The word self-sufficiency has a nice ring to it. The will to become self-sufficient probably ranks very high on every human’s—and every nation’s—list, although attaining complete self-sufficiency is probably more of a utopian concept. Most nations in one way or another practice it—selectively. Subsequent to the 2007-08 food price crisis, there was a rise in several countries’ desire to attain food self-sufficiency. Nepal is not an exception. On May 29, Finance Minister Yubaraj Khatiwada delivered his 2018-19 budget speech to a joint session of the federal Parliament. He said arrangements had been made to provide basic protection for at least a dozen basic goods and construction materials including sugar, medicine, iron bar, wood and cement. The goal is to become self-reliant within the next two years. Sugarcane farmers will receive production-based grants. Support prices will be fixed before planting specified agricultural crops including wheat, rice and sugarcane.

Quest for self-sufficiency

Let us take sugar for our discussion purposes. It is a global commodity, entrenched in subsidy and price support. Depending on which side one is on, the scales can easily tilt from sweet to sour. A farmer’s cost-benefit analysis differs from a middleman to a sugar mill to a user. From this respect, it is not easy being in Khatiwada’s shoes, particularly being the finance minister of a nation sandwiched between two giants.

India, for one, heavily subsidises its sugar industry where sugarcane farmers are a key voting bloc. In February this year, it doubled the import duty on sugar to 100 percent. In the current sugar season (2017-18), the southern neighbor expects a bumper harvest. But prices are dropping everywhere. In September 2016, the international price of sugar peaked at $0.2410 per pound. This then got more than cut in half before bottoming at $0.1093 in April this year. It is currently at $0.114. Consequently, India is trying to protect its domestic growers from cheaper imports. Thailand, too, is seeing record sugar production, even as the drop in prices is adversely impacting millers in Brazil, the world’s top producer.

With this as a background, while subsidies in Nepal may or may not help the domestic sugar industry in the long run, right here and now not doing so can invite cheaper Indian imports, putting farmers and mill owners at risk.That is the conventional thinking. On June 4, the Supreme Court upheld a Cabinet decision to hike the customs tariff on sugar imports.Three months before that, these tariffs were raised from 15 percent to 30 percent.The goal was to protect the domestic sugar industry from a drop in prices and from increasing imports of low-cost sugar. Be that as it may, it is a zero-sum game.

In the US, which uses price supports and tariff-rate quotas to prop up prices, processed food, confectionery and soda industries such as Coca-Cola, Cargill and Nestle have long fought federal protection of domestic sugar. To them, price support measures artificially inflate prices, as do restrictions on imports. But they are also up against a strong agricultural lobby, who argue that domestic manufacturers should be protected from foreign dumping. Some US candy makers have gone on to move production to Mexico.

David versus Goliath

It is not an easy issue to tackle. In economics, there is a concept called comparative advantage, which refers to the ability to produce goods and services more efficiently or at a lower opportunity cost than somebody else. Call centres in India are an example. US companies are better off outsourcing this service to India rather than setting up a call centre on American soil. It is cheaper that way.This is the reason why as much as US President Donald Trump wishes Apple brings manufacturing home, in all probability it will not happen. Foxconn Technology, a Taiwanese contract manufacturer, makes the iPhone, among other Apple products, in China. One of the comparative advantages Foxconn enjoys is the Far East’s well-established electronics supply chain—from LCD screens to printed circuit boards to memory to camera lenses. Assembly is much easier in that region. Not so in the US. Along the same lines, Germany, which draws two-fifths of its GDP from exports, counts machinery and autos as its top exports but imports all its computers.

Hence the question: Do subsidies do away with comparative advantage? Better yet, do they distort prices? If a price is guaranteed, are farmers who would otherwise be planting other crops incentivised to switch to subsidised ones? Are costs outweighing the benefits? Are zombies born? Even if the answer is a yes to these questions, painting the issue of subsidies with a broad brush can yield the wrong results. Rich—or richer—countries can afford to pay healthy subsidies, poor countries not so much. More often than not, a subsidy mismatch between the two takes a heavy toll on the less prosperous. Haiti used to be self-sufficient in rice until the 1980s. Then the International Monetary Fund and the World Bank asked the nation to liberalise the economy by lowering tariffs, which it did. Haitian rice was soon displaced by cheaper subsidised rice from the US. Haitian consumers benefited, but not the farmers who earlier were protected by import tariffs.

In an ideal world, a country facing the risk of foreign dumping should be able to easily switch to a crop that is not as easily influenced by, in Nepal’s case, Indian policy. In the real world, David does not always win the fight against Goliath unless he thinks smart. Letting go is always difficult. In the early 20th century, Henry Ford’s Model T brought motoring to the masses. The buggy whip manufacturers of the time that did not read the tea leaves and stayed put went bankrupt. Ditto typewriters that became a relic as personal computers burst onto the scene.

It was not until December 1993 that Japan ended its ban on rice imports, about the same time South Korea opened its rice market. In our subsidy discussion, New Zealand’s example may serve a purpose. It is a large agricultural exporter and got rid of its farm subsidies in 1984. The attempt here is not to suggest to the concerned authorities to follow New Zealand’s path willy-nilly, rather to look inward and try to find one’s comparative advantage. The quest for self-sufficiency is noble; but attaining the same with the help of subsidies, likely not.

Pandey specialises in portfolio investment and economic issues