Syncretic Zoellick

World Bank president Bob Zoellick gave an interesting speech at the Center for Global Development a couple of days ago in which he laid out four big challenges to development and the global economy. 

Challenge number one, he said, is high food prices.  In his words:

As financial markets have tumbled, food prices have soared.   Since 2005, the prices of staples have jumped 80 percent.  Last month, the real price of rice hit a 19-year high; the real price of wheat rose to a 28-year high and almost twice the average price of the last 25 years.

The good news for some farmers adds a crushing load to the most vulnerable – children, as young as four or five, forced to flee the safety of their rural communities to fight for food in teeming cities; food riots threatening societal breakdown; mothers deprived of nutrition for healthy babies.   The World Bank Group estimates that 33 countries around the world face potential social unrest because of the acute hike in food and energy prices.  For these countries, where food comprises from half to three quarters of consumption, there is no margin for survival.

Challenge number two, he said, is concluding the Doha round of global trade negotiations: 

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? 

Wait a second.  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?

Don't take my word for it  Here is a chart from Zoellick's own World Bank, taken from its recent World Development Report on agriculture: 

 

These estimates show that prices of coarse grains, wheat and rice will rise between 4 and 7 percent (relative to all other prices) if there is a successful trade round with complete removal of all restrictions. 

So challenge number one is that world food prices are too high, but challenge number two is the need to get rid of developed country policies so that food prices can rise even more?  

As it so happens, Zoellick was at the HKS yesterday and I expressed my puzzlement to him.  His answer was that he didn't think economists really understood how agricultural liberalization would work, he doubted that the effect on world prices would be to raise them (no matter what the WDR says), and that in any case import liberalization within developing countries would help reduce domestic prices.  But if Zoellick really believes that Doha will lower food prices in developing nations, he has just articulated a new doctrine that upends years (nay, decades) of research on the subject.  The truth, I fear, is that Zoellick's faith in trade agreements has little to do with the underlying economics and like many ideological free traders he is willing to latch on to the economic arguments only when they serve the cause (and to discard them just as easily when they no longer do).

As for the real impact of food prices on poverty, we can avoid much confusion by recognizing the diverse and heterogeneous effects that food prices have on poverty around the world. The impacts depend on whether you are a net seller or a buyer of food (which is determined in part by whether you live in urban or rural areas), as well as on net supply elasticities (a large enough price increase can turn you into a net seller even if you were not one initially). 

Now repeat after me: it depends...

Comments

[Nicolás Lillo]

Hi Dani,

I don't have the intention of defending Zoellick, but the possibility that trade liberalization in agriculture could make prices stabilize is not so far fetched I believe. I think that the benefits of cutting agricultural subsidies in developed countries have to be seen in a dinamic perspective. What I mean is that cutting subsidies would make agricultural industries far more atractive because of the initial price hike and firms and corporations in the developed world would find a new line of business that so far has not been explored much. Once more firms from developed countries establish themselves in developing countries, there's a significant possibility (I don't have data that supports this) that prices will fall due to more competition...for all countries.

Now, of course, what indeed would happen if countries don't open themselves to foreign investment and/or if real wages in developing countries continue to be low (i.e. the new foreign investment is just exploitative and corrupt), then of course, the higher demand from developed countries would make people in developing countries worst off.

Regards,

[Dan]

If you were president of the World Bank - or, perhaps, in some fictional position where you could dictate global trade rules - what would you do about food prices?

[TBT]

Zoellick is an MPP '81 from KSG. Did ITF-345 pre-requisites preclude MPP students then also? Maybe the class would have helped!

[William Perera]

I’m only a high school student, but I’m pretty sure anything that increases the cost of production reduces the supply. By removing subsidies, there will be less food put on the market, which in turn will drive up prices overall. Although the industry may become more attractive by increasing competitiveness, I don’t know how effective it would be at bringing goods to the people of developing countries.

[AK]

Urban consumers suffer from rising commodity prices but conversely don't rural agricultural producers benefit? I am under the impression that urbanization has some correlation with economic development; therefore I would assume that poorer countries have a larger portion of their population in the agricultural sector. How do we know ex ante that the rising commodity prices will not end up causing greater benefit for less developed countries? I vaguely remember a proof in 1st year grad econ that profit is convex vs. a rising price. Is it not possible that this will be a net win for less developed countries by both raising aggregate income and slowing urban migration?

