A menu of dilemmas

Governments will have to negotiate many tough choices in their battle against rapidly rising food prices

Cafe Economics | Niranjan Rajadhyaksha

The images from the global food crisis are grim. A smouldering slum in Haiti after food riots there. Thai farmers protecting rice farms from looters. Winding queues outside provision stores in the Philippines. Soldiers guarding grain supplies in Africa. World Bank president Robert Zoellick says that the near doubling of food prices over the past three years could push 100 million people deeper into poverty. Finance minister P. Chidambaram has said that the diversion of crops to make biofuels rather than feed people is a crime against humanity.

Tough words. The food crisis could be a temporary scare that will wither away with the next harvest. Or, it could be the first section on the road to a bigger humanitarian calamity. Either way, what has happened in these past few months should ideally be a wake-up call for a world that did not pay too much attention to agriculture over the past couple of decades.

There will be several policy dilemmas to deal with in the months ahead. Here, I will outline a few.

First, whom should the government protect: farmers or consumers? High food prices are good news for those who are net sellers of the stuff. Their relative incomes would rise. But higher prices of food will feed inflation expectations in the rest of the economy and could lead to spiralling demands for wage hikes in the industrial and services sector. Interest rates would rise. Higher wages and borrowing costs will eat into corporate profits.

Second, what should be done to boost farm output? The current rush to ban exports of some types of food and cut import duties on others is a temporary fix. The only viable long-term solution is to increase farm productivity and output. But artificially suppressing food prices will be a disincentive for farmers to work harder and take more risks. So, there is an inevitable tension between the short-term and long-term measures needed to tackle food shortages.

Third, if price controls and fiscal measures to keep down food prices will harm incentives to increase farm output, what should the government do to protect poor consumers? The only viable strategy right now is to let the food subsidy rise. This means the government buys food from farmers at market rates and sells it through the public distribution system at low prices. The difference will be met through the budget. But then there is also the task of keeping the fiscal deficit under control. I think a higher food subsidy should be balanced with deep cuts in other subsidies. That’ll be a political minefield.

Fourth, who will come up with the money and technology needed to boost long-term farm output—the private sector or the government? It is unlikely that debt-ridden farmers will have either the money or the appetite to take large risks at this point of time. The government needs to step in. But how? Till around the mid-1980s, public investment accounted for a majority of the total government spending on agriculture. Since then, subsidies have become the more important intervention. By the early years of this decade, public investment was a little more than 1% of gross domestic product (GDP) while subsidies were more than 6% of GDP. The government needs to figure out ways to reverse the balance between the two—spending far more money on rural infrastructure rather than subsidies.

Fifth, what role can global trade play? The Doha round of trade talks has made little progress in breaking down trade barriers on agriculture. We are now seeing opportunistic cuts in import duties as countries try to ship in cheaper food. But then there are also bans on exports as countries try to keep food within national borders. Yet, there is still the broader issue of what can happen to the liberalization of global trade in agriculture.

World Bank’s Zoellick said in a recent speech: “If ever there is a time to cut distorting agricultural subsidies and open markets for food imports, it must be now. If not now, when?” The entire premise of the trade talks was that agricultural subsidies in Europe and the US were artificially keeping down the global price of food and other farm commodities such as cotton. Open trade would push up their prices and help millions of impoverished Asian and African farmers.

“Wouldn’t the removal of these distorting policies raise world prices in agriculture even further? And, in fact, aren’t these price effects the main channel through which agricultural trade liberalization in the North is supposed to benefit the South?” asks Harvard University economist Dani Rodrik on his blog.

With food inflation a growing threat, the unexpected policy lesson is that the subsidies that the European and US governments give to their farmers are keeping the price of food down globally. So, in effect, these are subsidies that are paid by taxpayers in rich countries to help urban consumers in poor countries.

Are our trade negotiators barking up the wrong tree by asking the rich nations to cut the subsidies they give to their farmers?

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