024 Article A005 en

The Fiscal Role of Food
Subsidy Programs
JEFFREY M. DAVIS*
W HILE FOOD SUBSIDIES HAVE LED to considerable political debate,

they have, for the most part, been subjected to only limited eco-
nomic analysis. Nor has there been much effort to systematically cate-
gorize the importance of these subsidies in different countries. The grow-
ing interest in the methods of effecting income redistribution, particularly
in developing countries, and the attempts to use food subsidies to
insulate consumers from the recent exceptional rise in world food prices
have, however, made this a subject of particular importance. Further, as
a result of this rise in food prices, the financial cost of food subsidy pro-
grams has increased sharply, with implications for fiscal and monetary
stability and the balance of payments.
This paper discusses the problems of defining and measuring food sub-
sidies (Section I), their efficiency as an instrument for achieving proffered
objectives (Section II), and the financial and resource allocation costs
that may be associated with their use (Section III). The emphasis is on
schemes that have a significant aggregative impact and that are, at least
in principle, aimed at benefiting the consumer rather than the producer.
The analysis and problems are illustrated by reference to the food sub-
sidy schemes employed in selected countries.1
* Mr. Davis, economist in the Fiscal Analysis Division of the Fiscal Affairs
Department when this paper was prepared, is currently in the English Division of
the IMF Institute. He holds degrees from the Universities of York and Manchester,
England, and has written several articles in the field of public finance.
The author wishes to acknowledge the information provided by colleagues spe-
cializing in the countries discussed. The views expressed and any errors remain
solely
1
the responsibility of the author.
Countries were selected on the basis of availability of data and the need to
illustrate a variety of schemes. For the most part, Asian and African countries are
discussed. A full list of the countries covered and of the main commodities sub-
sidized is provided in the Appendix.
100
©International Monetary Fund. Not for Redistribution

FISCAL ROLE OF FOOD SUBSIDY PROGRAMS 101
I. Problems of Definition and Measurement
The problems of defining subsidies have been subject to extensive dis-

cussion in recent literature.2 A reasonably broad-ranging definition has
been developed by Shoup:
. . . a government subsidy is a measure that provides to a firm or household
in the private sector a financial advantage that is linked with a household's
or firm's buying or selling some good or service or factor of production,
including credit, and that is intended to increase, or to decrease, the purchase,
sale, or use of that particular good or service or factor.3
This type of definition, and the analysis usually associated with it,
emphasizes the role of subsidies as working through rather than sup-
planting the price mechanism. Subsidies are thereby distinguished from
cash transfers and the free provision of public goods. It is often assumed
that the role of subsidies is limited in relation to both the goods and
factors covered and the proportion of the population eligible for the
subsidy. The definition also emphasizes an "externality" or "merit good"
type of justification for subsidies rather than any larger role as an instru-
ment of income redistribution.
From the viewpoint of analyzing the fiscal role of food subsidies, this
type of definition has several disadvantages.4 For a developing country
in particular, the income redistribution to be achieved through food sub-
sidies may be of primary importance. In this context it makes little sense
to exclude the free distribution of food products. Also, a certain artifi-
ciality exists in distinguishing the budgetary effects of providing food at
prices that are significantly below market prices and of giving it away
free. If the use of food subsidies as an instrument to influence income
distribution is to be analyzed, their income effects need to be given at least
as much attention as their substitution effects. From this viewpoint, food
subsidies might also be expected to be a rather more general instrument
than is implied by the earlier definition.
In this paper, a food subsidy is considered as any policy measure that
results, in the short run, in the direct lowering of the price of food items
to certain groups of consumers in relation to what the price of these items
would have been without a subsidy.5 This definition stresses certain
effects of food subsidies and in doing so in part prejudges the main
2
See, for example, Shoup (1972), U.S. Joint Economic Committee (1972), and
Prest
3
(1974).
4
Shoup (1972), pp. 307-308.
5
Some more general criticisms are given in Prest (1974), pp. 21-22.
This represents a modification of the definition used by Gottlieb (1958), p. 42.

102 INTERNATIONAL MONETARY FUND STAFF PAPERS
objectives of these subsidies.6 It also recognizes that in order to cate-

gorize a subsidy as benefiting the consumer rather than the producer or
to consider its impact on any objective, it is necessary to consider market
responses as well as initial legislative intent. The definition is sufficiently
broad to encompass both explicit subsidies involving financial flows and
implicit subsidies arising from government regulations and other factors.7
In current terminology, subsidies benefiting the consumer are referred
to as food subsidies, and those applicable to the producer as agricultural
subsidies. For a per-unit price subsidy, in a partial equilibrium frame-
work, the incidence depends on the relative size of the price elasticities
of supply and demand. In the standard analysis of the per-unit subsidy,
the price advantage to the consumer is likely to be greater in direct rela-
tion to the inelasticity of demand and the elasticity of supply (U. S. Joint
Economic Committee, 1972, p. 59). If the absence of market friction is
assumed, this result holds irrespective of whether the subsidy is initially
paid to the producer or the consumer of the product. For broad-based
schemes, there is the familiar problem of the adequacy of partial as
opposed to general equilibrium analysis. In order to use a partial equilib-
rium framework, it has to be assumed that the impact on demand and
supply conditions in other markets, as well as feedbacks on the market
for the subsidized commodity, can safely be ignored (Shoup, 1969, Ch. 1).
Also, the method of financing the subsidy is assumed to have no impor-
tant effects. These assumptions clearly will not hold where food subsidies
represent a major instrument effecting income distribution.8
In practice, some qualitative distinctions can usually be made between
producer and consumer subsidies on the basis of examination of the
features of particular schemes. Subsidies on imported foodstuffs usually
benefit the consumer, while those on exports normally accrue to the pro-
ducer (Shoup, 1969, pp. 157-58). Agricultural subsidies are often accom-
panied by restrictions on output that effectively limit the elasticity of
supply and ensure that the producer largely retains the benefit. More
often, the subsidy schemes used in many countries entail considerably
more government interference in the market mechanism than is implied
in the simple incidence model. These schemes often involve government
compulsory purchase at less than market prices with actual financial
losses incurred on sales to the consumer. In such circumstances, this
6
7
The objectives of food subsidies are discussed in Section II.
8
This distinction is elaborated in Section III.
A further problem, which can be dealt with satisfactorily only in a general
equilibrium framework, is the treatment of subsidies on intermediate goods, such
as fertilizers. Subsidies on intermediate goods are not discussed in this paper.