[Dean Baker]

Fantastic post. Maybe we can get these folks to stop pushing simplistic nonsense about how eliminating agricultural subsidies will be such a boon to the developing world.

[Theo O'Brien]

The soaring prices will not likely benefit the agricultural sector because no one can afford the inflated prices, like rice. It isn't that there are so many buyers paying this incredible price for common foods and the farmers are reaping the rewards.

[Theo O'Brien]

Rather, the increased prices will not likely benefit those in the agricultural sector in the long run. So, perpetuating these high food prices are not going to help developing countries, especially if it just leads to importing from other countries that will produce food at a lower price. And, of course, the solution offered by Zoellick is not going to help anyone except those that don't need help.

[Per Kurowski]

I do not understand this post.

Of course that eliminating some of the agricultural subsidies paid in the developed countries will increase the prices of agricultural products worldwide… no doubt; but with that comes also an increase in opportunities for the developing countries… no doubt; problem is though that those opportunities are not equally distributed around the world… no doubt.

Now are we going to stop farmers in developing countries from having a chance to exploit opportunities just because some countries do no have those farmers?

If yes, why do we then not stop the more intelligent from using their intelligence since that is not equally distributed either?

[TBT]

Theo,

By definition, people can afford the inflated prices, or else the prices would deflate. Enough buyers are paying the incredible price that farmers are indeed reaping rewards--assuming the price spike derives from increased demand, as many presume given China/India eating more & countries producing biofuels.

Attention has shifted dramatically. Before, we sympathized for poor rural farmers, victims of *low* food prices; now we sympathize for poor urban dwellers, victims of *high* food prices.

This tradeoff is why some "unconventional" economists believe that ag liberalization is overhyped.

[Random African]

errrr..
I don't get what's to misunderstand about this post Zoellick describes an emergency, the possibility of famine, social unrest, food riots in the short term and then pulls out a solution that has long terms benefits. He actualy does mention that the margin of survival is narrow but yet recommends a policy that would make prices rise further before competition and investment and higher profits kick in.

It would have been much more honest from him to actually say that the World Bank doesn't mind some short-term suffering and more riots, famine and stuff because in what happens in the long run is worth it. But alas, he tried to sell that policy as a solution to a short-term problem.

There's also something interesting about the assumption that low prices are the biggest distortion on agricultural productivity in develloping countries.

[David]

Ok... so the conclusion would be that it's a good thing to keep giving US farmers and cotton growers billions in subsidy from the taxpayers, while maintaining trade barriers to prevent African countries from selling us their food at lower prices? I think economics just reached a new low on this website.

Why doesn't the second chart of the WDR appears on the post, The one that shows the trade share gains for developing countries after trade liberalization? Yes, food prices will rise in the short-term. But for developing countries, this rise will be more than offset by the revenues brought in by these increased market share. Now, how this increase income will be distributed is left to politicians over there. If history is any guide, the are reasons to be worried. But it sure is a better option that the status quo.

And I haven't talked yet about the benefits to developed countries taxpayers...

[Rupert]

Thank you for pointing out this glaring inconsistency. I think the Bank's energy would be much better spent persuading food exporters NOT to tax or restrict their food exports, because that would be guaranteed to raise the price. I can almost feel the pain of food importing countries (like our friends in Liberia) as Thailand, Vietnam, etc cut back on their rice exports!

[Dan Nicolai]

Rising food prices are a result of futures markets, and movement of capital out of stocks and bonds, not just demand. Kind of puts comparative advantage in some perspective, doesn't it? Food isn't cars, and people don't riot if they can't afford a VCR this week.

[Dan Nicolai]

Rising food prices are a result of futures markets, and movement of capital out of stocks and bonds, not just demand. Kind of puts comparative advantage in some perspective, doesn't it? Food isn't cars, and people don't riot if they can't afford a VCR this week.

[Nathan Smith]

The juxtaposition of views was, no doubt, unfortunate. But the point is that agricultural subsidies have long been recognized as damaging to poor countries, and the rise in prices makes it politically opportune to eliminate agricultural subsidies now. In the long run there should be a supply-side response and global food prices won't necessarily rise much. In the meantime, those who could be helped by agricultural market opening in the West (rural dwellers and farmers) and those who stand to lose by the change (poor urban workers, slum-dwellers, etc.) aren't typically the same people, and there might be ways to help the latter without closing to the other a long-denied opportunity. In short, Zoellick's argument is clumsy but he's probably right.

