De Toqueville and the Indian Sugar Market

(Chuck Muth) – In a recent column published by Forbes.com, Tim Worstall, author of “23 Things We Are Telling You About Capitalism,” explains how India’s sugar subsidy programs are distorting the global market.  The big underlying problem is government price-fixing…

“Each year the federal government and states fix the price at which (sugar) mills can buy (sugar) cane from farmers,” an Indian news report explains.  “The cane price has climbed 65 percent in five years, while sugar prices have fallen 8 percent.”

Well, with sugar prices artificially higher than the free market will bear, farmers have, of course, grown a lot more sugar than the market needs.  So sugar mills now face an over-supply vs. under-demand problem and are, in turn, demanding government action to fix this government-created problem.

Export subsidies.

Since they have a glut of sugar on their hands far in excess of what Indians will consume, mills want to unload the excess on the global market.  But since they’ve already paid too much for the sugar to local farmers, the price they have to charge to be competitive in the international export market – where other governments are also generously subsidizing their own sugar industries – is also too high.  So they’re looking for government subsidies so they can lower their export price.

This sort of government manipulation of pricing through subsidization does not a free market make.  And India has painted itself into a corner from which it’s not likely to emerge on its own anytime soon.  As Alexis de Tocqueville (possibly misattributed) observed…

“A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy.”

And as Worstall points out, Indian “Cane farmers have many more votes than sugar mill owners.  So, the inventible result of such government or politician price fixing is that prices for cane will be set high to garner the votes of cane farmers.”

As the world’s #2 sugar producer, the cause and effect of India’s market manipulating subsidy policies is for the United States to, unfortunately but necessarily, limit imports of government subsidized sugar at an artificially cheap price in order to protect our own domestic sugar farmers.

This is not how a true free market operates.  But it is the market we’re operating in. The solution isn’t universal disarmament by eliminating the U.S. sugar program.  It’s eliminating India’s.