(1/n #Pakistan) STORY: One day a noble soul wakes up wanting to improve lives of sugarcane farmers. Govt sets a high support price for sugarcane. However, more than just increasing sugarcane prices, this encourages cotton farmers to switch to sugarcane. bit.ly/2u6bH0G
(2/n) Cotton production falls, cotton imports increase & govt starts worrying about the decrease in cotton belt. To incentivise cotton production, govt increases tariffs on cotton imports. Hoping, that this will increase demand for domestic cotton and cotton farmers will benefit.
(3/n) But this creates another problem. Textile exporters loose access to good quality/cheap cotton. Consequently, exports suffer. Govt cannot let this happen so comes up with a policy giving taxpayers' money in subsides to textile exporters to help them regain competitiveness.
(4/n) In the process of doing this, there is overproduction of sugar. This is good for GDP but there is a problem. It will cause sugarcane prices to drop. So, to maintain the support price, govt uses taxpayers' money to give subsidies so the surplus stock can be exported.
(5/n) Govt also borrows money from banks to finance some of these operations. So banks are pretty happy contributing towards this noble cause.
But there is a bigger problem: Govt is not being appreciated.
But there is a bigger problem: Govt is not being appreciated.
(6/n) Everyone in town has started crying 'elite capture.' From sugar mill owners to textile producers to bankers... everyone has gained from taxpayers' money. But the press continues to report that the farmers 'are still being exploited.'
Noble intentions have turned sour.
Noble intentions have turned sour.
(7/n) Perhaps farmers would have been way better-off had the govt given all this taxpayers' money directly to the farmers rather than through maintaining support prices. This would have also saved the govt from spending so much time/effort in managing crisis after crisis.
(8/n) Or, better still, govt could have used all this money to create a 'crop insurance fund' aimed at compensating farmers at times of adversity.
(n/n) LESSON? It is the 'general equilibrium,' stupid!
Policy interventions can change the incentive structure across the economy thus affecting allocation of resources for good or bad. This must always be taken into consideration: dawn.com/news/1458827
Policy interventions can change the incentive structure across the economy thus affecting allocation of resources for good or bad. This must always be taken into consideration: dawn.com/news/1458827
