Soaring food prices in recent months have triggered a real crisis, riots in various countries, and all sorts of government responses that do not seem to work. Striking moves are export restrictions in Asia, and other countries such as Russia or Argentina, or a ban on trading in agricultural futures in India…
Nancy Birdsall, Center for Global Development, and Arvind Subramanian, from the Peterson Institute cannot be said to be absolute free market fundamentalists. Subramanian for example advocates a limitation to international capital flows, a matter on which I profoundly disagree. But the oped both wrote on how to respond to the food crisis in the Wall Street Journal Asia give their views the more weight when addressed to market skeptics. The problem they identified is thus:
“To prevent future crises, the fundamental incentives in agriculture need to be fixed. That in turn means efficient and food-friendly trade policies around the world. But not only are we far away from that objective, we are moving in the wrong direction.”
Both attack in particular the current fashion of biofuel subsidies (see my previous post on climate change too) and export bans:
“Biofuel mandates in Europe and subsidies in the United States, along with tariff barriers against alternative sources of biofuels, are encouraging farmers to divert food from hungry mouths toward fuel production. Corn-based ethanol production in the United States has increased fourfold since 2000 and now takes up close to 20 percent of total corn production. This not only takes corn—an important human staple and animal feed component in its own right—off the table or out of the trough, but it also leads farmers to switch to corn, thus diminishing supply of other staples like wheat and soy, and driving up those prices as well.
Meanwhile in the developing world, tightened restrictions on exports of foodstuffs are obstructing a long-term solution, even as import barriers come tumbling down. Each country is trying to keep domestic supplies high on the justifiable grounds of food security. But by holding prices artificially low, export bans keep the market from sending accurate demand signals to domestic farmers. This penalizes farmers, who can’t get the full, world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply. Topping it all off, such measures subsidize high-income households, not just the poor.
Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up by at least 10 percent and possibly much more. A vicious spiral lurks here, as panic- and policy-induced speculative hoarding drives world prices even higher.
Without a collective agreement to undo these restrictions, the world’s poor, already at terrible risk, will be even worse off. Industrial countries should eliminate any practices—including all forms of ethanol subsidies and tariffs—that divert food production toward biofuels. In turn, developing-country food producers should eschew export restrictions and allow market forces to help boost agricultural supply. The assurance that all countries will do so should give each developing-country government incentives to better target assistance to the most affected and vulnerable consumers in their own countries.
In an ideal world, we would need to go even further – deeper reform of agricultural markets allround is required. Better property rights and market access for farmers in developing countries, abandonment of the Common Agricultural Policy in Europe (subsidies give wrong production incentives, production quotas prop up prices and disincentivise production, tariffs protect the wrong farmers, and in particular food processors (i.e.Danone!), and dropping of agricultural subsidies in the US. The other major supporters of agriculture – Japan, South Korea, Norway, Switzerland should also make some moves there.
In conclusion: it becomes increasingly evident that the policies that are aimed at supporting agriculture actually stifle it! Will the lesson ever be learnt?