clearly represents a subsidy for certain groups of consumers rather than

for the producers of subsidized food.
II. Objectives of Food Subsidy Schemes

This section considers the efficiency of food subsidies as instruments
for achieving possible goals. Efficiency in this context means how food
subsidies can achieve their purpose in a manner predictable for policy-
makers, how undesirable side effects may be limited, and what the over-
all benefits are that can be attained at a given cost. An assessment of
food subsidies according to these criteria is most meaningful when their
efficiency is compared with other potential policy instruments. The actual
goals of food subsidies vary between countries and in any one country
over time. These aims encompass political as well as economic factors,
and the use of food subsidies is influenced by institutional constraints
imposed on alternative policy instruments. In most countries, an impor-
tant stated objective of food subsidies is to change relative prices in a
manner that provides a desired redistribution of income. However, this
leaves open the question of among what groups income is to be redistrib-
uted. A further common aim is to use subsidies to influence overall
price stability. While this paper emphasizes these two objectives, it
should be recognized that broad-based schemes inevitably have incidental
implications for other macroeconomic and growth objectives. Discussion
of the possible costs of food subsidies, including aggregate demand
effects and any impact on production incentives, is largely postponed
until Section III.
DISTRIBUTION OF INCOME
The theoretical arguments affecting food subsidies as an instrument

of income redistribution are initially examined prior to an analysis of the
relevant provisions of particular schemes. Except as otherwise stated, it
is assumed that the desired redistribution of income is from rich to poor.
Theory
The assumptions of traditional welfare economics have led to a pre-
sumed superiority of cash transfers over price subsidies as a means of
improving income redistribution.9 For a given increase in income, the
cash transfer allows the consumer to adopt the commodity choices that
9
This is the analogue of the more usual discussion of direct versus indirect taxes.

provide the highest level of satisfaction. The same increase in income

obtained through a subsidy requires that a different and, from the view-
point of the consumer, inferior commodity choice be accepted.10 Also,
the distortions in relative prices resulting from a subsidy can involve
inefficiencies in production and waste in consumption.11 By analogous
arguments, a food-stamp program would be superior to a price subsidy
or in-kind transfer insofar as it allowed the consumer a wider choice
of commodities.
A justification for subsidies over general income transfers is provided
by collective or nonindividualistic preferences. The government might
decide that it prefers to provide food rather than cash to poor families.
This may be based not only on the "merit good" nature of food but on
the potential advantage in providing for the redistribution of the benefit
within the family and not merely to the head of household. The "merit
good" argument would also serve as a justification for schemes that had
improved nutritional standards as the major objective. From the nutri-
tional viewpoint, the emphasis is on the effectiveness of subsidies in
increasing consumption of foods with a high nutritional value. For a
price subsidy, the choice of commodities subsidized becomes relatively
important, as do any substitution effects generated by the change in
relative prices. In these circumstances, a food-stamp program that allowed
a wider choice of foods might be considered the inferior instrument.
Similarly, if the consumer was thought to have a relatively low marginal
propensity to consume for goods with a high nutritional value, a simple
income transfer may not be favored.
The foregoing analysis compares food subsidies with a lump-sum
transfer that is assumed "neutral" in its impact on relative prices in the
economy. The practical alternatives to food subsidies may, particularly
in developing countries, themselves have considerable limitations. The
alternative to expenditure on food subsidies may involve other measures
distorting prices in factor or commodity markets, such as wage or capital
subsidies, incentives to particular industries, or interference in the pricing
10
In terms of the Pareto optimality conditions, the subsidy interferes with the
necessary condition that the marginal rate of substitution of any two products in
consumption equals the marginal rate of transformation in production, equals rela-
tive prices. The traditional arguments against in-kind transfers can be challenged
even within the framework of maximization of utility based on individual prefer-
ences. Buchanan (1968) has pointed out the inconsistency of taking account of the
individual preferences of the recipient, but not of the donor, of income transfers.
A general model incorporating taxpayers' and beneficiaries' preferences is devel-
oped
11
by Garfinkel (1973).
Clarkson {1975, Appendix B) attempts to distinguish three effects of bonus
food stamps—general purchasing power, specific purchasing power, and waste. He
estimates that $1.00 worth of bonus food stamps has a value to the recipient of
only $0.82.

policy of public corporations.12 Even if it were decided that some form

of negative income tax was a preferable means of redistributing income,
there might well be significant administrative problems in introducing
such a scheme.13 Also, under certain assumptions the practical effects of
food subsidies and cash transfers are similar. Where the marginal pro-
pensity to consume and the price elasticity are near one, food subsidies,
in-kind transfers, and cash transfers have very similar effects (Reutlinger
and Selowsky, 1975, p. 70). This may represent the situation where an
attempt is made to aid the poorest groups in certain developing countries.
Also, to the extent that food subsidies do not change the consumption of
a commodity, they act effectively as an income supplement.
A further general problem relates to the degree of specificity that
should be employed in food subsidy programs. An important deterrent
to generalized measures is, clearly, cost. The smaller the size of the group
to be affected within the total population, the less efficient are generalized
measures as opposed to programs aimed at specific groups.14 The target-
group approach to alleviating poverty has been emphasized in a recent
study by Chenery and others (1974, especially Ch. V). Problems arise,
however, in the identification of the relevant homogeneous groups and
the prevention of leakages between markets.
Estimated effects
Substantial problems are experienced in any attempt to provide a
quantitative appraisal of the impact of food subsidies on income distri-
bution.15 As already indicated, the emphasis on subsidies with a substan-
tial macroeconomic impact precludes the standard partial equilibrium
analysis of incidence. A reasonably full analysis would involve such fac-
tors as the behavioral response (by income group) of consumers, the
impact on different producers' incomes, and the secondary effects through
supply and employment. In addition, the impact of the methods of
financing the subsidy would need to be considered. Mellor (1975) uses
Indian household income and expenditure data to analyze the possible
impact of an increase in relative agricultural prices. The study implies
that because of the weight of food items in the expenditure patterns of
the poor, the latter will lose most by this measure, while large producers
12
See Chenery and others (1974, Ch. IV) for a general discussion of different
methods
13
of redistributing income in developing countries.
The limited scope of income tax in many developing countries may be indica-
tive of this. One justification presented for food subsidies in the United Kingdom
is the
14
difficulty of increasing the claimant rates for social security benefits.
13
See Reutlinger and Selowsky (1975), pp. 51-57.
It should not, however, be suggested that these problems are any more severe
than for other categories of government expenditure. See De Wulf (1975).

with significant marketable surpluses will gain relative to small units.

The change in relative prices assumed in this type of study does not
necessarily correspond to the pattern resulting from actual food subsidy
schemes. Some qualitative appraisal of the possible impact of such
schemes may be obtained by viewing the restrictions placed on the eligi-
bility for benefits and the type of commodities subsidized.
An indication of the criteria used to distribute subsidized food in the
countries analyzed is provided in Table I.16 Most of the schemes are not
universal in effect and provide for some statutory or informal rationing.
Formal rationing is on a per capita basis, which provides some differen-
tiation by family size. Apart from family size, the most common form of
restriction relates to region.17 There is a clear preference for using food
subsidies to provide aid for the larger urban centers. In Bangladesh, the
statutory rationing areas are restricted to five urban centers, while in Sri
Lanka an additional ration is available in urban and deficit areas. Other
countries exhibit preference toward urban areas through more informal
means. In Pakistan, subsidized food is sold through official ration shops,
and the location of these facilities is for the most part restricted to the
larger urban centers. Similarly, in Egypt, the largest subsidy in budgetary
terms is on wheat, which benefits for the most part the urban population,
as maize is the staple foodstuff in rural areas.
A further important criterion for eligibility relates to employment. To
a large extent this tends to complement the urban bias of many food
subsidy schemes. In Bangladesh, certain public sector employees are
designated priority consumers and are entitled to subsidized food even if
they are not otherwise covered by the rationing system.18 Indonesia pro-
vides food as in-kind wages to the army, government, and state enterprise
employees. In large part, this reflects a response to earlier periods of very
rapid inflation in that country. Since 1974/75, a direct "food-for-work"
program has been in operation in Bangladesh. In Mali, there is informal
rationing through availability to the benefit of urban public employees
(Shepherd, 1976).
There is little formal attempt to differentiate food availability accord-
ing to income. Sri Lanka restricts the free ration to persons not paying
income tax, but as nearly all the population is in this category, the level
16
Measures aimed at disaster relief are not discussed.
17
Further differentiation in the size of the subsidy by region occurs insofar as
price differentials are not allowed to reflect variations in costs. This occurs in
Indonesia,
18
Mali, and Tanzania.
Hospitals, prisons, orphanages, and employees of large works are also in this
category.

