Food inflation: lessons from India
The current rise in food prices is very, very dangerous. Not because food will be more expensive, but because chances are the government will intervene to prevent this.
The unions in South Africa have already called for a food price freeze. This merely serves to show that they didn’t bother paying attention in Economics 101. Nor bothered to witness the results of price controls in our neighbouring no-crisis zone, Zimbabwe. If you cap prices, you cause shortages. Simple. Fact. Nothing can change that except complete nationalisation of the entire supply chain, and even then, the difference will be made up from tax, so lower real incomes will keep the real price of food the same.
The danger is that there are enough communists, socialists, interventionists and developmental-statists in government that they might just listen to the unions. If only to pander to the population and avoid the counter-productive impact of strikes and riots.
A recent commentary by the grandiloquently named Swaminathan S. Anklesaria Aiyar, picked up by the Wall Street Journal Asia, makes a good example of India. His conclusion is similar to mine, posted a few weeks ago:
India’s current food price problem isn’t a market failure. Rather, it’s a government failure to allow markets to work. The only sustainable solution is to pull back the subsidies and protections. But sustainability is the last thing on the minds of politicians competing to win the next election with ever-higher subsidies.
It’s a simple truism that in a free market, the solution to high prices is high prices. High prices drive prices down by stimulating production and discouraging unnecessary consumption. It is also true, however, that artificial costs and inefficiencies introduced into the supply chain by government intervention merely serve to perpetuate the supply-demand imbalance.
Our government should indeed take drastic action, by removing any and all regulations, subsidies, tariffs and other red tape from the agricultural sector. It should take drastic action to ensure that any pending land transfers are expedited (or cancelled) as quickly as possible, to prevent otherwise productive commercial farm land lying fallow. It should take drastic action to guarantee farmers — including new farmers on restitution or redistribution lands — gain full title to their property, so they can raise working capital by using their land and equipment as collateral. It should take drastic action to complete its long-overdue audit of state-owned land, and make suitable land available to emerging farmers and communities. And it would do well to take to heart the lessons Aiyar cites from India’s agricultural policy and its history of government intervention.
Everyone asks what government can do. Instead of acting innocent and blaming corporate collusion, this is what the government can do. This is positive action. This is taking the moral high ground. And it had better do these things quickly, or people might start thinking the unions actually have the right idea. I can think of no more dangerous result of food price inflation than that.
I agree with your view on minimal government intervention, however the difference between food and another commodity crisis such as high steel prices etc is that people can actually die due to starvation or get serious pathologies from malnutrition- particularly infants and HIV infected people. So instead of simply staying out of it, the government may have to act to keep people alive. I suggest however, instead of direct subsidies, it should simply buy basic food stuffs such as maize etc from the private sector and give it out to the poor. This bill would have to be footed by the taxpayer ultimately, however it should not warp the economics of food prices too drastically.
The argument that government should help because the commodity in question is somehow essential is flawed. That goes for many things. As a temporary measure, in extremis, you’re right, your proposal will do less damage than others. It still distorts supply and demand pressures, however, which makes it more likely that the problem will persist. Short of saying “let them starve”, I’d prefer to rely on the market to bring prices down, to offer alternatives to usual staples, and then let private charity deal with any extremes. That creates less expectation that every time prices rise, the government will step in, creates less price distortion, and ultimately is a more sustainable way of handling economic fluctuations. But whatever emergency measures you advocate, none is justifiable before the basic measures I described have been taken.
Unfortunately, the government doesn’t read your blog. Good post though.
True enough. However, I have been commissioned to write on food inflation for a publication they might read.
Thankfully our Minister of Agriculture did attend ECO101.
http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A758053
Tyler Cowen’s piece in the NYT is also worth a read:
http://www.nytimes.com/2008/04/27/business/worldbusiness/27view.html?_r=1&oref=slogin
” [. .] whenever the people are well-informed, they can be trusted with their own government; that, whenever things get so far wrong as to attract their notice, they may be relied on to set them right.”
Thomas Jefferson 1743 – 1826
As always Ivo, straight down the line!
I hope the publication for which this piece was commissioned enjoys a VERY wide readership, as this issue is of desperate importance.
