More Efficient Production Subsidies for Emerging Agriculture in Arab Micro-States: A Conceptual Model

Abstract

Import-dependent arid Arab micro-states such as those in the Persian Gulf are particularly vulnerable to food-security risk. Among the many remedial policy suggestions, some initiation or increase in domestic production is to insulate these countries from supply disruption, import price volatility, and high import prices. This article does not address the efficacy of domestic production but notes that such production will require government intervention in the form of production subsidies to mitigate market risk. The narrow focus of this article is to provide a conceptual structure of subsidies that avoids many previous problems in established subsidy systems. The model has two components: a calculation of the true economic cost of a unit of an agricultural product and a deficit payment that is calculated to bridge the gap between true economic cost and market remuneration. The structure of the deficit payment is crucial to the establishment of a beneficial incentive system but the article is limited to a few of many possible options. The deficit-payment option we suggest makes the most use of market signals, avoids perverse incentives, and provides a structure to encourage efficiency, quality enhancement, and product differentiation in agricultural products. The system is designed to be WTO compliant. A detailed numerical example is used for the economic price and simple analytics, and numeric examples are used to illustrate the incentive effects of deficit payments.