Subsidies - back to square one?

Subsidies as a percentage of central government budgetary expenditure is at an all-time high and as a percentage of GDP is fast approaching its 1990-91 peak. The graphic below appear to indicate that the much discussed subsidy reforms over the past two decades may have come to naught.



On the back of weakening rupee and high global oil price, fertilizer and fuel subsidies have risen alarmingly. Fertilizer subsidies, estimated currently at Rs 95000 Cr, are sure to breach Rs 1 lakh Cr. Fuel subsidies are expected to touch Rs 1.3 lakh Cr.

Every time the rupee depreciates by one unit against the US dollar, Rs 8,000 Cr is added to the fuel subsidy bill. Since the rupee has depreciated from Rs 46 to roughly Rs 52 per US dollar, Rs 50,000 Cr has been added to the fuel subsisdy bill itself.

The newly promulgated Food Security Bill, which gives legal entitlement of 7 kg of rice, wheat and coarse grains per month at the rate of Rs 3, Rs 2, and Rs 1 respectively to over 63% of national population, has increased the food subsidy burden by another Rs 27,663 Cr to about Rs 95000 Cr.

The world food situation graphics

Excellent interactive graphic by Oxfam which shows how poor communities across the world are being hurt by volatile food prices, which have been hovering near an all-time peak since late 2010.



It attributes the price rises to failed crops (due to climate change), rising cost of oil (used to grow, fertilize and transport food), short-sighted biofuels strategies, and dysfunctional commodities markets.

The global food loss and wastage problem

This story provided lighthearted amusement for some time recently, though its underlying message did not generate much debate. However, there are some interesting findings from a study released by the Food and Agriculture Organisation (FAO) on trends in food loss and wastage across the world,

"Roughly one-third of food produced for human consumption is lost or wasted globally, which amounts to about 1.3 billion tons per year... Food wasted by consumers in rich countries (222m tonnes) is roughly equal to the entire food production of sub-Saharan Africa (230m tonnes)."

The report makes the distinction between food loss - occurring at the production, harvest, post-harvest and processing phases - and wastage - retailers and consumers throwing perfectly edible foodstuffs into the trash. The study finds that though industrialised and developing countries waste or lose roughly the same amount of food each year – 670 m and 630 m tonnes respectively - there are important differences.

Rich countries waste food primarily at the level of the consumer and at the retailer level, especially for fruits and vegetables, by often unreasonable quality standards that over-emphasize appearance instead of safety and taste. For developing countries, the major concern is food loss due to weak infrastructure – including poor storage, processing and packaging facilities that lack the capacity to keep produce fresh. Further, on a per-capita basis, the per capita food waste by consumers in Europe and North-America is 95-115 kg/year, while this figure in Sub-Saharan Africa and South/Southeast Asia is only 6-11 kg/year.



Apart from strengthening food supply chains (by investing in storage, processing, packaging, and transportation), the report also advocates reducing reliance on retailers like big supermarkets, promotion of direct sales of farm produce to consumers, encourages retailers and charities to work together to distribute unsold but perfectly edible food that would otherwise go to waste.

These findings come at a time when the food prices have been soaring (overall cost of food in April was 36% higher than in 2010). Last month, the World Bank said that rising food prices had pushed 44 million more people into extreme poverty, and an additional 10 million people live at the margins of falling into poverty. There are two observations in this context,

1. It is ironical that while public policy explicitly tries to lower electricity transmission and distribution losses, we are, at best, ambivalent about reducing food wastage. This is despite, food wastage being a much bigger problem than the former. More unfortunately, this issue gets even less attention than issues like energy and water conservation.

2. There is some food for thought for behavioural economists and psychologists here. Apart from the hard policy and investment-driven (more storage facilities etc) choices required for cutting down on food loss, can we also nudge people into reducing their food wastage? Such subtle nudges could be incorporated into the processes undertaken at every level in the production-marketing-consumption chain, so as to reduce the likelihood of food being wasted.

For example, one way to nudge people into lowering food consumption wastage is to encourage the purchases of smaller packets of food materials from stores. Another option is some form of restrictions on promotional offers that encourage people to buy more food than they need. Given the amounts of food wasted in hotels, are there some nudges or strategies that could enable hotels more effectively manage their cooking demand schedules? In particular, what are the strategies that enable hotels to minimize wastage from buffet spreads?

