Sunday, May 4, 2008
By Dr. Emmanuel Martin
The hunger riots arising from soaring food prices are a terrible human drama. The world price of wheat has nearly tripled in three years, and doubled in the last year; the price of rice has increased by more than 50 % in three months. The cost of a meal is 40% higher than one year ago in many poor countries. When food purchases can represent 75% of a household’s budget, those price increases become a nightmare. This could mean the return of millions under the poverty threshold, wiping out several years’ development efforts. What are the reasons for this situation? Given that the economy is made of complex interconnections, we shall seek the real reasons of the crisis in more depth than is usually done. The crisis can be interpreted as the unintended consequence -the perverse effect- of several policies which prevent many decision-makers from acting responsibly.
First though, let us recall that each year millions can pull themselves out of poverty thanks to the integration of their economies into globalization. This is clearly very good news but has induced an increasing demand for food, and especially for meat (and cattle need cereal). Now we need to understand why food supply does not follow -or rather is not permitted to follow- demand. While we do need to take into account climate hazards (like drought in Australia), we mainly need to focus on the direct or indirect political elements that prevent markets from adjusting quantities and maintaining relatively stable prices where possible.
The perverse effects of subsidies and protectionism
Subsidies in rich countries are sometimes rightly pointed at. They generate two types of effects. First, subsidies divert producers toward subsidized crops. And when governments subsidize crops for biofuel production, it means less food crops and higher cereal prices. The second effect is that subsidies combined with tariffs in rich countries close the door to poor countries, preventing them from competing on the markets of rich countries and developing their competitive advantage. However it should also be remembered that protectionism amongst African countries especially, is stifling their economies by reducing the possibilities of having productivity-enhancing regional markets. Protectionist policies are thus partly responsible here.
The need for agricultural land property
Institutional arrangements for agricultural land property are fundamental to the understanding of food problems today. In some countries short supply is not only caused by exogenous items. You can’t blame the market where it can’t develop. In Africa the main problem of agriculture is that poorly-defined property rights over the land are disincentives for investment. The major challenge of development policy is to foster agricultural expansion in some countries by allowing institutional arrangements – integrated to local traditions – enabling the responsibility of “farming entrepreneurs”. Only with such incentives will the supply of agricultural production really emerge in some countries. In this regard China recently strengthened the protection of its farmers’ property rights. This is an example to follow.
The role of International aid agencies
Interventionist policies from the World Bank and the IMF brought nearly no positive results compared to the massive amounts swallowed up in the aid process. However, they made several poor economies “sustainably dependent”. Huge debts were created from counterproductive “Big push” utopian programs, logically followed by structural adjustment programs. Hence the obligation in aided countries to sometimes develop non-food export crops such as cotton in order to reimburse loans. These aid policies thus disturbed the food security of some poor countries. But they also enriched and maintained irresponsible or corrupted government cliques. International agencies are still lending them money whilst they are oppressing their peoples and preventing them from enjoying economic freedom.
The impact of the financial crisis
The recent financial crisis was somewhat deflected on the food market, as rice and corn are now investment shelters for speculators. We therefore must seek an indirect explanation of the food crisis behind the financial crisis. What we find are American banks granting too many risky loans. But few people realize that this is strongly linked to the Federal Reserve policy. First, the Fed kept interest rates low for far too long in the early 2000’s, artificially feeding the housing boom. Second, what is often called the “Greenspan doctrine” produced at least one major perverse effect: that the Fed in a way “insures” losers (banks) who deliberately take risks. This policy of wrong incentives led to banks acting irresponsibly and eventually degenerated into a global crisis. There is a striking parallel here with the behavior of the IMF and World Bank: top organizations render other organizations under their control simply irresponsible. However, States and markets work efficiently only if the responsibility of decision-makers is sanctioned.
High Oil Prices
Finally, the oil price surge has an impact on transportation costs, and thus on the final price of food. The increase in oil prices is explained by an increase in demand at the world level with a supply which is essentially a rigid cartel that has not invested to adapt its production. Besides, oil also represents an investment shelter for speculators in this period of crisis: the price increase can thus partially and indirectly be attributed to the people responsible for the financial crisis.
Emergency aid is necessary to relieve people from disaster. However, after treating the symptom, we will have to deal with the deep structural causes of these disequilibria. Yet, “responsible” representatives of various organizations and States do not seem to hold a responsible discourse. We heard references to the New Deal, to lasting supplementary aid by the president of the World Bank, to new market distortions, and even to lasting European protectionism by the French Agriculture Minister. These are bad omens. This crisis should be an opportunity to promote the idea of responsibility in the system and to rethink development policies in the widest sense. This means changing attitudes within international aid agencies, governments in poor countries, and, of course, in wealthy countries as well.
Dr. Emmanuel Martin is the editor of www.UnMondeLibre.org, the Cato Institute’s francophone project.