Saturday, August 15, 2009

Sugar and Government Intervention

A recent article from the New York Times looks at how government intervention in India has resulted in negative economic effects in the market for refined sugar.

A few years ago domestic Indian sugar prices were sky high, so in order to lower the domestic price of sugar, the Indian government banned sugar exports. Since domestic sugar producers could no longer sell in international markets, they turned to selling domestically which shifted the refined sugar supply curve to the right and lowered domestic sugar prices. This benefited refined sugar consumers in the short-run.

With the decline in sugar prices, rational Indian farmers decided to grow other agricultural products - much like Mexican agave growers did in response to higher corn prices - and sugar production in India fell. Now India is faced with importing an estimated 20% to 30% of its total consumption of refined sugar this year - hurting those same domestic sugar consumers through higher prices.

As an economist, I am naturally skeptical of government price support programs - such as those in India, Europe or the US. Just to be fair, India is not the only country following economically foolish policies; the United States is one of the leaders of goofy economic policy in the sugar market - as mentioned in the NY Times piece linked at the top.

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