A framework for analyzing food subsidies

Abstract

Budgetary pressures and foreign exchange scarcities are increasingly forcing countries to review the costs and benefits of food subsidy programs. This paper is intended to help policymakers to assess alternative food subsidy policies and to draw out their more important implications. A number of alternative policies are analyzed, including both rationing and market-clearing schemes. These schemes are assessed according to (1) their effectiveness in restricting program benefits to the most nutritionally at-risk segment of the population, (2) their effect on the level and composition of demand for other goods, particularly imports, (3) consequences for domestic agricultural price, and (4) the long-run implications of economic growth for the size of the subsidy bill. The conclusions highlight the importance of the demand characteristics of the subsidized good.