TABLE 1. SELECTED COUNTRIES: DISTRIBUTION OF SUBSIDIZED FOOD
Country Income Employment Region Remarks
1
RATIONING
Bangladesh In nonstatutory areas 2 Priority consumers: 3army, Statutory rationing in "Food-far- work" program
civil servants, etc. urban centers
Burma Supplement to low-income government employees Restricted to Burmese and
nationalized aliens 4
Egypt Informal 5through product Two-tier pricing system
FISCAL ROLE OF FOOD SUBSIDY PROGRAMS

choice
India Statutory rationing in Drought relief on ad hoc
urban centers basis
6
Pakistan Largely available in urban
centers
Sri Lanka Free ration to those not Larger ration to urban Two-tier pricing system
paying income tax and deficit areas
Thailand Food stamps 7 Largely available in urban
centers
NO RATIONING
Indonesia In-kind wages 8 Market injections
Korea Market injections 9
Mali 10 Urban public employees
Morocco
Nepal 6 Deficit areas
Tanzania
United Kingdom
United States Food stamps
Zambia
6
Sources: Food and Agriculture Organization (1975), Kaur (1975), and national The Government distributes lower-quality rice.
7
sources. Introduced in 1976, and exchangeable for money.
1 8
Schemes with formal rationing differentiate according to family size. Armed services and central and regional government employees. In rice surplus
2 Rural areas according to amount of tax payments, urban according to income. areas, these wages are generally exchanged for money.
9
Supplies in nonstatutory areas vary according to overall availability. Subsidized rice and barley sold in mixed bags to encourage consumption of the
107
* Where not otherwise provided for. latter.
10
« Achieved through restriction of rationed rice to members of cooperatives. Informal rationing through availability.
* Wheat consumed largely in urban areas.

of discrimination is limited.19 In Bangladesh, potential recipients in non-

statutory areas are divided into categories according to tax payments or
income, and a ration is provided only to the poorest categories. The
United States and Thailand link the availability of food stamps to
income.20 It is also noticeable that, except for emergency relief, most
schemes involve some payment, which might be a limitation for the
poorest groups. This may be particularly true for ration or food-stamp
schemes involving some lump-sum payments.
The emphasis on urban populations could be defended as providing
identifiable target groups that can most conveniently be aided by food
subsidies. If, however, benefits are provided at the cost of the agricul-
tural population, this needs to be seen in the context of evidence for
many countries of the relative poverty in rural areas.21 Further, when
restrictions effectively limit benefits to the urban employed, then it might
be more appropriate to consider these food subsidies as a form of in-kind
wage supplement.22 To the extent that food subsidies allow lower urban
wages, the immediate beneficiaries are the employers rather than the
direct recipients.
A further problem relates to the policing of access to subsidized sales.
Such factors as forged ration cards, hoarding, and internal and external
leakages to more profitable markets are common in several countries.
Smuggling appears to be a particular problem for countries bordering on
India. In this situation, the actual beneficiaries of subsidies may be the
foreign instead of the domestic consumer.
The distribution of benefits is affected not only by restrictions placed
on eligibility but by the characteristics of the commodities subsidized.23
A food subsidy redistributes income according to the pattern of expend-
iture that consumers make on the subsidized commodity. If the program
is aimed at low-income groups, the commodities subsidized should be
19
20
The free and paid rations are also available to farmers.
A further restriction, which has the greatest effect on higher-income groups, is
dual-pricing schemes. In some countries a basic ration is provided at a subsidized
price, while further amounts are sold at higher or even profitable prices, for
example, sugar in Sri Lanka and tea and sugar in Egypt. More generally, if there is
rationing, a transfer may occur between those receiving the ration and those forced
to 21
do without or to buy at free or black market prices.
See, for example, evidence presented in the Food and Agriculture Organiza-
tion study on Egypt (1973). Chenery and others (1974) suggest that as many as
three fourths of the poor may be located in rural areas. A discussion of the pos-
sible relationship between food subsidies and domestic agricultural prices is pro-
vided
22
in Section III.
The earlier comments on the relative merit of income and in-kind transfers
would
23
hold equally for wage payments.
See the Appendix for the main commodities subsidized in the countries sur-
veyed.

relatively important in the budgets of the poor; that is, they should have
a low income elasticity of demand. For most countries, estimates of this
kind are not available for the subsidized commodities.24 In general, the
commodities chosen appear to reflect the staple consumption items in
each country, with various cereals, sugar, and edible oils most often
subsidized. Further, the low quality of the subsidized food provided often
serves to differentiate the consumption patterns of rich and poor.25 There
are, however, some anomalies. The subsidies on imported wheat in
Zambia probably accrue largely to those with higher incomes, while it
seems questionable to justify subsidies on such commodities as butter,
cheese, and tea in the United Kingdom purely on grounds of income
redistribution.26
PRICE STABILITY
The definition of subsidies adopted for this study indicates that they
are intended to reduce the price of specified items to certain groups of
consumers.27 In some countries, this reduction in price is considered
important not only insofar as it affects relative prices and, thereby,
income distribution but as an instrument for achieving overall price
stability. This approach may be examined under various headings: the
effect on the level of prices, the rate of inflation, and the variability of
prices.
The effect on the level of prices depends on the weight of the sub-
sidized items in the consumer price index. The more important the sub-
sidized items in the index, the greater is the impact of a given subsidy
on the level of prices. The weights of subsidized commodities in the
consumer price index of selected countries are indicated in Table 2.
An obvious problem is how far the available consumer price indices
are, in fact, indicative of actual price levels. In many countries, the
weights may come from outdated expenditure studies, or the index may
24
It has been estimated for Sri Lanka that in January and February 1973 those
with monthly incomes of less than SL Rs 200 a month had their income increased
by free and subsidized food by 14 per cent, while for those in the highest-income
groups the comparable rise was 1 per cent (Central Bank of Ceylon, 1974). Even if
the poor receive the greatest percentage increase in income, the largest absolute
rise25 may still accrue to the rich.
For example, the rice officially distributed in Nepal and Pakistan is meant to
be26of a lower quality than that available on the free market.
In some countries the choice of subsidized commodities (e.g., sugar) may not
be consistent with maximizing nutritional impact. For the United States, it has been
suggested that the food-stamp program may have encouraged consumption of con-
venience
27
foods rather than of nutritious foods (Clarkson, 1975).
An exception would be a per-unit subsidy paid to the consumer, which would
normally lead to some increase in price. See U. S. Joint Economic Committee
(1972), p. 61.

