Thailand’s agricultural policies: a hand out, not a hand up

In the final of a three-part series on the Thai economy, Craig Keating investigates the country’s inefficient agriculture sector and finds urgent reforms have stalled because of quick fixes like rice price subsidies.

Thailand’s agricultural subsidies and other short-term policies may help some farmers temporarily. But they benefit the rural poor the least, and they are holding back the productivity gains needed to ensure sustainable, long-term growth in rural living standards. Without change, most Thai farmers will be destined to remain in poverty.

Thailand’s agriculture sector is inefficient. United States Department of Agriculture data show the yield for rice — its main crop — is among the lowest of the eight major ASEAN rice growers (Graph 1), and lags far behind its chief export rivals, India and Vietnam.

Graph 1: Rice yields (metric tons per hectare) for major ASEAN rice producers

Source: United States Department of Agriculture’s World Agricultural Production circular series.

Agriculture is also less efficient that other sectors of the economy. It employs 31 percent of Thai workers (Table) – a much higher proportion than in similar countries, according to a 2020 World Bank report. But it contributes a mere eight percent of Thailand’s GDP. Put another way, the typical agricultural worker contributes a mere fifth of their counterpart in another sector to Thailand’s GDP.

So it is unsurprising that around 40 percent of farming households were living below the poverty line in 2017. Half of all farming households owned 1.6 hectares or less. Unless and until the government raises rural productivity, it will not achieve its ambitious goal of raising farmer incomes to parity with other workers by 2037.

Table: Agriculture’s share of value-added to GDP and employment in 2019

Sources: The Organisation for Economic Cooperation and Development (OECD), Bank of Thailand.

Since the 1970s, Thai governments have sought farmer’s votes through price interventions, and policies that — directly or indirectly — bought produce from farmers at inflated prices, policies that many farmers have now come to expect. The purchase of crops at above market prices in particular has held back, and in some cases reversed, productivity gains.

This came to a head when Yingluck Shinawatra’s government (August 2011-May 2014) bought rice from farmers at least thirty percent above market prices. The World Bank reported that, within two years, the government was saddled with an 18 million ton “rice mountain” (one year of Thai rice production, or forty percent of world annual rice trade). As the stockpile grew, it became obvious the government could not sell its stockpile except at a discount.

The cost was enormous. According to the World Bank, the impost on the government budget of its two years was USD 12.7 billion (3.5 percent of GDP), and USD 13.9 billion (3.6 percent of GDP), respectively. A World Bank economist estimated the net loss at two percent of GDP in just one year.

Losses compounded over time, some rice mouldering, and millions of tons “missing”, some allegedly stolen. Rice was smuggled in from neighbouring countries to be sold to the government at its inflated prices – and could well explain the reported fall in rice yields in Thailand’s neighbours from 2010-2011. And it wasn’t just rice. Yingluck’s brother (and former prime minister) Thaksin lamented Thai traders bought tapioca in other countries, knowing the Thai government would pay twice the price.

The richest twenty percent of farmers — who supplied 42 percent of rice sold — gained the most. The poorest farmers, who consumed most or all of what they grew, gained the least. Even Yingluck’s chief policy adviser admitted at the time it was “not a very efficient way of spending tax money to create income”.

Thai rice became uncompetitive. Thai rice exports plunged 37 percent in a year to the lowest level in more than a decade. Thailand, which had been the world’s biggest rice exporter for more than three decades, slipped to third place. It has never recovered its former market share.

Yingluck’s policies set back agricultural productivity (Graph 2), reversing the sector’s slow productivity gains. Farmers grew more low quality, but higher yielding, varieties of rice. Labour shifted from the more productive industrial and service sectors to take advantage of the government’s generosity. Agricultural productivity only regaining sustained positive momentum after General Prayuth Chan-ocha seized power in the 2014 coup and axed Yingluck’s profligate policies.

Graph 2: Sectoral share of employment and value added per agricultural worker

Note: The area inside the Box shows the period of Yingluck Shinawatra’s government. Source: World Development Indicators.

Nevertheless, the need to placate Thailand’s large but poorer hinterland was too great for even coup-makers to ignore. It often determines elections. And, if sufficiently provoked, rural people can bring Bangkok to a standstill, with attendant instability and heightened risk of violence. So in 2016, when farmers threatened protests after the rice price fell, Prayuth quickly provided them with interest-free government loans. With farmers using their rice as collateral, the government was effectively buying the rice at a 20 percent mark-up – in practice, little different from Yingluck’s policy.

After a nominally-democratic election in 2019, Prayuth’s coalition government did try to reform rice production by encouraging farmers to shift to other crops and create larger-scale cooperatives. But both policies failed, as the rice subsidy was greater than the gains farmers could get from either scheme.

The need for reform

Without major reform, agricultural worker productivity will remain but a small fraction of that of the non-agricultural sectors. Rural productivity and living standards will stay low. This, in turn, will shift the burden of increasing costs of Thailand’s ageing population disproportionately onto workers in the more productive sectors. Reform will not be easy, and it will take years. So it will be crucial to involve farmers and rural workers in determining the scope and pace of reform.

Improving the living standards of poor smallholder farmers in the short-term could be better achieved through direct social welfare payments including, but not limited to, a more generous old age allowance. These would not distort agricultural production, and remove a major disincentive to reform.

To help raise agricultural productivity, more spending on research and development research and development is needed. As Graph 3 shows, Thai rice yields lag far behind India and Vietnam, which have increased their productivity by 42 percent over the last 20 years. Research and development could also improve the marketability of Thai rice, which has not kept pace with changing consumer tastes. On 11 February, the government said it will do just that. However, its goal to raise yields by 30 percent in five years seems out of reach, given how long India and Vietnam took. And, even if by some miracle it were to succeed, it would still not be enough to match, let alone overtake, either country.

Graph 3: Rice yields (metric tons per hectare)

Source: United States Department of Agriculture’s World Agricultural Production circular series.

Furthermore, Thailand has too many rice farmers to compete successfully with more efficient producers or to provide them with a decent standard of living. People in rural areas need to be provided with the skills needed to engage more successfully in the industrial and service sectors. This can only be realised through qualitative improvements to Thailand’s laggard education system.

Cross-party commitment is also crucial for reforms to be sustained over the long term. However, this is far from guaranteed. In December 2021, a senior member of Yingluck’s party, intimated it may revive her rice purchasing policy if gains power after the next election. If this is the case, then other parties will almost certainly announce similar policies in what is shaping up to be a tight contest. They know crop subsidies have been a proven vote winner in the populous rural areas. If this proves to be the case, then the prospects for the changes needed to sustain improved rural livelihoods and higher national productivity look dim indeed.

Craig Keating is a former senior analyst with Australia’s Office of National Assessments (ONA).

Banner image: Farmer works rice terraces in Ban Pa Pong Piang, Chiang Mai, Thailand. Credit: Thirawatana Phaisalratana, Shutterstock.

[1] According to the Bank of Thailand, the sectoral allocation of 75,580 workers was unknown.