Poor Economics and Food Subsidy

Book Excerpts from Poor Economics by Abhijit V Banerjee and Esther Duflo. While the book talks about things like healthcare, education, entrepreneurship, micro-credit, poverty etc but i did not find much about food. An omission. I have added something to this narrative which is a revolutionary approach to solving the problem of subsidy delivery.

Every year 9 million children die before their fifth birthday. A woman in sub-Saharan Africa has a one-in-thirty chance of dying while giving birth - in the developed world, the chance is one in 5,600. There are at least twenty-five countries, most of them in sub-saharan Africa, where the average person is expected to live no more than fifty-five years. In India alone, more than 50 million school-going children cannot read a very simple text.

The problem seems too big, too intractable. Students shown images of sick and dying people out of food shortages in Malawi donated more generously when a victim chosen randomly was shown. When told that the two images they were shown of had something special in them, and that people are more likely to donate to an identifiable victim, students donations more or less became the same. We feel our contribution will be a drop in the bucket, and that the bucket probably leaks.

This book is an invitation to think of the whole set of problems which when once properly identified and understood, can be solved one at a time. The western world is roughly divided into two groups, one lead by Jeffry Sachs, advisor to the United Nations, director of the Earth institute at Columbia University in New York City. He Says poor countries are poor because they are hot, infertile, malaria infested, often landlocked; this makes it hard for them to be productive without an initial large investment to help them deal with these endemic problems. But they cannot pay for the investments precisely because they are poor- they are in what economists call a “poverty Trap”.

The other side represented by William Easterly, who battles Sachs has become one of the most influential anti-aid public figures. Dambisa Moyo has joined her voice to Easterly's and both argue that aid does more bad than good: It prevents people from searching for their own solutions, while corrupting and undermining local institutions and creating a self-perpetuating lobby of aid agencies. The best bet for poor countries is to rely on one simple idea: When markets are free and the incentives are right, people can find ways to solve their problems. They do not need handouts, from foreigners or from their own governments. They say poverty is a white man's burden which he has to live with.

Whom should we believe? Rwanda received generous aid after the genocide and prospered. Now president Paul Kagame has started to wean the country off aid. Should we wait and watch for the final word to see if there is another economic downturn or consider the good that aid has done and lay pipes from the rich countries to the poor. There is data on a couple of hundred countries in the world to show that those that received more aid did not grow faster than the rest. Perhaps the opposite can be true too and that the aid helped them avoid major disaster, and things would have been much worse without it. We simply do not know; we are just speculating on a grand scale.

In the book authors try to answer if particular instances of aid did some good or not and nothing about whether aid is good or bad per se. Authors cannot say anything about efficacy of democracy but they have something to say about whether democracy could be made more effective in rural Indonesia by changing the way it is organized on the ground and so on.

What really matters is not so much were the money comes from, but where it goes. No one really disagrees that we should help the poor when we can. A philosopher observes that most people would willingly sacrifice a $1000 suit to rescue a child seen drowning in a pond and argues that there should be no difference between that drowning child and the 9 million children who, every year, die before their fifth birthday.

Philosophers agree that poverty leads to an intolerable waste of talent. Poverty is not just a lack of money; it is not having the capability to realize one's full potential as a human being. A girl from Africa may not get the nutrition to be the world-class athlete she might have been, or the funds to start a business if she has a great idea.

She could become sick and make traveling people from the developed world sick. Had she gone to school she might have turned out to be the person who invents a cure for a disease or perhaps, she would end up as a business tycoon employing thousands of others. And even if she doesn't what could justify not giving her a chance?

Implicit in the argument is that we know how to help people in distress. Yes we do, we know we need to supply education and health care in heavy doses, how to do them while turning the outcomes to your liking is the real matter. The point is simple: Talking of the problems of the world without talking about some accessible solutions is the way to paralysis rather than progress.

The book talks about malaria affecting millions in Africa and a simple solution of a bed net and the economics of its supply and demand. It asks, What is the best way to make sure that children sleep under bed nets?

Moyo tells the story of how a bed-net supplier was ruined by a free bed-net distribution program. When free distribution stopped, there was no one to supply bed nets at any price.

To shed light on this debate we need to answer three questions.
First, if people must pay full price(or at least a significant fraction of the price) for a bed net, will they prefer to go without?
Second, if bed nets are given to them free at some subsidized price, will people use them, or will they be wasted?
Third, after getting the net at subsidized price once, will they become more or less willing to pay for the next one if the subsidies are reduced in the future?

Significance of the book for India:

Products or services such as education or healthcare or micro credit are good to have but people do not seem to value them enough to demand larger public outlays. The problem is compounded by mediocre services currently being offered by the government health and education departments. Bed net protects us from diseases and its demand may fall if mosquitoes menace is tackled. Food is something which will never go out of demand.
Regarding food in the Indian context, our farmers are in distress.
The problem is manifold. Reducing farm incomes and land holding sizes due to sub-division among family members. Increasing number of landless laborers on farms, informal tenancy agreements and lack of tenancy registration. Water shortages and other environmental factors like drought and floods. Lack of soil testing and adequate use of fertilizers in appropriate ratios. Illiteracy of farmers and inability to shift to industry or services. Regulatory restrictions and monopolies in agricultural produce marketing yards. Overemphasis on rice and wheat production as a result of increasing MSPs year after year to the detriment of other crops.
If we were to help our, what would be the best way? They need help but the way we provide help matters. Food prices are a factor of demand and supply and due to vagaries of nature Indian Food Prices experience a lot of volatility. Farmers are at the mercy of the middlemen.
How can governments incentivize the markets to pay remunerative prices to the farmers unless it intervenes. A little bit about the context in which i speak needs to be told.
India has a large organization with multi-billion dollar budget to procure, store and release grains in the market. This organization called the Food Corporation of India(FCI) controls the market. Another purpose of this organization is to maintain a buffer of grains in case of shortages and export excess grains in case of bountiful harvest.
The problem is that FCI due to operational and budgetary constraints is not able to procure from all farmers across the country. It does major portion of wheat procurement from Punjab and Haryana and rice from the southern states. So some of the farmers are at the mercy of traders.
If FCI has to work effectively its losses have to be reduced. Major losses occur due to high prices at which FCI procures grains and low prices at which it sells them. Procurement prices and prices at which FCI issues(Issue price) grains to the states are both determined by the agriculture/food ministry. States manage the public distribution system through the fair price shops and the country as a whole has nearly only 450 thousand fair price shops. While market prices for food grains are higher fair price shops sell grains at lower rates. This naturally creates incentives for diversion. In poorer states there is large scale diversion and trucks laden with grains never reach the FPS. In some Fair Price Shops(FPSs), managers cheat too.
Technocrats have looked at the problem and suggested several measures. One of them being direct benefit transfer. Direct benefit transfer involves selling grains to customers at market rates and then getting a rebate into the bank accounts equal to the difference in the subsidized price and market rates. They argue that once grains move at market rates from the FCI to the consumer there is lesser incentive for diversion.
There are several opponents of the cash transfer idea. They argue that bank branches are scarce in the villages and the villagers would lose a days pay to travel to the nearest city to withdraw the benefits. Experience has suggested that people first have to go to the bank to withdraw money and then to the shop to purchase grains. A big country like India has only about 80 thousand bank branches out of which only 38 thousand are in rural areas. Another problem is power and telecom coverage is not available in all villages, something which is needed to operate the POS and in receiving the PIN. Some opponents contend that if money is transferred to accounts of the women in the household, women abuse would rise as most villagers are alcoholic and may spend this extra money on drinking. Another argument against DBT is that villagers fingerprints are worn out due to hard work and high biometric authentication failure may lead to some amount of corruption.
Regardless of the opposition the government thinks the DBT scheme works. An elaborate IT system to gauge demand and supply in real time would be needed. Aadhaar enabled PDS(AEPDS) would be one such system where the fair price shops dispense grains and create an electronic record of the sale. Servers would then read these records and authorize banks to disburse benefits to the correct beneficiary.