TABLE 2. SELECTED COUNTRIES: WEIGHT OF SOME SUBSIDIZED ITEMS

IN CONSUMER PRICE INDICES
Country Commodities Index Weight
(per cent)
Burma Rice Rangoon 11
Egypt Cereals Urban 11
India Foodgrains Wholesale 15
Indonesia Rice Jakarta 31
Korea Foodgrains Wholesale 10
Morocco Sugar, edible oils, and Urban 15
flour products
Nepal Foodgrains Kathmandu 40
Zambia Cereals and edible oils Low income 20
High income 5
Sources: National statistical bulletins.
apply only to a limited (often urban) segment of the population. Further,

problems may arise when subsidies lead to dual-pricing systems and only
the lower (rationed) price is reflected in the index. Insofar as the reduced
price level involves a significant degree of nonprice rationing, the impact
on measured price rise is somewhat illusory, as actual is replaced by
suppressed inflation. These problems are illustrated by the available data
for Sri Lanka, where the Colombo price index reflects weights based on
1952 expenditure patterns and covers less than 5 per cent of the popula-
tion. Also, the official rather than free market prices for food are used,
with rice actually represented by the free ration.
Even if the available index is accepted as realistic, there are several
steps involved in translating an effect on the level of prices into an
impact on the rate of inflation. A given subsidy payment may have an
initial once and for all effect on the level of prices while leaving the
subsequent increase in prices unchanged.28 In order for there to be an
impact on the rate of inflation, there has to be some mechanism whereby
the initial reduction in the price level itself leads to subsequent further falls
or retardation of the rate of increase. Such mechanisms could be pro-
vided by wage reaction or expectation theories of inflation. The wage
reaction might be formalized in terms of indexing to the cost of living
or in policy packages in which wages and subsidies are two elements.29
28
U. K. calculations, based on the weights of the subsidized items, indicate that in
December 1975 the savings on the food and retail price indices were 5.7 percent-
age points and 1.4 percentage points, respectively. Between January and December
of that year the points saved actually fell, so that it could be argued that during
the29year food subsidies had no beneficial effect on the rate of inflation.
Gottlieb (1958) discusses the relationship between consumer subsidies and wage
indexing. Pakistan and Sri Lanka have, in recent years, introduced several policy
packages involving simultaneous changes in subsidies and wages.

Against these effects, however, should be set any net aggregate demand
impact of subsidies. This impact will depend on the method of financing
the subsidies and the relevant marginal spending propensities of those
providing and receiving the transfers. Insofar as the transfer is from
rich to poor, it may be expected that the aggregate demand effects will
be positive. The overall impact on inflation then becomes uncertain and
depends on the relative weights of the expansionary impact through
aggregate demand and negative effects from expectations.
A further objective might relate to limiting the variability of food
prices. As is well known, the combination of inelastic demand and
supply and natural factors affecting production can lead to considerable
instability of food prices (Tomek and Robinson, 1972, Ch. 8). One
response to this situation has been to build up buffer stocks that can be
used to withdraw and to inject supplies into the market to counteract
exogenous factors affecting prices. Except where it is necessary to build
up initial stocks, this should not lead to any secular subsidy. In fact, in
several countries the buffer stock element has tended to be outweighed
by government intervention to subsidize certain groups.30 For countries
dependent on imported food, an additional element of instability is
added. World food prices have, in recent years, been both unstable and
difficult to predict, reflecting limited international reserves and the strong
impact of a few large buyers (Khatchadourian, 1976). Some countries
(e.g., Morocco) justified the subsidies on imported food during the period
1972-74 on the basis that they were attempting to price according to the
long-term level of international prices. An obvious difficulty here is
identifying the long-term price that would not lead to a secular subsidy.
This policy should, at least in principle, be distinguished from the secular
objective of insulating the domestic consumer from world market prices.31
III. Some Costs of Food Subsidies

This section attempts to provide an analysis of the various types of
cost associated with food subsidy schemes. Three forms of cost are dis-
tinguished: the domestic financial cost, the balance of payments effect,
and the implications for production incentives.
DOMESTIC FINANCIAL COST
The measured cost of food subsidies represents only a partial indicator

30
31
See Okonkwo (1975) for a study of price stabilization in Indonesia.
This provides a justification for subsidies not only for food importers but also
for such exporters as Nepal and Thailand.

TABLE 3. SELECTED COUNTRIES: BUDGETARY COST OF FOOD SUBSIDIES, 1972-75l

(In per cent of total expenditure)2
3
Country 1972 1973 1974 1975
Bangladesh 4 — 13 11 8
Burma 6 — — 8 5
Egypt 4 10 22 21
Indonesia 6 — 1 13 7
Korea 4 10 14 19
Morocco 1 1 9 12
Pakistan 4 1 8 13 11
Sri Lanka 13 14 17 16
Sources:
1
National budget documents.
Full data were not available for India, Mali, Tanzania, or Zambia. The budgetary
implications of food subsidies in Mali are discussed in the text. Food subsidies in
Tanzania were approximately 9 per cent of total expenditure in 1974, while those in
Zambia were about 6 per cent of the total in both 1974 and 1975. U.K. food subsidies
were about 1 per cent of total expenditure in 1975, while the U.S. food-stamp program
has2 represented less than 0.1 per cent of the total.
Central government expenditure, except for Burma where the consolidated public
sector expenditure is used. The data for Pakistan exclude provincial government ex-
penditure on food subsidies, which was equal to about 5 per cent of their expenditure
in both 1974 and 1975. For Egypt, total expenditure excludes emergency fund spending
linked
3
to defense.
4
Provisional.
6
Fiscal year ended June 30.
Fiscal year ended September 30 up to 1973; the 1974 fiscal year was October 1,1973-
March
6
31, 1974; the 1975 fiscal year ended on March 31.
Fiscal year ended March 31. Excludes in-kind wage payments.
of their economic cost. This reflects not only limitations in the quality
of data but also, for some countries, inadequate allowance for the shadow
price of resources or presentation of information for organizational units
that aggregate items making a profit and a loss.32 While this certainly
argues for caution in interpreting budgetary losses, such measures remain
important as an indicator of pre-emption of resources and possible finan-
cial impact. A more prosaic reason for looking at the financial cost of
food subsidy programs is that this is often the only measure available.
Budgetary cost
Table 3 provides summary indicators of the budgetary cost of food
subsidies in selected countries. The data are presented as a percentage
of total expenditure (current plus capital), emphasizing the impact of
food subsidies on the structure of government spending. An alternative
would have been to present the cost in relation to government revenue,
32
Implicit subsidies arising from inadequate definition of costs are discussed in
PRODUCTION INCENTIVES AND RESOURCE ALLOCATION (later in Section III).

