More efficient production subsidies for emerging agriculture in micro Arab states: a conceptual model

Import-dependent arid Arab micro states such as those in the Persian Gulf are particularly vulnerable to food-security risk. Among the many remedial policy suggestions is some initiation or increase in domestic production to insulate these countries from supply disruption, import price volatility and high import prices. This paper does not address the efficacy of domestic production but notes that such production will require government intervention in the form of production subsidies to mitigate market risk. The narrow focus of this paper is to provide a conceptual model of subsidies that avoids many previous problems in established subsidy systems. The paper describes a subsidy model that makes the most use of market signals, avoids perverse incentives, and provides a structure to encourage efficiency, quality enhancement and product differentiation in agricultural products. The system is designed to be WTO compliant. The model has two components: a calculation of the true economic cost of a unit of an agricultural product and a deficit payment that is calculated to bridge the gap between true economic cost and market remuneration. The structure of the deficit payment is crucial to the establishment of a beneficial incentive system. The paper provides a mathematical rendering of the model, analysis of the associated incentive structure and a numerical example for a hypothetical Arab micro state.