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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