A ‘magic’ recipe for global food shortages

Vic­tor Mal­let in the Finan­cial Times has accu­rate­ly iden­ti­fied the problem: 

…The imme­di­ate cause of this cri­sis is not – per­haps sur­pris­ing­ly – a short­age of food. The prob­lem is the sud­den reluc­tance of tra­di­tion­al exporters to sell their sur­plus­es. As with cred­it­providers in the seized-up cred­it mar­kets, each pro­duc­er is hoard­ing its own sup­ply in case of hard times at home, because it sus­pects its trad­ing part­ners will do the same. Trust in the effi­cien­cy and liq­uid­i­ty of the mar­ket has col­lapsed… The cur­rent seizures in the mar­kets are there­fore a cause for gen­er­al alarm. Sin­ga­pore, one of the world’s wealth­i­est nations, depends on food imports as much as Eritrea, one of the poor­est.

…Like inter­na­tion­al trade, domes­tic trade in farm pro­duce is often high­ly dis­tort­ed. While devel­oped nations tend to sup­port their farm­ers at the expense of con­sumers, devel­op­ing coun­tries typ­i­cal­ly sub­sidise city-dwellers at the expense of rur­al small­hold­ers, who receive low prices and have no incen­tive to increase their out­put.

As the Finan­cial Times report­ed two weeks ago, Asian coun­tries are among the worst offend­ers. Farm­ing pro­duc­tiv­i­ty growth has slowed dras­ti­cal­ly in the cur­rent decade…Asian gov­ern­ments could do much to boost food out­put by lib­er­al­is­ing their domes­tic mar­kets, help­ing to pro­vide farm­ers with cred­it and giv­ing them access to the sort of mod­ern tech­nol­o­gy and advice they once received as a pub­lic ser­vice. “(Finan­cial Times”)

Prices for grains and live­stock prod­ucts on world mar­kets are at record highs at present part­ly because of a coin­ci­dence of bad grow­ing-sea­sons. But gov­ern­ments have made the sit­u­a­tion much worse—as Vic­tor Mal­let argues—by ban­ning exports to keep local prices below mar­ket prices and by sub­si­diz­ing non-food uses of grains. Here is an excerpt from the lat­est USDA mar­ket out­look for grains that describes the prob­lem graph­cial­ly. Chances are, how­ev­er, these crit­i­cal food short­ages will be over­come because they are most­ly the result of ‘fric­tions’ in sup­ply and demand, made worse by knee-jerk reactions.

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There is a much more seri­ous under­ly­ing prob­lem that ensures these fric­tions will return. Trade pro­tec­tion for farm­ers and food proces­sors in devel­op­ing coun­tries is high­er on aver­age than it is even in pro­tect­ed indus­tri­al­ized coun­tries (click the col­umn-graph, below). This wide-spread trade pro­tec­tion tax­es food sup­plies world wide, depress­ing mar­ket prices and dis­cour­ag­ing com­pet­i­tive pro­duc­ers who live with the mar­ket price. 

But these low­er prices on world mar­kets do not flow through to poor peo­ple who live in coun­tries where gov­ern­ments slug imports with high tax­es. The result is a dou­ble-wham­my of mis­ery: poor peo­ple face high­er prices and small­er sup­plies than they should and pro­duc­tion falls because mar­ket-fac­ing farm­ers get low­er prices than peo­ple are will­ing to pay.

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The “mag­ic” solu­tion has been known for many years. Open­ing food mar­kets to trade will lead to two appar­ent­ly con­trary results that solve the prob­lem. There will be high­er prices for pro­duc­ers world wide and low­er prices (and more sta­ble sup­ply) for poor consumers.

The Cen­ter for Agri­cul­tur­al and Rur­al Devel­op­ment (CARD) at Iowa State Uni­ver­si­ty has a decades-long rep­u­ta­tion for analy­sis of glob­al food mar­kets. In a study pub­lished for CARD this month, Jac­in­to Fabiosa nice­ly demon­strates this “mag­ic” effect with a straight­for­ward analy­sis that uses data from 158 devel­op­ing coun­tries. Here is the abstract of the study describ­ing the results:

First, agri­cul­tur­al trade lib­er­al­iza­tion is esti­mat­ed to raise eco­nom­ic growth by 0.43% and 0.46% in devel­op­ing and indus­tri­al­ized coun­tries, respec­tive­ly. Since food con­sump­tion of house­holds with low­er income are more respon­sive to changes in income, their food con­sump­tion increas­es more under a trade lib­er­al­iza­tion regime.

Sec­ond, trade lib­er­al­iza­tion is expect­ed to raise world com­mod­i­ty prices in the range of 3% to 34%. Since, in gen­er­al, bor­der pro­tec­tion is much high­er in devel­op­ing coun­tries and the lev­el of their tar­iff rates are like­ly to exceed the rate of price increas­es, 87% to 99% of the 83 to 98 coun­tries exam­ined would have low­er domes­tic prices under lib­er­al­iza­tion. Again, giv­en that low-income coun­tries are more respon­sive to changes in prices, food con­sump­tion in these coun­tries would increase more.

Final­ly, empir­i­cal evi­dence shows that if there is any harm on small net sell­ing pro­duc­ers in a net import­ing coun­try, it is nei­ther large in scale nor wide­spread because the sub­sti­tu­tion effect dom­i­nates the net income effect from the low­er domes­tic prices. (CARD: Fabiosa)

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