Randomized trials that are used in medicine to evaluate the effectiveness of new drugs can be tailored to answer certain questions regarding the design of this system. Research by NYU Stern professor Dr. Arun Sundararajan and NEC Faculty Fellow & Doctoral Coordinator & Professor Ravi Bapna of the University of Minnesota’s Carlson School of Management has shown that UID is reaching the Underprivileged who had no previous IDs. Government has a few alternatives before itself. If you tinker with the food chain that is vital for the economy the damage that may happen may be unacceptable. So rather than supplant the market forces by an elaborate IT driven backbone why not explore other options to maximize choices that people have in procuring food. We could for example have competition for the fair price shops and let people buy food from private shops too while getting the subsidy in their account.

The idea that finance minister Mr. Arun Jaitley hinted is that procurement from the farmers will be made at minimum support prices and the goods move through the pipeline at market rates. At the point of sales the consumer pays the market rates and gets a subsidy in his bank account. Initially this would be done in cities with higher banking coverage. Progressively the scheme may be rolled out in the villages later.
Another problem related to food is that the government incurs heavy expenditure(nearly 72 thousand crores) on fertilizer subsidy, a vital ingredient for agriculture. Urea subsidies are a major component of this. Solution suggested here too is  DBT by increasing prices of urea to market rate(stopping subsidies) and subsequently increasing the MRP to a level at par with those of our neighboring countries. The fertilizer DBT is much more difficult to implement as the subsidy is given to the fertilizer producers and farmers are purchasing them from the market. Sales are not tracked. Fertilizer companies are lobbying with the government to start DBT in fertilizers as they stand to benefit by market price sales. Currently the fertilizer companies get paid the subsidy with months and sometimes years of delay. India is a large importer of fertilizers too. Several fertilizer manufacturers had closed factories due to losses. The modi government has successfully revived majority of the factories recently.

The government has also deliberated on paying farm subsidies directly to farmers at a rate of say Rs 4000/- per hectare of land holding. This means on an average farmers are going to get nearly 10k into their accounts annually(At an average holding of 2.5 hectare per farmer) to buy the expensive fertilizers. This dole may be tied to the farmer getting his soil tested every three years by making a soil health card. The problem is more than 60% of the laborers working in the fields do not own the farm. This subsidy may be pocketed by the landlord.

The Namo Govt has concentrated on increasing efficiency and reducing leakages in PDS by digitization. e-POS machines have been installed in most of the FPSes and aadhaar has been linked with all ration cards. Aadhaar linking has reduced scope for ghost lifting. There was talk of BAPU (biometric authenticated physical uptake) which seeks to ensure real sales. The government can now think of increasing the issue price to market rates and give the states cash in lieu of subsidized grain. This makes the role of states crucial and states need to behave more responsibly.
The previous congress government had enacted a law to guarantee food to the citizens called the national food security act(NFSA). The new government has amended the act with the FSB(food security bill). In the new bill government has reduced the number of beneficiaries in from 68% of the population to 40% of the population. It believes it can target the poor effectively and cover most of them for this benefit.

Hence farmers are going to benefit by a passive income even if they do not cultivate as the government will pay them to apply fertilizers. If they cultivate they will get a high MSP. To ensure that farmers get the government stipulated MSP an IT solution can be employed at the rural level. So the question before us is really this. Is there a central Food Corporation of India really required? The farmers can sell their produce to the market and the market supplies the food grains to the fair price shops. The role of the market should not be overlooked. It transports the goods, grades them according to quality and securely stores them till such time that they are ready to be sold to the highest bidder. Where IT comes in is at the point where farmers sell the produce and the point where the people purchase the goods. E-tendering could be used at the village level to sell goods over the Internet. Then the government procures the food from the market and supplies to the fair price shops. The government just incurs the cost of the IT infrastructure, the cost of subsidy that is transferred to the end consumers and the fertilizer subsidy as a dole. Needless to say every state can have its own MSP. Everything else is left to the market forces.

I don't claim to be an expert on the subject but have made my best effort to collate information from diverse sources into a coherent story.