emphasizing the share of this source of finance pre-empted by food sub-

sidies. Only where there was a substantial overall deficit would this have
much impact on the measured share. It can also be argued that, insofar
as nonrevenue financing is specifically linked to expenditure on food, the
share of revenue would exaggerate the pre-emption of resources.33
Even allowing for the necessary reservations as to the quality of the
data, this table emphasizes the budgetary importance of food subsidies
in several of the countries surveyed. In Egypt, Korea, and Sri Lanka,
food subsidies accounted for as much as one fifth of total expenditure
in 1974 or 1975, while several other countries devoted approximately one
tenth of expenditure to this component. The pre-emption of government
expenditure by food subsidies should be viewed with particular concern
insofar as sources of revenue are limited, and the government sector is
expected to play a large part in the development effort.34 The large share
of food subsidies in total expenditure in developing countries may be
contrasted with the limited quantitative importance of these subsidies in
most industrialized countries. Despite its growth in 1975, the U. K. food
subsidy program accounted for only about 1 per cent of total expendi-
ture, while the U. S. food-stamp scheme accounted for only about one
tenth of this amount.
In 1972-75, there was a marked increase in the budgetary cost of food
subsidies. This can be related to the price and quantities of food pur-
chased and distributed. For many countries the primary factor was the
exceptional increase in the price of imported food. The increases in
world market prices for some of the major subsidized items are indicated
in Table 4.
The price of wheat and maize almost tripled between 1972 and the
peak in 1974, while the price of edible oil more than doubled over the
33
Bangladesh provides an example of this type of situation. The share of food
subsidies in revenue was 37 per cent, 26 per cent, and 15 per cent in 1973, 1974,
and34 1975, respectively.
In this context, a comparison between the budgetary importance of food sub-
sidies and capital expenditure might be of interest. The classification of capital
expenditure has a considerable arbitrary element, while the impact of this form of
investment on growth remains a matter of debate. From national budget data, the
ratio of food subsidy to capital expenditure in 1974 and 1975 is as follows:
1975
1974 (provisional)
(per cent)
Bangladesh 24 16
Egypt 67 68
Indonesia 34 20
Morocco 34 35
Korea 49 56
Pakistan 28 22
Sri Lanka 67 57

TABLE 4. SELECTED SUBSIDIZED FOODS: INDEX OF EXPORT PRICES, 1973-75

(7972 - 100)
1973 1974 1975 Peak1

Wheat2 201 257 213 298(74/1)
Rice3 198 361 242 411(74/11)
Maize 4 175 237 214 265(74/IV)
Sugar 5 98 157 379 408(75/1)
Edible oil 6 208 198 159 222(74/IV)
Sources: Khatchadourian (1976); Commodities Division of the Fund's Research
Department.
1
2
Roman numerals indicate quarter.
3
U.S. No. 1, hard red winter, ordinary protein, f.o.b. Gulf ports.
4
Thai, white, 5 per cent broken, f.o.b. Bangkok.
5
U.S. No. 2, yellow, f.o.b. Gulf ports.
Free market price.
6
Soybeans.
same period. Rice and sugar prices quadrupled by the second quarter
of 1974 and the start of 1975, respectively. Although commodity prices
began to decline in 1975, this was not necessarily immediately reflected
in the size of the subsidy, owing to the lagged effect of food contracted
for in 1974 but delivered in 1975.35 For the same reason, these indices
need not correspond generally to the movement of prices in any given
country.36
Table 5 presents data on the relationship between the domestic selling
price and the import or domestic procurement cost in selected countries.
Insofar as the prices are unit values and inclusive of all costs, a ratio of
less than 100 indicates a per-unit subsidy. In practice, however, all costs
are not always included, and, in particular, information on handling and
administrative costs are usually deficient.37 Nevertheless, the year-to-year
movements in the ratio serve to indicate the response of domestic prices
to recent increases in costs. In most countries surveyed, domestic selling
prices did not keep pace with the rapid rise in import prices. For some
countries (e.g., Bangladesh and Mali), the financial costs of the higher
import prices were further exacerbated by poor domestic supply condi-
tions. To a lesser extent there were also examples of increases in the
subsidy on domestic procurement. In part, the higher payments for
35
The lagged effect of earlier contracts also explains why Burma made losses on
export
36
sales in 1973/74.
Differences in transport costs and sources of imports also affect relative prices
in 37
different countries.
These costs also tended to rise over the period surveyed because of the
impact of higher petroleum costs on transport charges.

TABLE 5. SELECTED COUNTRIES: INDICATORS OF THE RESPONSE OF FOOD SUBSIDY

SCHEMES TO IMPORT AND DOMESTIC COST INCREASES, 1972-751
(In per cent)
1972 1973 1974 1975 2
DOMESTIC SELLING PRICE/IMPORT COST
Egypt
Wheat 103 40 31 28
Maize 115 63 47 44
Vegetable oil 35 26 14 12
Sugar 3 55 32 32
Indonesia 4
Rice 82 83 48 41
Morocco
Wheat 119 85 66 93
Sugar 161 64 38
Pakistan
Wheat 78 54 44 32
Sri Lanka 6
Rice 208 170 93 109
(135) (103) (57) (66)
Flour 110 88 92 115
(70) (53) (55) (70)
Sugar 139 92 29 18
DOMESTIC SELLING PRICE/DOMESTIC PURCHASE COST

Egypt
Wheat 89 89 71 60
Maize 73 73 73
Sugar 269 220 212 212
Korea 6
Rice 100 89 89 75
Barley 77 67 76 66
Sources: Information obtained by Fund staff from national sources.
1
The correspondence between fiscal and calendar years is as indicated in Table 3.
Prices are unit values, and costs exclude administration and handling expenses unless
otherwise indicated.
2
Provisional.
3
Rationed sugar only.
4
Sales index refers to Jakarta and Thai milled rice, 5 per cent broken kernels, f.o.b.
Bangkok used as indicator of import price.
5
Ration prices used for sales. This substantially underestimates the per-unit subsidy,
as it takes no account of the free ration. Figures in parentheses indicate ratios when
import prices are adjusted to the more depreciated Foreign Exchange Entitlement
Certificate rate.
6
Includes handling costs.
domestic crops may be seen as a further reaction to the increased cost

of importing food. For many countries, these declining ratios reflect
delayed or inadequate adjustments of domestic selling prices rather
than the absence of any adjustment at all. Also, in some countries

restrictions on the amount of food offered at the subsidized price or

various forms of dual-pricing systems were introduced.38
Sources of finance
Insofar as the subsidy is channeled through the budgetary system, it is
usually neither possible nor particularly meaningful to try to isolate the
exact sources of finance. At any point of time it becomes a policy deci-
sion whether, in the event of a change in the subsidy, any particular
revenue item should be altered or in what form recourse to financing
should be changed. This situation usually prevails even if the food sub-
sidy is channeled through some extrabudgetary fund and separate sources
of finance are indicated within these accounts.
The specific source of finance becomes relevant when it is likely to
affect the size of the subsidy or the pricing or tax policy pertaining to
another commodity.39 This not only leads to the possibility of additional
distortions in resource allocation but also vitiates any system of expendi-
ture control. Mali provides a good illustration of this type of problem.
The financial subsidy is reflected in the loss of public enterprises and
does not enter the budgetary system. For the most part, finance is
acquired through direct access to the banking system, thereby bypassing
the statutory limitation on government borrowing from the Central Bank.
Since 1972, losses on food items have been a major factor in increased
credit to the economy.40
A further form of financing that warrants particular attention is
through funds generated by foreign food aid.41 For the sake of simplicity,
it is assumed that the food is provided in the form of a grant or loan
with no immediate costs. This aid can provide the basis for a domestic
food subsidy program. Ignoring administrative and handling costs, the
food could be given away domestically and the financing would come
38
Sri Lanka, for example, made substantial adjustments in the food subsidy
scheme in October 1973. Over the period 1970/71-74, the quantum distribution of
rice and sugar declined by 43 per cent and 65 per cent, respectively. See Central
Bank
39
of Ceylon (1975), p. 183.
The relevant point here is that cross subsidization not only disguises the size
of the subsidy but also presents the possibility that the purchase price on a profit-
able
40
item or earmarked revenue may be adjusted to offset losses on food sales.
Food subsidies in Mali are for the most part channeled through three public
enterprises—SOMIEX (Import and Export Company of Mali), OPAM (Agricultural
Marketing Agency), and SEPOM (Malian Oil Processing Company); see the
Appendix for the names of these enterprises in French. These accounted for nearly
three fourths of the total credit increase in both 1973 and 1974. Further, there
appears to be a significant amount of cross subsidization within these enterprises.
See41Shepherd (1976).
See Lachman (1968) and Srivastava and others (1975).

