Remove Protectionist Regimes And Nations Rice Output Can Grow

The paddy and rice industry is one of the most assisted and insulated industries in Malaysia. Protectionist measures such as utilising a state trading enterprise (STE) — Bernas (Padiberas Nasional Bhd) — to be the single gatekeeper for rice imports, price controls and subsidies have effectively sheltered the industry from market realities.

This has prevented it from evolving into an industry that is dynamic, open and competitive. In the pursuit of protecting farmers’ income and spurring production, billions of ringgit of taxpayers’ money are being poured into this industry every year. Nonetheless, such high levels of spending have neither significantly improved farmers’ productivity nor their welfare.

According to the 2018 Auditor-General report, paddy production between 2016 and 2018 dropped between 1.4% and 8.5%, missing the Ministry of Agriculture’s target for self-sufficiency for three straight years.

The failure of current subsidies to spur productivity among farmers, coupled with the rising cost of production, has led paddy farmers to become one of the most vulnerable populations, where they consistently fall within the low-income B40 category. Paddy farmers often pursue additional income from other sources, as paddy cultivation alone is insufficient to support them.

Decades of investments in farming subsidies have failed to improve farmers’ income sustainably. Worse yet, it has created an ecosystem that disincentivises entrepreneurship among farmers. These outcomes are symptoms of a larger, systemic problem facing the industry — the lack of competition.

Case studies from Bernas in Malaysia and Bulog in Indonesia” have demonstrated extensively how the use of protectionist measures have contributed to many unintended consequences. These include little competition and innovation, low value-add among the players and slow development of small and medium enterprises. This ecosystem is neither equitable nor sustainable.

When farmers’ creativity and entrepreneurship are stifled by the perverse incentives created by this protectionist regime, they are the ones who will ultimately be at the losing end, as their livelihoods will be highly dependent on given subsidies. If we want to see paddy farmers being independent and able to sustain themselves, we need to inject competition into the industry. This will ignite the much-needed creativity and entrepreneurship among them to drive the industry towards growth and innovation.

To achieve this, the distortive nature of our current farm subsidies needs to be addressed. When IDEAS interviewed farmers, a significant proportion of them raised concerns about the quality of the subsidised inputs (seeds, fertilisers and chemicals) and their suitability with the soil of their respective farms.

Under the current structure, many farmers had to compromise on the quality and suitability of their inputs as only the given inputs are subsidised. This is one of the factors that led to lacklustre levels of productivity. Put simply, the current system does not value farmers’ judgment and agency. How can we expect farmers to be successful, innovative entrepreneurs when their judgment on what is best for their farms are being ignored?

Prof Datin Paduka Fatimah Mohamed Arshad, Kusairi Mohd Noh and Emmy Farha Alias, proposed transforming the current various farm subsidies into a single direct payment independent of farmers’ production decisions. This payment is called area-based decoupled payment (ABDP). Unlike the current paternalistic subsidy system, ABDP values farmers’ judgment and agency because farmers are free to use the payment to purchase the best inputs of their regard for their respective farms. They are free to change any of their farm inputs at any given time.

If they wish to venture into other, more rewarding enterprises, they are also free to do so, provided they comply with the conditionalities of ABDP. This will reduce the distortion the subsidies have on the market, and it will also incentivise farmers to be creative in improving their farm management skills. IDEAS’ latest report does not call for the total abolishment of farm subsidies. Instead, it is a call to adopt a more optimised form of assistance that values farmers’ agency.

Switching to ABDP would also ease the burden of administering and distributing subsidies. Currently, our farm subsidies are being mismanaged. According to the 2018 Auditor-General Report, from 2016 to 2018, between 3,210 and 7,061 farmers who have passed away still receive subsidies every replanting season, costing the government up to RM57.92 million.

The report also highlighted that distribution of excess fertilisers, owing to the differences in calculation methods in the same period, cost the government RM59.44 million. Farmers also experienced significant delays in the delivery of fertilisers, which ranged from 14 to 278 days. All this wastage could be alleviated when the various forms of subsidies are streamlined into one payment. The savings could then be used to improve farmers’ capacity further.

Of course, switching to ABDP alone will not solve all the systemic problems faced by the industry. The policy roadmap provided by IDEAS’ latest report includes other recommendations such as enhancing the role of collective action within the industry and establishing a National Rice Board. This policy roadmap serves as a useful framework to start conceptualising the much-needed transformation of the industry.

One thing is clear: A concrete transformation strategy for our paddy and rice industry is urgently needed. Continuing the status quo would only see the current problems plaguing the sector persist. After 50 years of the protectionist regime, farmers’ livelihoods have not improved. Despite the billions of ringgit the government invests in the industry every year, they are still the poorest in our society. Don’t they deserve the same opportunity to prosper and flourish like everyone else?

Written by Gamaliel Kan, Research executive at the social policy unit at IDEAS

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