But this nudge (or shove) may be one step too far!

Sunset for Mugabe in Zimbabwe?

I recently interviewed Peter Jacobs of the University of the Western Cape in Cape Town, South Africa about the political crisis in Zimbabwe.

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In your estimation, is the land reform issue at the root of the political crisis in Zimbabwe?

Indeed, land reform or the absence of a genuine pro-poor land redistribution policy is a major source of the socio-economic and political crisis in Zimbabwe. But it is inaccurate to trace everything to this single driving factor.

The most productive resources remain concentrated in the hands of a few (including the black elite). But the land issue alone cannot explain the depth, breath and long duration of this crisis. Other post-independence economic and social policy blunders plus the dictatorial degeneration of the ZANPU-PF regime must also be factored into this story.

How has the land reform issue been dealt with in South Africa?

In South Africa, land reform is law-abiding and modeled on the willing seller willing buyer template promoted by the World Bank. In other words, it is through the law and the market, the pillars of land reform entrenched in the post-apartheid Constitution, that 30% of white-owned land is to be transferred to blacks.

Fast-tracking land restitution with a tougher expropriation law is becoming increasingly popular among ANC politicians- especially those most likely to seize hold of parliamentary power after the 2009 national elections.

What risks exist for the regional economy as a result of the ongoing crisis in Zimbabwe?

This really depends on who one talks to and at what time. Among most investors, the mood is very gloomy, but they are eager to pour capital into Zimbabwe if there is greater stability.

South Africa’s poor record in attracting long-term fixed capital investment is often blamed on the crisis in Zimbabwe. But it is not easy to support this claim with hard evidence given the many other things happening in South Africa and other neighboring countries. Other resource based economies in the region (such as Angola and Botswana, for instance) have been attracting investors.

For the rural and urban poor, on the other hand, this is a different matter. The region appears to be unable to handle the sharp rise in out-migration from Zimbabwe. This factor, no doubt, has contributed to the mindless violent attacks on nationals from neighboring countries which have erupted mainly in South African slums.

Do you expect violence in Zimbabwe to worsen prior to the June 27 runoff?

The entire state machine is now deployed to terrorize Zimbabweans. And the post-election humanitarian crimes and brutality of the regime go far beyond imprisoning the 2 vociferous leaders of the MDC, Arthur Mutambara and Morgan Tsvangirai.

The worst scenario as the country heads towards the run-off poll on June 27 is a massive intensification of this campaign of violence. In the best scenario, the run-off will take place in a volatile climate of fear, intimidation and the threat of destabilization.

Are the people of South Africa satisfied with the response of their government to what is happening across the border?

South African reactions to the crisis in Zimbabwe can best be described as mixed. Elements within the governing ANC have been speaking out against ZANU-PF, asking it to accept its defeat in the March elections.

This runs counter to the official ‘quiet diplomacy’ approach of President Mbeki and leading state officials. In their view, Zimbabwe is an independent and sovereign state which needs to resolve its internal difficulties without external interference.

Civil society groups, including COSATU which is the trade union federation allied to the ANC, have been demonstrating against the human rights record of the Zimbabwean government. Aside from this ‘indirect lobbying’, poorer South Africans have not expressed or articulated any organized public dissatisfaction towards the way government has handled the Zimbabwean situation so far.

Minority opposition parties in South Africa, like the Democratic Alliance and Independent Democrats, however, want the Mbeki cabinet to shift from its ‘quiet diplomacy’ stance to active support for ‘regime change’.

What should an MDC or a unity government do to address the dire economic conditions inside Zimbabwe?

Let us assume that there is no rigging of the June 27 run-off and the MDC scores a landslide victory. What the MDC needs to tackle in this context, for a start, is to stop the economic meltdown of Zimbabwe, create a free space for civil society to engage in politics and implement a pro-poor redistributive project.

Large-scale capital investment is required to rebuild its physical and social (healthcare, education, etc) infrastructure. Private foreign capital inflows may not be enough to quickly address these needs, yet privatization is core to its economic platform.

To boost food security, it needs an integrated program to redistribute land and agricultural resources to poorer farmers. However, until now, the MDC appears to have woefully neglected drafting a clear proposal on how to resolve Zimbabwe’s complex land question.

photo by babasteve