from international aid. If correctly accounted, the budget would show as

food subsidy expenditure the implicit value of the food with the loan or
grant from abroad entered as finance. To the extent, however, that the
implicit value of the food is not shown as an expenditure item, this leads
to an underestimation of the size of the subsidy. Even though the aid is
given in the form of food, unless it is tied to this purpose, there is no
necessary reason why it should be used to subsidize domestic food sales.42
If the food is sold at full market value, this generates counterpart funds
that, within the limits imposed by any agreements, can be used to finance
other expenditure.43 To the extent that food aid is used to subsidize
domestic sales, the opportunity cost is the expenditure that could other-
wise be generated by the counterpart funds resulting from the sale of the
food at market prices.44 Although from a budgetary viewpoint food aid
need not be tied to domestic food subsidies, for countries with a foreign
exchange constraint, the availability of food on concessional terms con-
siderably eases the balance of payments problems of importing to sup-
port a food subsidy program. Concomitantly, the reduced availability of
aid in recent years has significantly increased the cost of maintaining
subsidy schemes based on imported food.
BALANCE OF PAYMENTS
The importance of various subsidized food items in total imports is

illustrated in Table 6.45 It is clear that for most of these countries the
necessity to import food has pre-empted a substantial share of available
foreign resources, while the increased price of these imports tended to
exacerbate the problem during the period 1972-74. This latter occurrence
can be seen more directly when related to exports, where for countries
with deteriorating terms of trade (e.g., Bangladesh and Sri Lanka) the
pre-emption of foreign resources rose to exceptional levels.46 For some
countries (e.g., Bangladesh, Mali, and Pakistan), aid provided a substan-
tial part of the finance, although as previously indicated, in general the
availability of food on concessional terms declined during this period.
In some forms of food subsidy schemes, imports may effectively
become a residual item. If the government sets consumer prices at a level
where there is excess demand, then available supplies must be shared by
42
Even if the aid is formally tied, to the extent that it replaces programs that
would
43
have existed in any event, funds are released for other uses.
44
These funds are temporary as long as the aid is repaid.
45
There may also be implications for domestic production incentives.
46
For an earlier account of this problem, see Ridler and Khatchadourian (1974).
The consequent balance of payments problems were exacerbated by the
increases in oil prices.

TABLE 6. SELECTE D COUNTRIES : FOOD IMPORT S AND THE BALANC E

OF PAYMENTS , 1972-75 l
(In per cent; X = value of exports, Μ = value of imports)
2
1972 1973 1974 1975
Countr y Commoditie s X Μ X Μ Χ Μ Χ Μ
Bangladesh Grai n and
edible oil 94 44 95 38 163 47
Egypt Foo d 30 19 49 30 59 29 69 28
Indi a 3 Cereal s 8 7 4 4 19 15 23 17
Indonesi a Rice, wheat,
and sugar 8 8 12 13 16 17 10 13
Kore a Grain s 18 11 14 11 15 10 14 9
Mali Foo d 50 29 24 52 59 57 47 28
Morocc o Foo d 25 20 33 26 31 27 44 28
Pakista n Cereal s 7 6 14 14 15 11 21 11
Sri Lanka Rice, flour,
and sugar 33 30 48 43 56 41 64 39
Tanzani a Food 4 13 9 13 9 41 19
Sources : Nationa l foreign trade statistics.
1
The correspondenc e between fiscal and calenda r years is as indicate d in Table 3.
2
Provisional .
3
Year ended Marc h 31.
4
Include s beverages and tobacco .
nonprice-mechanism rationin g or supplemente d by imports . Several

countrie s not only set the price of subsidized food items but also try to
ensure free availability at that price or specify the size of the ration at
amount s greater than available domesti c supply. Further , the problem s
of excess deman d are often exacerbate d by low prices for domesti c pur-
chases. 47 There are definite element s of this mechanis m in Sri Lanka,
where the Governmen t sets the domesti c purchas e price of paddy and
determine s the amoun t and price of rice available on the free and paid
ration . To the extent that the quantit y and price decision s are adhere d to,
and ignorin g variation s in stocks, rice import s may becom e an essentially
residual item. Also, the foreign exchange allocatio n system emphasize s
the importanc e of food import s by giving them priorit y in the process of
48
rationin g foreign exchange.
The residual natur e of food import s is not a necessary feature of food
subsidy schemes. The require d amoun t of food import s can be change d
by alterin g the domesti c buying or selling price or the ratio n available
to the consumer . There is, however, a trade-off between the alteratio n
47
Both throug h effects on tota l supply and the share procure d by the govern-
ment .
48
These mechanism s are discussed in Kelly (1976).

of these factors and the amount of imports. The recent exceptional rise
in international food prices implied a substantial change in the terms of
this trade-off. The resource cost of measures that affect the relative price
of domestic and international procurement and sale were similarly
increased. While such measures are best discussed as resource allocation
costs, it should be noted that export restraints, dual exchange rates, and
measures affecting domestic procurement prices may also have a sub-
stantial balance of payments impact.
PRODUCTION INCENTIVES AND RESOURCE ALLOCATION
Food subsidies financed by the fiscal or monetary system have impli-

cations for resource allocation and production incentives according to
the particular tax or monetary instruments used. However, in addition to
explicit cash subsidies, many countries have various forms of implicit
subsidy, owing to government measures to directly alter relative prices
for the benefit of the consumer.49 A common form of such implicit sub-
sidy occurs when the government uses its purchasing or regulatory power
to force a direct transfer from the food producer to the consumer.50
Such practices are seen particularly where, as in many developing coun-
tries, the government plays an important role in the purchasing and
marketing of subsidized food.
Even if the subsidy scheme operates through the government (or its
agent) purchasing the food and then providing for its sale at a lower
price, this need not necessarily affect producer prices. The important
factor here is that the government should purchase domestically in a free
market.51 There are, however, several reasons why domestic producer
prices are usually affected by these subsidy schemes. In particular, there
is a direct trade-off between the financial cost of the subsidy and the price
paid for the product to the domestic producer.52 There is clearly a temp-
tation to reduce the cash cost by placing part of the burden on the pro-
ducer. Further, where market circumstances or systems dictate significant
government interference in the market, it might be difficult to know what
the free market price would otherwise have been.
Depressed producer prices are usually enforced by various forms of
compulsory government purchase. An indication of such measures in
selected countries is provided in Table 7. Several countries requisition
49
50
Tax subsidies would represent another example of this type of measure.
For a discussion of explicit and implicit taxation of producers, see Bhatty
(1975).
51
In Korea, for example, the Government does not have monopsony power in
its52domestic purchases, and there is a substantial free market.
See Government of India (1975) for an explicit recognition of this trade-off.

TABLE?. SELECTED COUNTRIES: FACTORS AFFECTING DOMESTIC

PROCUREMENT AND PRODUCTION INCENTIVES
Bangladesh Compulsory procurement of rice, with quota system and ban on

interregional transport (1974/75). Transportation ban lifted in Feb-
ruary 1975.
Burma Intermittent compulsory quota system for rice, with procurement
price usually below export price.
Egypt Requisition of part of domestic rice and wheat crop. Purchase price
for rice below export price.
India Ban on interregional transport. Various procurement methods
according to states, including monopoly procurement, levies on pro-
ducers, millers, or traders, and pre-emptive open market purchases.
Indonesia Intermittent pre-emptive purchases of rice, and ban on interisland
shipments.
Mali Monopoly purchase of essential food crops.
Nepal Levy on exports of rice.
Pakistan Monopoly purchase of exported rice at less than world market prices.
Ban on exports of meat, fruit, and vegetables.
Sri Lanka Restrictions on the transportation, possession, and sale of paddy and
rice (February 1974-October 1975).
Thailand Levy on exports of rice.
Zambia Monopoly purchase for maize and other essentials.
Sources: U.S. Comptroller General (1975); national sources.
part of the crop of essential food items. In Egypt, the general principle
adopted in the pricing of such items is to work backward from the
socially determined consumer price to the producer price (Food and
Agriculture Organization, 1973, pp. 1, 2, and 10). Other countries have
sufficient monopsony power to provide low-priced produce to the con-
sumer without explicit cash transfers. This occurs in Mali, where the
Government sets the producer price and then works up to the consumer
price in a manner that, at least in principle, should not lead to any overt
subsidy. Restrictions on interregional transport in many countries (e.g.,
India and Indonesia) are used to support government procurement objec-
tives.
A particular example of the depression of domestic producer prices to
the advantage of the consumer occurs with export crops. In several
countries (e.g., Burma, Nepal, and Thailand), mechanisms have evolved
for insulating the domestic consumer from export price developments by
diverting to the domestic market part of the crop that would otherwise
have been exported. Such mechanisms include government monopoly
purchase at prices below those of the world market, and levies and
taxation on export crops.
A further form of government intervention affecting domestic market
incentives is to subsidize imports. Such imports change the relative price

to the consumer of domestic and internationally procured crops as well

as increasing the total food supply on the market. Dual exchange rate
systems represent a particular example of such price distortions. In Sri
Lanka, a de jacto dual exchange rate exists, with imports of flour and
rice costing 65 per cent less in local currency than items imported at the
depreciated rate. Valuing food imports at the depreciated rate would
more than double the measured subsidy.53
Implicit subsidies from the producer to the consumer cannot be easily
assessed. In principle, the subsidy should be measured as the difference
between the price the producer would have received on the free market
and the amount actually paid. As already indicated, where there is signifi-
cant government intervention, a measure of this notional free market
price might not be readily available. When a parallel free or black
market price does exist in the country, this provides some guidance as
to the opportunity cost of governmental food purchase. If, however, the
government takes a substantial portion of the crop, this will affect prices
in the truncated free market and a black market price will incorporate
a risk premium. Alternatively, where there is actual or potential inter-
national trade, the export or import price may provide some guide to
the relevant shadow price. Some indicators of implicit subsidies are
provided in Table 8, where the ratios of domestic purchase costs to pos-
sible shadow prices are indicated. To the extent that the shadow price is
accepted as the relevant one and the coverage of the data is adequate,
a ratio of less than 100 is indicative of an implicit subsidy. In practice,
both the choice of shadow price and the quality of the data are subject
to challenge. Nevertheless, the decrease in this ratio in recent years
suggests that in several countries there has been a significant increase in
the importance of these types of implicit subsidy.
The complex of input subsidies and explicit and implicit taxation
applicable to agriculture in many countries makes difficult any unam-
biguous assessment of the overall impact of government policies on pro-
ducer prices. Also, under certain circumstances, government compulsory
procurement of part of the crop, with the rest sold on the free market,
might not leave the producer with a lower average price.54 There seems,
however, to be reasonable evidence that in many developing countries
there has been recourse to depressed producer prices as a means of financing
consumer subsidies. For many countries, empirical evidence is strongly
53
Another example of this type of problem is in Colombia, where it has been
estimated that the official exchange rate underestimates the shadow price of
imported
54
wheat by about 40 per cent (Dudley and Sandilands, 1975).
This might occur if the reduced amount entering the free market were pur-
chased by high-income consumers with inelastic demand.

suggestive of a significant supply response to producer prices.55 Particu-

larly in the long run, the concomitant reduced availability of food has
considerable implications for domestic consumers and the balance of
payments.
TABLE 8. SELECTED COUNTRIES: INDICATORS OF IMPLICIT SUBSIDY, 1972-751

(In per cent)
1972 1973 1974 1975 2
DOMESTIC PURCHASE COST/EXPORT PRICE
Burma (rice) 79 81 36 39
Zambia (maize) 3 65
Pakistan (rice) 4 120 42 25 31
Thailand (rice) 87 68 40 59
DOMESTIC PURCHASE COST/IMPORT PRICE
Egypt
Wheat 116 46 44 47
Maize 86 64 61
Sugar 25 16 15
Sri Lanka (rice) 188 144 78 104
Adjusted for FEECs 6 122 87 47 63
Pakistan (wheat) 117 48 28 31
DOMESTIC PURCHASE COST/FREE MARKET PRICE
Sri Lanka (rice) 63 57 43
Pakistan (wheat) 74 67 70 44
Sources:
1
Information obtained by Fund staff from national sources.
The correspondence between fiscal and calendar years is as indicated in Table 3.
Prices are unit values, and costs exclude administration and handling expenses.
2
3
Provisional.
4
Export price to Tanzania.
5
Coarse rice.
Import price for rice adjusted to the more depreciated Foreign Exchange Entitlement
Certificate (FEEC) rate.
IV. Conclusions
The paper has analyzed the role of food subsidy programs in selected
countries. Emphasis has been on providing information on the various
forms of food subsidies used and assessing the efficiency and costs of
the different types of scheme as instruments for achieving possible objec-
tives. In particular, the role of food subsidies as a major tool for income
redistribution has been analyzed. From a theoretical viewpoint, the
standard arguments on consumer choice, with some reservations, are for
ss See, for example, Krishna (1967) and Singh (1975).

