Chapter 06: Political Economy of Subsidies, Procurement, and Price Controls: Political economy of subsidies and price controls

The tools of the developing world governments provided agricultural subsidies, public procurement systems, and price controls that still have the potential to spark some of the most politically charged and economically devastating reactions from the people they serve. This chapter provides an extensive overview of the political economy processes and their impact on the design and implementation of these interventions in a very varied set of developing economies, exploring the role of distributional coalitions, electoral politics, bureaucratic interests and institutional path-dependencies. Based on evidence from South Asia, Sub-Saharan Africa, the Middle East and Latin America, the chapter argues that the persistence of high cost, low efficiency food policies is not solely a consequence of technical ignorance but a reflection of sound political motives in some contexts, especially in states that lack social protection, have high rural poverty, and are characterized by weak state capacity. It builds a four-pillar analytical framework, based on principal-agent theory, collective action problems, institutional path dependence and distributional coalition theory, to understand the lifecycle of food policy instruments. It delivers detailed insights into the architecture of subsidy programs, governance problems in the procurement system (such as high leakage rates and fiscal waste reported in India, Egypt, Pakistan, and Indonesia), and welfare implications of retail price control structures. Special focus is given to the political environment that facilitates or hinders reform, such as civil society, technocratic capacity, and international financial institutions. The chapter ends with a sequenced roadmap for reform with a focus on fiscal sustainability, poverty targeting and market development, yet recognizes that reformers must face political feasibility challenges.