A good decision to bring back subsidy on cereals

01 Dec, 2019 - 00:12 0 Views
A good decision to bring back subsidy on cereals

The Sunday News

Michael Mhlanga 

In one of the days this past week, people woke up to the shocking news of mealie-meal price increase. While the evening before, news had filtered in, that beginning 2020, Government will liberalise the maize and wheat industry by removing a Government subsidy, many understood less of the matrices of Government price subsidies. To that effect, the retail and purchase shock of a key cereal immediately had gastric, if not hazardous effects on an already scrounging population. Despite the immediate relief of the policy review, the dynamics of a cost subsidy by the Government at a time there is a sadly astonishing atmosphere of food insecurity needs revisit. In simple terms, the removal of the cost subsidy on maize had been the greatest folly, thankfully it was reviewed. In fact, the public were promised social safety nets during the austerity phase, subsidy on cereals such as maize and wheat are a necessity when the economy and the ecosystem are disfavouring us.

Let me indulge the subject matter: the implications of the removal of a critical subsidy on a cereal. Let’s first understand the context from an ecosystemic perspective which confirms that the current cropping season (2018/19) was marked with late onset of rains, which resulted in abnormally dry conditions, affecting agriculture activities, thereby reducing the income of the most vulnerable households relying on occasional agriculture labour. 

The dry conditions have further plummeted the scarcity of maize owing to cyclone Idai and the present drought. As of March 2019, Zimbabwe was looking at importing 900 000 metric tonnes; almost half of what it annually needs, which is 1,8 million tonnes of grain.  

With delayed rains accompanied by a charcoaling heatwave, the deficit grows, the hungrily poor increase and its only remedy is food aid and a subsidised cereal market. 

The current food insecurity in the country is driven by multiple shocks, including climate and economic shocks. 

As the drought looms, a period development practitioners refer to as a lean season, households deplete their cereal stock and usually depend on the market. 

An analysis done in February 2019 by Integrated Food Security Classification Phase assessed that Food prices are currently 50 to 150% above the five-year average and are expected to keep increasing throughout the lean season, with extremely negative effects on households’ financial access to food. 

A decade month ago, the analysis on a general scale proves to be true, it’s even truer when a critical subsidy is removed.

If we are to rely on statistics and reportage, also confirmed by the Ministry of Public Service, Labour and Social Welfare, the country is food insecure, and the imprudent gesture least expected is to remove a Government subsidy on essential cereals like maize, whose effect is a startling price increase, beyond the reach of the few remaining, and, affording. 

In this case, cereal subsidies comprise all measures that keep prices for consumers below the market level or keep prices for producers above the market level or that reduce costs for consumers and producers by giving direct or indirect support. 

Consider, for example, the case of a poor maize farmer in Kadoma. There are several ways in which this farmer can receive subsidies, but the Zimbabwean scenario had, for a long time, Government funding procurement of grain at market price and sold this to registered grain millers at a subsidised price. 

In the removal of this, the outcome was that millers would either purchase at GMB at market price, or, import. From a business sense, sell it to the poor man at a market price. 

Of course, demand for the product is always high, cereals are staple foods, but accessibility of the food was going to be an uphill. 

The reason subsidies on these critical cereals exist is because subsidies are generally introduced to mitigate a possible imbalance in the allocation and use of resources. 

Thus if, for example, by virtue of poor endowment of natural and/or human resource, a rural farmer is unable to produce enough to feed his family, his production process can be enhanced by subsidising the cost of his inputs.

While the logic informing the idea to remove such a critical subsidy is purely economic, it ignored the politics of avoiding a human catastrophe. 

I also understand where the idea comes from; current economic crises are forcing governments of many countries to look for ways to reduce Government spending, inflation and improve the foreign exchange balance. 

Using basic economic principles, it is often argued that removal of subsidies can stimulate economic efficiency and increase economic growth. It is argued that resources are scarce and must be allocated according to market prices, based on marginal costs; and that subsidisation can lead to prices that reflect neither true resource scarcity nor the costs of consumption or production. 

On the other hand, proponents for maintaining subsidies insist that they serve good purposes and their removal would harm the economy. While those for the removal of subsidy base their argument on economic principles rooted in “first best” practices, those who argue for subsidies resort to “second-best” arguments. For the latter group, because of market imperfections, “first best” solutions although achievable, are no longer desirable. 

Even though, at such a time of strife like this one, consumer-oriented food subsidies are a powerful policy tool for reaching certain social, economic, and political goals. 

Targeted food subsidies are also effective in protecting specific groups of poor households from deteriorations in their standard of living such as those associated with severe economic crises and macroeconomic adjustments.

Although food subsidies may represent large drains of Government revenue, they are also effective policy tools for reaching specific government objectives including those aimed at enhancing the health, nutrition, and general well-being of the most disadvantaged members of society. 

If used imaginatively, the grain subsidies, may be very effective in reaching specific and limited policy goals with little or no negative effect on economic growth and may in fact result in healthier children, more productive adults, and stronger economic growth in the long run.

Share This: