Tuesday, March 11, 2014

What is the best way to give food subsidies?

There are three ways in which subsidies can be given: food handouts, cash, vouchers. Which is most effective is an important policy issue. The Economist summarises the results of a recent paper on the subject, which analysed an experiment carried out by the World Food Program in Ecuador in 2011:

The study found that direct handouts—Iran’s new policy—were the least effective option. They cost three times as much as vouchers to boost calorie intake by 15%, and were four times as costly as a way of increasing dietary diversity and quality (see chart). Distribution costs were high, and wastage was also a problem. Only 63% of the food given away was actually eaten, whereas 83% of the cash was spent on food and 99% of the vouchers were exchanged as intended. Food transfers have also been the costliest option in similar projects in Yemen, Uganda and Niger, according to John Hoddinott at IFPRI.

In Ecuador there was little difference in cost between handing out cash and food vouchers, the other two options. But vouchers were better at encouraging people to buy healthier foods because of restrictions on what items could be exchanged for them. It was 25% cheaper to boost the quality of household nutrition using food vouchers than it was by handing out cash. A switch from universal subsidies to vouchers could be the most efficient way of boosting health as well as relieving poverty.
So, the order of preference, according to the study, should be: vouchers, cash, handouts. However, it would be unwise to generalise from the results of an experiment in a small country such as Ecuador. It is easier to hand out vouchers to a small population. Moreover, access to food can be ensured. In a large country, such as India, how do we ensure that, in the absence of public distribution outlets, there are places where people with vouchers or cash can go to in order to exchange these for food? Moreover, we need a certain stability in food prices. Vouchers or cash may not fetch enough food if they have been issued on the basis of food prices that were lower than the prices at a given point in time.

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