Governments in the Gulf Cooperation Council (GCC)1 face a complex challenge in designing the right agricultural subsidy scheme. Strategy& analysis shows that output-based subsidies, in which governments reward farmers for finished agricultural products, are the prevalent form of subsidy in many countries. Output subsidies offer several benefits as they lead to increased efficiency and productivity for individual 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.
Each country’s situation is unique, and output-based subsidies may not always be the most appropriate method. Regardless of which scheme an agriculture ministry chooses, it should use three principles for successful policy design:
1The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the UnitedArab Emirates.
Governments seeking to develop the agricultural sector in their country have a powerful tool available: subsidies. Structured correctly, agricultural subsidies can accomplish a range of policy objectives. They can, for example, 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 subsidy impact, is not easy.
The complexity of the decision process is amplified by a dearth of empirical evidence. Governments often lack precise data about the true impact of various subsidy schemes, the opportunity cost of alternative approaches, or even the administrative cost of running such programs. Moreover, any subsidy assessment needs to consider more than the initial financial implications. It must also consider the long-term sustainability of the program, its efficiency, and its fairness in allocating benefits among multiple stakeholders.
Broadly, the two main subsidy schemes are input-based (which lowers the purchasing cost of raw materials for farmers) and output-based (which pays farmers based on finished agricultural products).
The global trend is toward output-based subsidies. In recent decades, countries with large agricultural sectors, such as China and Russia, have shifted to output-based subsidies from input-based subsidies.2 Indeed, China has introduced a number of output-based policies to benefit farmers directly and has phased out its taxes on farmers following its entry into the World Trade Organization. Previously, Chinese farmers had paid an agricultural tax based on the productive value of their land, an agricultural specialty product tax, and a myriad of additional local taxes and fees levied by village and township authorities.3
Other countries that have relied on output-based subsidies, such as Canada and Turkey, have increased their use of them relative to input-based subsidies. For example, Turkey’s Ministry of Agriculture and Forestry uses output-based subsidies to increase farmers’ revenues. The ministry pays farmers based on their production levels of certain crops, such as corn, cotton, rapeseed, and sunflower.4
2 Organisation for Economic Cooperation and Development 2019 database, “Producer Support Estimate (PSE)”
3 Fred Gale, Bryan Lohmar, and Francis Tuan, “China’s New Farm Subsidies,” USDA Economic Research Service, February 2005
4 Alper Demirdöğen, Emine Olhan, and Jean-Paul Chavas, “Food vs. fiber: An analysis of agricultural support policy in Turkey,” Food Policy, 2016, vol. 61, issue C, 1-8
Agricultural subsidies are a powerful tool, but also a complex one. To design the right policies, GCC governments should focus on three principles: integration with other agricultural schemes and a predetermined exit strategy; controls and transparency; and environmental protection. Through this approach, governments can ensure that the subsidies they develop generate the maximum possible impact.