What can be done about rising food prices?

According to the United Nations World Food Programme (WFP), the global price of essential agricultural staples, wheat, corn and other cereals has risen by more than 50 per cent over the last six months. The strain of rising food prices has caused riots and protests in a number of countries including Cameroon, Burkina Faso, Haiti and Egypt and contributed to civil unrest in several others. World Bank President Robert Zoellick has warned that rising food prices could push at least 100 million people in low-income countries into poverty.

At the opening speech of the 12th United Nations Conference on Trade and Development (UNCTAD) in Accra, Ghana, Secretary-General Ban Ki-moon commenting on the issue of rising world food prices urged the more than 3,000 delegates from 193 member states to “resist the impulse toward protectionism”. He also said, “International grain markets must remain open and functioning normally… Beggar Thy Neighbour food wars cannot, in the long-run, help anyone”.

On the one hand, developing countries complain about the farm subsidies that developed country governments pay their farmers. On the other hand, rich countries complain about the trade barriers in the form of tariffs on manufactured goods that developing countries have in place. Of course both parties are right – the way to improve trading conditions for all parties is to substantially reduce all barriers to trade.

Between 1990 and 2007, the global economy grew from USD23 trillion to USD53 trillion. Trade increased by 133, with developing nations generating more than half of this growth. The share of developing countries in world trade grew from 29 per cent to 37 per cent between 1996 and 2006. Economic ties between developing countries are growing stronger through unilateral reductions to trade barriers and multilateral agreements – resulting in South-South trade almost quadrupling in the past decade to reach over $2 trillion or 17 per cent of world trade. Through increased trade, once poor countries have become engines of growth, lifting hundreds of millions of people out of poverty.

The recent UNCTAD meeting provided the ideal opportunity to make amends for the failed Doha negotiations and to address the chronic trade distorting practices applied in both developed and developing countries. If large economies, such as the United States and the European Union withdrew some of their more problematic demands upon developing nations such as extreme environmental restrictions, and substantially reduced subsidies to their own producers, there would be great welfare gains, not only in developing countries but also within their own economies.

Despite the significant gains made by developing countries, many continue to enforce trade-distorting policies. These policies, largely motivated by infant industry arguments, have compounded the problems of their citizens. The evidence shows that protected infant industries never grow up, never become internationally competitive, and persistently appeal for extensions of protection. These import-substituting policies have imposed substantial costs on developing country consumers and greatly reduced their well-being.

According to Tyler Cowen, a professor of economics at George Mason University in the United States, the damage that trade restrictions cause is probably most evident in the case of rice. “Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 per cent of the world’s rice production is traded across borders”. Cowen suggests that this is mainly due to “restrictions on rice exports in rice producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt”.

Export restrictions may seem appealing at first glance, especially if countries want to stockpile foodstuffs for future consumption but the restrictions interfere with long-term economic incentives created by unrestricted trade. Cowen notes, “Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed. There is little incentive to plant, harvest or store enough rice – or any other crop, for that matter – as a hedge against bad times.” Thus restrictions on trade run the risk of making shortages and high prices permanent.

The simplistic yet seductive view that developing countries will take off into sustained growth if more money is poured into their economies should be avoided. Long-term aid in the form of intergovernmental transfers has done more harm than good. It has simply allowed recipient country governments to postpone much-needed reforms such as rooting out corruption, investing in much needed infrastructure, creating a secure property rights environment, and eliminating price restrictions. At the same time, developed countries have to a large extent used the act of giving as a scapegoat to counter-balance the perverse effects of the subsidies they provide to their own farmers.

The report entitled: “Agricultural policies in OECD countries” estimated that government support to farmers in OECD countries totalled approximately €225 billion in 2005, representing 29 per cent of farm receipts and this proportion is unchanged from the previous year and is only marginally lower than the 30 per cent reported in 2003. The report shows that most of the support goes to those who have the largest farming enterprises while government aid often “leaks” out to those who are not the intended beneficiaries – such as agricultural goods suppliers or people who own, but do not farm, land.

Humanitarian aid in the form of food parcels to those countries most severely affected will help to alleviate the immediate situation. But development aid in the form of intergovernmental transfers will simply serve to continue and entrench the trade distorting policies in both developing and developed nations. Humanitarian assistance must be accompanied by the elimination of artificial trade barriers in developing countries as well as the subsidies to farmers in developed countries.

Author: Jasson Urbach an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 06 May 2008 - Policy Bulletin / 21 July 2009