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Hind Al Soulia - Riyadh - DUBAI — The COVID-19 pandemic has emphasized the importance of developing local food sources. Agricultural subsidies are a powerful tool to accomplish that objective and governments in the Gulf Cooperation Council (GCC) have a unique opportunity to develop the right agricultural subsidy scheme.
The predominant type of agricultural subsidies in many countries is output-based, in which governments reward farmers for finished agricultural products. Output subsidies offer several benefits as they lead to increased efficiency and productivity for the farmers and for the whole agricultural sector.
They also support a more sustainable approach to natural resources, and they enable governments to track results more easily. For subsidies to succeed, they need to adhere to three policy design principles: policy integration, controls and transparency, and environmental protection.
By focusing on these three principles, GCC governments can design the right policies for their needs, and ensure that subsidy programs generate the maximum possible impact.
“Governments seeking to develop the agricultural sector in their country have a powerful tool available: subsidies. If structured correctly, agricultural subsidies can accomplish a range of policy objectives.
“They can ensure food security and social protection, enhance farmers’ productivity, stimulate exports, and speed disaster recovery. Each country’s situation and needs are unique and the best-suited subsidy scheme will vary by country.
“Selecting the most appropriate subsidy scheme, given certain objectives or the desired impact, is not easy,” said Salim Ghazaly, partner with Strategy& Middle East, part of the PwC network.
The report identifies the two main subsidy schemes as input-based, which lowers the purchasing cost of raw materials for farmers and output-based, which pays farmers based on finished agricultural products.
Currently, the global trend is transitioning toward output-based subsidies and is shifting to sectors across the GCC. Output-based subsidies generally increase efficiency and productivity across the agricultural value chain because they reward performance.
When farmers have a clear target price for finished products, they know what they have to aim for. For instance, Saudi Arabia has recently embarked on a large subsidy reallocation program in the poultry sector that aims to lower the level of subsidy on animal feed and instead support finished agricultural products.
Turkey’s Ministry of Agriculture and Forestry also pays farmers based on their production levels of certain crops such as corn, cotton, rapeseed, and sunflower.
Roger Rabbat, partner with Strategy& Middle East, added, “The rationale for output-based subsidies is compelling. Output-based subsidies generally increase efficiency and productivity across the agricultural value chain because they reward performance.
“They achieve this through payments made for outputs that are agreed in advance, so that farmers know what they have to aim for. By contrast, input-based subsidies can lead to inefficiency and environmental damage because they simply incentivize the use of resources, rather than effective and sustainable consumption of these resources.”
According to the report, Strategy& stresses the importance of three principles for successful policy design:
Rather than applying subsidies in isolation, governments should integrate them with other agricultural policies as part of a broader agenda to develop the agricultural sector and make it self-sustaining.
Controls and transparency
As with any government spending initiative, subsidies are vulnerable to fraud and misreporting. For that reason, subsidy programs need to include mechanisms and systems to identify fraud and other types of misuse, such as unlicensed operation, or the use of illicit materials or equipment.
Agricultural subsidies need to take into account environmental and sustainability considerations, with the goal of protecting the environment and ensuring the most efficient use of water, energy, and other resources. Water is a particular concern in GCC countries, which have a chronic water shortage. Subsidies can reward the efficient, prudent use of resources, potentially through technology, to ensure the long-term sustainability of the agricultural sector and environmental protection.
“A ministry should integrate subsidies with other policies as part of a broader agenda to develop the agricultural sector, rather than applying them in isolation. Critically, subsidies should also be designed for eventual obsolescence. Rather than lasting indefinitely, they should offer temporary support to farmers and protect them until the sector can become self-sustaining,” said Ousama Elghazzi, manager with Strategy& Middle East. — SG
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