The Budgetary Constraint

Abstract

The budgetary constraint is fundamental to the basic dilemma. If it did not exist the solution would be easy. The government would simultaneously keep producer prices high and consumer prices low by a general system of deficiency payments to farmers or general food subsidies to consumers. Such a system is possible only if the food is consumed in processed form (e.g. bread). Otherwise, food will be bought at the low, subsidized prices and resold at the higher producer prices. Even advanced countries have found it difficult to sustain such a system, and no developing country has the capacity for such a large subsidy programme, without sacrificing other important objectives such as new productive investment or operating existing investments. Either the country keeps prices paid to farmers low, with the negative effect on agricultural production (though, as we have seen, much less for total output than for one specific crop), or parastatal organizations buy at higher prices and sell at lower ones. The budgetary burden of such a subsidy programme means that other types of development expenditure are sacrificed. Subsidies to food absorb up to 20 per cent of budgetary expenditure in some developing countries. The solution to the dilemma has therefore to be found against severe budgetary constraints. The dilemma has three, not two, horns. Keep producer prices up, consumer prices down, and minimize government costs.