April 30, 2008
Food crisis is a chance to reform global agriculture
By Martin Wolf
Of the two crises disturbing the world economy – financial disarray and soaring food prices – the latter is the more disturbing. In many developing countries, the poorest quartile of consumers spends close to three-quarters of its income on food. Inevitably, high prices threaten unrest at best and mass starvation at worst.
The recent price spikes apply to almost all significant food and feedstuffs (see charts). Yet these jumps are themselves part of a wider range of commodity price rises. Powerful forces are linking prices of energy, industrial raw materials and foodstuffs. Those forces include rapid economic growth in the emerging world, strains on world energy supplies, the weakness of the US dollar and global inflationary pressures.
The remainder of this column can be read here. Debate from our panel of economists appears below.
Paul Collier: The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe. Despite the predominance of peasant agriculture, most African countries are net food importers and food accounts for over half of the budget of low-income households. This is the result of decades of agricultural stagnation combined with growing populations. Although many of the net purchasers are rural, evidently the problem is at its most intense in the urban slums. These slums are political powder kegs and so rising food prices have already triggered riots. Indeed, they sow the seeds of an ugly and destructive populist politics.
Why have food prices rocketed? Paradoxically, this squeeze on the poorest has come about as a result of the success of globalization in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce a kilo of meat takes six kilos of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?
The best solution to a problem is often not closely related to its cause (a proposition that that might be recognized in the climate change debate). China’s long march to prosperity is something to celebrate. The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique’s land, an enormous area, is idle.
Unfortunately, large-scale commercial agriculture is unromantic. We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established.
Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies.
First, the European Commission is now imitating the American bio-fuels policy. At present the programme is small enough to be unimportant, but we need to pull it back before it does real damage. We have surely learnt enough about European agriculture to realize how important it is to kill this incipient scam before we are engulfed by it. But the true European equivalent of America’s folly with bio-fuels is the ban on GM. Europe’s distinctive and deep-seated fears of science have been manipulated by the agricultural lobby into yet another form of protectionism. The ban on both the production and import of genetically modified crops has obviously retarded productivity growth in European agriculture: again, the best that can be said of it is that we are rich enough to afford such folly. But Europe is a major agricultural producer, so the cumulative consequence of this reduction in the growth of productivity has most surely rebounded onto world food markets. Further, and most cruelly, as an unintended side-effect the ban has terrified African governments into themselves banning genetic modification in case by growing modified crops they would permanently be shut out of selling to European markets. Africa definitely cannot afford this self-denial. It needs all the help it can possibly get from genetic modification. Not only is Africa currently being hit by rising food prices, over the longer term it will face climatic deterioration in the context of a rapidly growing population.
While the policies needed for the long term have been befuddled by romanticism, the short term global response has been pure beggar-thy-neighbour. It is easier for urban slum dwellers to riot than for farmers: riots need streets, not fields. And so, in the internal tussles between the interests of poor consumers and poor producers, the interests of consumers have prevailed. Governments in grain-exporting countries have swung prices in favour of their consumers and against their farmers by banning exports. These responses further politicize and fragment an already confused global food market. They increase the risks of investing in commercial-scale food production and drive up prices further in the food-importing countries. Unfortunately, trade in agriculture has been the main economic activity to have resisted being subject to global rules. We need stronger and fairer globalization, not less of it.
Posted by: Paul Collier | May 2nd, 2008 at 10:03 am | Report this commentMartin Wolf: Paul has added greatly to the arguments I made. I am entirely in agreement with him.
Posted by: Martin Wolf | May 2nd, 2008 at 10:44 am | Report this commentAlex Cobham (guest): I agree with Martin that the crisis presents opportunities for structural change to address the causes of food vulnerability of the poorest people in the world. To make the right changes, however, requires that we get the analysis of the problem right.
The real issue is not the rise in food prices – market prices, after all, go up and down. We would be foolish indeed to try to prevent that phenomenon. While some of the underlying causes relate to policy errors (unthinking support for mass production of biofuels for export, for example), and these should be corrected, the focus should instead be on the causes of food vulnerability. It is this that makes food price volatility costly in terms of deepening hunger and poverty.
