The Thai government operates a lending programme for low-income farmers, called the rice mortgage scheme. Originally, farmers without collateral used this scheme to raise a small amount of money for urgent payment in exchange for their harvested rice as collateral. The scheme also served to guarantee the lowest paddy prices and stabilise market prices, because it helped adjust excess demand and supply. However, the Yingluck government in 2011 set the loan amount per unit of paddy higher than the market prices with the aim to improve the income level of farmers, many of whom were low-income earners. The government’s decision to maintain a high loan amount （price） encouraged the farmers to sell their rice to the government instead in the markets, with the knowledge that they could earn more.
This strategy has led to the rice markets being monopolised by the government as the supplier, because the government buys all the rice from the farmers at exorbitant prices. Consequently, although the farmers’ income levels may have improved in a macroeconomic sense, the scheme faces much criticism, because it may worsen rather than improve the social welfare of Thailand and its farmers.
This paper aims to empirically examine the effect of setting a higher price for rice to reach income inequality in Thailand by deriving a model to measure the Gini coefficients. The findings suggest that the Yingluck government strategy of setting higher prices worsens the Gini coefficients for the farmer groups and society as a whole. The model also calculates the impact of possible amendments to the strategy for improving income inequality. The criticisms mentioned above include a huge fiscal burden, smaller benefit provision to farmers, and low-income farmer inaccessibility to the scheme. Resolving the problems of fiscal burden and low-income farmer accessibility to the scheme can improve the Gini coefficients. However, a direct rich-to-poor income redistribution policy would be far more efficient in alleviating income inequality. Therefore, the rice mortgage scheme should abandon its role for improving income inequality and focus on emergency lending for farmers while supporting and stabilising rice prices.
JEL Classifications: H20, I38, Q12, Q13, Q18