Monday, February 22, 2010

The Negative Effects of Subsidies in India--How to create a famine in one easy lesson...

India's "Green Revolution", begun in the 1970's, allowed it to become food self-sufficient and even a net exporter is now a net importer of food and is experiencing food inflation. Why?....This article suggests it is the use of particular, heavily subsidize urea-based fertilizer that is rapidly depleting soil quality and rendering arable land nutrient deficient.  There are alternatives to this fertilizer but are not widely used.  Again, WHY?  It appears to be the result of a common problem---once a subsidy is granted it is almot impossible to rescind it because entrenched corporate interests are eager to maintain the subsidy.  Subsidies tend to be very profitable for the recipient...
"The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price."
Farmers have become "addicted" to the low cost fertilizer even though they themselves see the harm it does...
"Without the urea, my crop looks sick," he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. "The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield."..."One farmer sees another's field looking greener, so he adds more urea," he says. "A farmer will become bankrupt, but he will not stop using urea."
This story is an excellent example of economics mixing with government/politics.  Subsidies are not bad if it creates a postitive externality, or a benefit that extends to society at large (food self-sufficiency is positive).  Early in the Green Revolution this subsidy appears to have created many benefits for the people of India. However, when the positive started to reach a point of diminishing returns, the policy should have been objectively reconsidered to ensure that positive externalities were still present in the production of food.  Interest group politics in this case stymied that reconsideration. As you know from class, I am fond of saying, economics tells you what should be done, politics decides otherwise..:)
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