The causes of this vulnerability are complex, but include the rash discarding of those institutions that – although not functioning perfectly – did provide some reduction in uncertainty for producers and consumers alike in the poorest countries. Christian Aid’s analysis (‘Farmers left behind’, 2007) shows that this is the underlying cause of the fall in staple food yields, and phenomena like the limited usage of available land in Mozambique that Paul Collier highlights above.
Two institutions in particular were discarded in the period of dogmatic liberalisation from the 1980s. First, state banks were rushed to privatisation. While this yielded some benefits by addressing some inefficiencies, it also generally led to sharp falls in rural lending of the sort that helped smooth consumption across volatile harvests, and provide investment funds for basics such as seed and fertiliser.
Second, agricultural marketing boards were dismantled. While these again had often not functioned perfectly, they had nonetheless provided an important degree of stability and improved access to markets for marginal producers who typically sell little into the market but for whom that little can be pivotal in determining whether they can continue and prosper over time.
Finally, the expansion of long-run supply that Martin also recognises as important will not come about through the careless embrace of GM technology. The recently launched International Agriculture Assessment on Science and Technology for Development, supported by around 60 governments, the World Bank and all UN institutions, concluded that ‘assessment of [genetic modification] technology lags behind its development, information [on its impact] is anecdotal and contradictory, which has led to uncertainty about the possible benefits and damage’. In other words, transgenetic crops cannot feed the world, and there is no evidence to support the emotive assertion that the only choice is between adoption of genetically modified crops or mass starvation.
Paul Collier argues that romanticism about agriculture and the environment has clouded the judgment of policymakers. That may be true. But romanticism about the role of the market, and the potential for large-scale agriculture, has also some blame to take. Ultimately, there is no scope for, nor likelihood of, the latter making a great change to the production and consumption possibilities of the poorest people on the planet. Staple food yields will instead be improved by providing a little more security to marginal producers, by replacing and improving institutions that were rashly abandoned, and by giving these producer-consumers some prospect of food security.
Finally, Paul Collier notes that falling poverty in China, for example, is partly responsible for the rise in food prices – so arguing that deepening poverty for some is a consequence of one success of the globalization that has been pursued. This is certainly true. An obvious feature of the current form of globalization, dominated by trade and financial liberalization whose basis is primarily ideological rather than supported by evidence, has been one of deepening inequality, and so falling poverty in one country or income group is entirely compatible with deepening poverty elsewhere.
The solution is not, of course, more liberalization; but rather more thought and more policy space for countries to pursue alternative options.
Alex Cobham is policy manager at Christian Aid and formerly a supernumerary fellow in Economics at St Anne’s College, Oxford.
Posted by: Alex Cobham, Christian Aid | May 2nd, 2008 at 1:32 pm | Report this commentBart van Ark: Martin Wolf, Paul Collier and Alex Cobham quite rightly draw attention to the supply-side issues that characterize the current food crisis, and the need for policy reforms to strengthen food production. Indeed, it has been disturbing to see how quickly many experts have found a scapegoat in such demand factors as the increased consumption in emerging economies. On their own, demand factors cannot fully explain the abrupt skyrocketing of many prices over the past 15 – and particularly the past three — months. Other commentators, who put the blame solely on speculation or on the recent growth of managed futures as an asset class, ignore the fact that a significant amount of price pressure has been building up for several years, before the recent shooting up of prices started.
We need to examine the two phenomena – increased shortages due to a decline in the growth of supply, and price increases related to speculation and securitization of several commodities – in conjunction to fully understand what has happened and what is likely to happen next. There is no question that the securitization of various food commodity markets in early 2007 has played an important role in this crisis, especially over recent months. The mean of the price increases of securitized agricultural commodities (including coffee, cotton, soybean oil, soybeans, sugar, wheat, and corn) was 49 percent in the 15 months from January 2007 to April 2008, compared to 20 percent in the preceding 12 months. In comparison, prices of non-securitized agricultural commodities (including, rice, tea, cocoa and rubber) increased by only 14 percent in the last 15 months, compared to 11 percent in the 12 months before.