“The danger is that there are enough communists, socialists, interventionists and developmental-statists in government that they might just listen to the unions.”
I disagree
Governments will always harbor at least a smattering of opportunistic populists eager to embark on some social experimentation with other’s lives, or rerun old, discredited systems if they bring in a fast buck and lots of unbridled power.
The danger is that ‘people’ as you suggest, labor in general and the union members in particular, numbering in the millions, would support calls for state intervention in the first place. How can this be?
They obviously do not know, understand or want to believe what the consequences of such action will be. They have no clue but they have the vote. This is a frightening, dangerous ‘tyranny of the majority’. The proletariat, having the vote, have every right to lobby for action by their government. When this mandate leads to their own demise, they alone are accountable for the consequences.
Whilst knowing this may be cold comfort to those swept along in some ghastly famished maelstrom, it shifts the focus from government to people, and the urgent need to educate by whatever means, in order to get those regulations, subsidies and tariffs removed.
Historically, the democratic populace can scarcely boast a flawless record of sound judgment in regard to its own governance, and the problem is not new.
“But the mild voice of reason, pleading the cause of an enlarged and permanent interest, is but too often drowned before public bodies, as well as individuals, by the clamors of an impatient avidity for immediate and immoderate gain.”
James Madison 1751 – 1836
I do not fear what the ANC might do; I fear what the populace, through ignorance and complacency, might allow to happen.
“If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.”
Thomas Jefferson
God forbid that our government attempt to fix prices. That will be a huge disaster for all of us and lead to wide scale starvation.
And that, ladies and gentlemen, is why the Federalist Papers are essential reading. Thanks, Perry.
The question in SA’s case, however, is how the disconnect between the people in general (as opposed to organised special interests), caused by our proportional representation as opposed to direct election system at national level, affects this. Is it more important that the people hear it, or that the government listens?
More on that subject tomorrow.
Tried to post this yesterday, but maybe it’s sitting in the moderation queue!
Our agriculture minister obviously attended those crucial ECO101 lectures as she has gone on record to say that export bans will not be imposed on local producers. A major victory, not just for sound economics but for the informed.
http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A758053
Tyler Cowen’s NYT article is also worth a read as it examines the issue in more depth.
http://www.nytimes.com/2008/04/27/business/worldbusiness/27view.html?_r=2&oref=slogin&oref=slogin
Sorry Michael, the double URL must have got my spam filter annoyed. I had to rescued your comments from, well, let’s just say it’s a very crowded sewer down there. For every valid comment, I get ten messages pumping cheap insurance or even cheaper porn.
Interesting points from Xingwana, indeed. Reassuring, too, in general. Notable, however, is her insistence against maize as a biofuel crop, which doesn’t go quite as far as I’d have hoped:
The idea of banning the use of maize for biofuels is inconsistent with her logic on exports, since this too would limit the potential market and therefore the incentive to produce for farmers. Anyway, limiting biofuel production to exclude maize isn’t a solution, since the non-maize biofuel crops grown as a result of mandates or subsidies will displace marginal maize lands. If I can get more money growing dual-purpose crops than growing food-only maize, I can well imagine a farmer opting for the security of the former.
The government’s “target” on biofuels is what needs to go. The government has no business setting such targets. Entrepreneurs in the market will set them, if and when biofuels become sufficiently attractive to consumers, and become more profitable for produces than other uses of agriculture land. And then those entrepreneurs will decide whether it’s better to burn stuff you could sell as food, or to use what is now mere fertilizer, such as bagasse (sugar cane fibre).
Good on her for standing up to Grain SA, though. I’m sure they’d love subsidies or mandated biofuel programmes, but like any other special interests demanding preferential treatment paid for by taxpayers, the government should tell them to get stuffed.
Thanks also for the Tyler Cowen article. I find myself nodding in pleased agreement, and would add only that his observation about the unusually slow rise in rice yields are probably also a result of the barriers to trade. If you can’t produce into a substantially larger market than just your domestic consumption, if you can’t take on less efficient producers elsewhere in the world, why bother investing in more efficient production and higher yields yourself?
Thanks for those links. Most appreciated. Sorry again about being classified spam. I’ve set the filter straight.