cash rather than in-kind transfers. It can, however, be maintained that,

for reasons of both cost and administrative convenience, food subsidies,
particularly in developing countries, may represent an efficient instrument
for influencing target poverty groups. A review of the provisions of actual
schemes raises considerable doubt as to how far they are consistent with
the achievement of such objectives. Few schemes affect those too poor to
purchase at the subsidized price, while many seem to provide a "back
door" method for raising the wages of the urban employed.
In assessing whether a generalized food subsidy may be an appropriate
instrument for affecting the rate of inflation, the distinction between the
impact on the level and rate of change of prices becomes important. For
food subsidies to affect the latter, there has to be either expectations or
wage adjustment reactions to the initial drop in prices. Also, the aggre-
gate demand effects of financing the subsidy need to be set against any
reduction of inflation from such factors. The proper instrument for
reducing the variability of prices is a buffer stock scheme. However,
many supposed buffer stock schemes, in recent years, have effectively
involved substantial subsidies. In part, this arises from the extension of
the price stability argument to attempts to insulate the domestic consu-
mer from violent swings in international food prices. While it may be
reasonably argued that domestic prices should not follow every change
in international markets, many schemes appear to be trying to stabilize
at a medium-term price that might involve substantial secular subsidies.
A distinction can be made between the financial costs involved in
subsidies and those arising from distortions in resource allocation. The
financial cost of food subsidies as measured by budgetary, monetary, or
balance of payments data has increased considerably in recent years.
This reflects the failure to pass on in full to the domestic consumer the
very large rise in import prices and, to a lesser extent, increased domestic
costs. In several countries, food subsidies have become one of the largest
components of government expenditure. This also reflects a tendency for
food imports to become an effective residual in schemes that attempt to
set both domestic prices and the supply available to the consumer.
Food subsidy schemes need not necessarily affect the level or structure
of production incentives. Nevertheless, insofar as reduced payments to
the producer limit the direct financial cost of food subsidy schemes, the
temptation exists for some form of compulsory procurement at less than
market prices. The presence of large-scale subsidized imports also affects
the free market price. In practice, the degree of government intervention
and the complexity of subsidies and taxes mean that it is almost impos-

sible in some countries to distinguish the overall effect on domestic

incentives. Insofar as food subsidies reduce supply, there may be a
trade-off between the increase in short-run and long-run benefits to the
consumer.
Further research on food subsidies should concentrate on case studies
of individual countries. Emphasis might be given to analyzing, in a
given country, the differential efficiency of food subsidies and other
instruments for redistributing income. In particular, studies are needed
of the practical limitations of substituting for large-scale food subsidy
schemes either cash transfers or small target-oriented programs. In
analyzing the effects of present schemes, further use could be made of
consumer expenditure surveys to provide some indication of the distribu-
tion by income groups of the benefits of food subsidy programs. Any
large-scale study of income redistribution effects should incorporate
implicit subsidies and allow for any impact on producer prices and
incomes in the rural sector. Econometric analysis of the effects of food
subsidies on the rate of inflation, while relevant, may be expected to
encounter significant empirical problems.

APPENDIX
TABLE 9. ORGANIZATIONAL ASPECTS OF FOOD SUBSIDY SCHEMES
Country Main Commodities Administrationl

Bangladesh Rice, wheat, sugar, edible oil, Food Ministry
and salt
Burma Rice Trade Corporation I (P.E.)
Egypt Wheat, maize, sugar, and edible
General Authority for Supply
oil Commodities
India Wheat Food Corporation of India and
individual states
Indonesia Rice, wheat, and sugar BULOG 2 (P.E.)
Korea Rice, barley, and flour Grain Management Fund
Mali Millet, sorghum, rice, and OPAM; 3SOMIEX; SEPOM
groundnut oil (P.E.)
Morocco Wheat, sugar, and vegetable PSFandONICL 4
oil
Nepal Rice Nepal Food Corporation (P.E.)
Pakistan Wheat and edible oil Ministry of Food and Agriculture
Sri Lanka Rice, flour, and sugar Food Commissioner (P.E.)
Tanzania Maize, rice, and wheat National Milling Corporation
(P.E.)
Thailand Rice Public Warehousing Organization
and Rice Reserve Committee
United Kingdom Bread, milk, butter, cheese, Department of ¡Prices and Con-
flour, and tea sumer Protection
United States Food stamps Department of Agriculture and
individual states
Zambia Maize, wheat, and edible oil National Marketing Board (P.E.)
1
2
P.E. = public enterprise.
Budan Urusan Logistik.
3
Office des Produits Agricoles du Mali (OPAM); Société Malienne d'Importations et
d'Exportations (SOMIEX); Société d'Exploitation des Produits Oléagineux du Mali
(SEPOM).
4
(See also footnote 40 in the text.)
Caisse de Compensation (Price Stabilization Fund—PSF), and Office National
Interprofessionnel des Cereales et des Légumineuses (ONICL).
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FISCA L ROLE OF FOO D SUBSID Y PROGRAM S 127
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The Fiscal Role of Food

W HILE FOOD SUBSIDIES HAVE LED to considerable political debate,

©International Monetary Fund. Not for Redistribution

I. Problems of Definition and Measurement

The problems of defining subsidies have been subject to extensive dis-

©International Monetary Fund. Not for Redistribution

objectives of these subsidies.6 It also recognizes that in order to cate-

©International Monetary Fund. Not for Redistribution

clearly represents a subsidy for certain groups of consumers rather than

II. Objectives of Food Subsidy Schemes

The theoretical arguments affecting food subsidies as an instrument

©International Monetary Fund. Not for Redistribution

provide the highest level of satisfaction. The same increase in income

©International Monetary Fund. Not for Redistribution

policy of public corporations.12 Even if it were decided that some form

©International Monetary Fund. Not for Redistribution

with significant marketable surpluses will gain relative to small units.

©International Monetary Fund. Not for Redistribution

FISCAL ROLE OF FOOD SUBSIDY PROGRAMS

©International Monetary Fund. Not for Redistribution

of discrimination is limited.19 In Bangladesh, potential recipients in non-

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

TABLE 2. SELECTED COUNTRIES: WEIGHT OF SOME SUBSIDIZED ITEMS

apply only to a limited (often urban) segment of the population. Further,

©International Monetary Fund. Not for Redistribution

III. Some Costs of Food Subsidies

DOMESTIC FINANCIAL COST

The measured cost of food subsidies represents only a partial indicator

©International Monetary Fund. Not for Redistribution

TABLE 3. SELECTED COUNTRIES: BUDGETARY COST OF FOOD SUBSIDIES, 1972-75l

©International Monetary Fund. Not for Redistribution

emphasizing the share of this source of finance pre-empted by food sub-

©International Monetary Fund. Not for Redistribution

TABLE 4. SELECTED SUBSIDIZED FOODS: INDEX OF EXPORT PRICES, 1973-75

1973 1974 1975 Peak1

©International Monetary Fund. Not for Redistribution

TABLE 5. SELECTED COUNTRIES: INDICATORS OF THE RESPONSE OF FOOD SUBSIDY

1972 1973 1974 1975 2

DOMESTIC SELLING PRICE/IMPORT COST

DOMESTIC SELLING PRICE/DOMESTIC PURCHASE COST

domestic crops may be seen as a further reaction to the increased cost

©International Monetary Fund. Not for Redistribution

restrictions on the amount of food offered at the subsidized price or

©International Monetary Fund. Not for Redistribution

from international aid. If correctly accounted, the budget would show as

The importance of various subsidized food items in total imports is

©International Monetary Fund. Not for Redistribution

TABLE 6. SELECTE D COUNTRIES : FOOD IMPORT S AND THE BALANC E

nonprice-mechanism rationin g or supplemente d by imports . Several

©International Monetary Fund. Not for Redistribution

PRODUCTION INCENTIVES AND RESOURCE ALLOCATION

Food subsidies financed by the fiscal or monetary system have impli-

©International Monetary Fund. Not for Redistribution

TABLE?. SELECTED COUNTRIES: FACTORS AFFECTING DOMESTIC

Bangladesh Compulsory procurement of rice, with quota system and ban on

©International Monetary Fund. Not for Redistribution

to the consumer of domestic and internationally procured crops as well

©International Monetary Fund. Not for Redistribution