Despite the slower average price increase, the effects of speculation do appear to have spilled over into some of these non-securitized commodities, for example, to rice (69 percent since January 2007) and palm oil (88%). One should also ask, as Martin Wolf does: If this is truly a speculative bubble, where are the stocks of these goods? The answer is in part: still out in the fields, as future contracts deal with future harvests. In all likelihood, some of the recent price jumps stems from the perception among hedgers and investors that the harvests will disappoint.
The supply side of this crisis stems from much more – and potentially much more enduring – issues than such bad luck events as droughts. A strong focus for many years on development of manufacturing and services in many emerging economies, notably in Asia, has come at the cost of improving agricultural productivity. World production of rice and wheat has barely increased in the past 10 years, and agricultural productivity has severely slowed in several key producing countries in Asia, including China (2 percent per year from 1996-2003, compared to 4 percent from 1989-1996), India (around 1 percent from 1995-2005 compared to almost 2 percent from 1985-1995, and Indonesia (only 1 per cent from 1995-2004 compared to more than 3 percent in 1985-1995). The causes of this productivity slowdown include a relative neglect of agricultural R&D, low investment in rural extension services, and even a failure to extend infrastructure such as roads and irrigation to rural areas. There is enormous potential to increase both food supply and agricultural productivity in these countries, but it will take time to bring production back up to the levels needed to meet demand.
The protectionist backlashes in important producing countries such as Thailand, Vietnam, and Argentina, will be difficult to reverse even after the bubbles have burst. Restrictions of exports, higher import subsidies to protect domestic supplies, and taxes on the rural sector to support consumer subsidies – will be difficult to remove even once the crises are past. More frequent mismatches between demand and supply will keep prices at a higher level and produce only more volatility Even with higher prices, these measures create more uncertainty for farmers to expand food production and will limit the growth potential of international markets. In emerging economies, many of the price declines from productivity growth before the mid 1990s will be reversed, and it will become harder for poorer people to move up the consumption ladder. Such increases in inequality could reduce the growth potential further.
Bart van Ark is chief economist of The Conference Board
Posted by: Bart van Ark | May 5th, 2008 at 9:58 am | Report this commentMartin Wolf: I want to thank Alex Cobham and Bart van Ark for their comments.
I have no comments to make on the consequences of the privatisation of banks and the abolition of agricultural marketing boards. It is clear that some form of rural credit is needed if farmers are to use fertilisers and improved seeds and to smooth their consumption over time. Whether that requires state banks is another matter. It might be possible, instead, to subsidise private banks to provide credit. Equally, marketing boards were inefficient monopolies. While some form of marketing assistance is needed, I find it difficult to believe that these institutions are the best solutions.
Obviously I am not in favour of “careless embrace of GM technology”. Who could be? But I am in favour of careful use of this technology, rather than careless rejection. Equally, I am not claiming that the only choice is between adoption of genetically modified crops and mass starvation. I am saying we should use whatever we have. Obviously, that means we should also assess the consequences as we go along. To do anything else would be unscientific.
Mr Cobham’s basic plea seems to be that we should make the poor better subsistence farmers. I don’t really believe this can be the long-run future, though it must be a part of the short-run future.
Apart from that, Mr Cobham makes a number of very broad assertions about globalisation with most of which I disagree. We are almost all in favour of “policy space” these days. It has become a mantra. But countries do have policy space: if you doubt that, take a look at Myanmar, North Korea and Zimbabwe. Unfortunately, as these examples show, they can abuse their freedom horribly.
I am grateful to Bart for his comments on securitisation and prices. I should note, however, that if futures prices are jumping because of the perception that harvests will disappoint, this is stabilising speculation. It acts to lower consumption now, thus preserving stocks.
I agree entirely with what Bart says on the importance of investing in increasing future supply. I also agree with him on the dangers of fragmenting the market, precisely the consequence of the “policy space” that Mr Cobham wants to increase. Export restrictions by food-surplus countries are part of the exploitation of their “policy space”. The losers will be vulnerable food-importing countries, precisely the countries that Christian Aid claims it wants to help. As is often the case, those who argue for trade policy interventions as a way of helping the poor risk achieving the opposite of their stated objectives.
Posted by: Martin Wolf | May 11th, 2008 at 7:24 pm | Report this comment