in India which experienced a poor summer
crop and as a result has seen severe shortages of some commodities such as onions.
India’s vast system of subsidies only exacerbates such naturally occurring
problems and magnifies their effect as has happened with the onion shortage.

Sources:

Polish farmers bow to government pressure, suspend protests for higher prices.
Andrzej Stylinski, Associated Press, February 4, 1999.

India lowers wheat, rice prices under pressure. Associated Press, February
2, 1999.

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