[John Bunting]

The WDR report states, "Key elements of the future agenda are to continue to get prices right through trade and domestic policy reform,". Actually, agricultural prices are set, by and large, through the pricing power of a very few players.

If subsidies created profits, the average age of farmers in developed countries would be declining as the young entered agriculture. Obviously, the average age of farmers is increasing world wide.

Very little critical thinking is involved in food (agriculture) policy.

[Dominic]

Dani, this is possibly the most disappointing thing I've read you say.

Ag subsidies are massive transfers of wealth from US/EU tax payers and developing country farmers to the owners of the largest US/EU agribusiness.

Removing these subsidies makes it possible for developing country farmers to increase profits, reducing urbanisation stress.

It will raise food prices in developing countries and lower food prices in US/EU. It will also raise incomes in developing countries and lower taxes in US/EU.

Just because you often find yourself arguing against a certain group of people doesn't mean you need to reflexively disagree with everything they say.

[Dani Rodrik]

Dominic --
I wasn't passing judgment on whether Doha is good or bad. That's a separate topic of discussion. I was passing judgment on the inconsistency of supporting Doha and also complaining at the same time about the current rise in food prices. If Doha is good, the current surge in food prices cannot be all bad. And if the current surge in prices is bad, Doha cannot be all good.

[robertdfeinman]

We have a faith-based foreign policy so what is so surprising about having a faith-based (international) economic policy?

The ideologues just dismiss any arguments or facts that run counter to their beliefs.

It seems to me that eliminating subsidies will influence so many aspects of the market that what the net effect might be is really unknowable. Will production increase or decrease? Will this change be in the developed or undeveloped countries? Will farmers shift to other crops? Will other countervailing processes happen (such as hidden trade restrictions, or retaliatory limits on other parts of the market)?

Since nothing like this has ever happened before the existing models and the limited amount of data from smaller cases can only provide a hint, not an assurance, of what may transpire.

A bit of humility from all parties would be a nice change.

[Random African]

As the result of riots, Cameroon and Mozambique lowered their tarriffs and reverse the price hike they anncounced. Even though they haven't announced it, they're not ruling out import subsidies if the cut in import tariffs isn't enough to keep prices low enough.

Does anyone really think that local food producers are about to rip the benefit of higher prices ? Or that the political effect of higher food prices in develloping countries will actually consolidate reforms the World Bank cares about ?

[Anh Tran]

Dear Dani and all,

There is actually a link between agricultural subsidies in the West and high food prices world wide.

Due to subsidies, giant agribusinesses deeply undercut their competitors in the developing world, driving them out of business or forcing them to scaleback production. Now, with the new energy policy in favor of biofuel, the agribusinesses now turn their attention and supply to biofuel sector, leaving less production destined for food. Although food prices have been going up, food producers in developing worlds have not been able to increase production significantly to drive down price because they have been cripled by big agribusinesses in the West for a long time due to subsidies.

[gawain]

It's fun to snark the World Bank President, no doubt. And you probably don't mean for your post to be dissected in this granular detail.

But it's worth noting that the “benefits” identified by World Bank modeling of trade liberalization (as under Doha) are largely from developing countries dropping trade barriers and lowering prices in their domestic markets, not from reducing rich country subsidies. In this Zoellick right that Doha would complement policies to address food prices.

I'm not defending the WB methodologies or measurements, nor Zoellicks prescription. But just saying that the WB has never argued that the majority of the value in trade liberalization (as in Doha) come from elminating rich country agriculture subsidies.

You're certainly right that the WB believes that trade liberalization will tend to raise prices – rather modestly for most commodities. Unless I'm mistaken, the chart you posted is a “full liberalization” scenario – and Doha is FAR from that. Even then, grains prices rise less than 10%. Implementation of a Doha agreement would be expected to take 5-10 years.

By comparison, food prices have climbed something like 20 % or more in the last two years. WB says 75 % since 2000:
http://siteresources.worldbank.org/DEC/Images/84796-1179761045903/food-prices-lg.gif

So, there's a difference between rising prices and price shocks. Policy measures to address each would be different.

Personally, I'm glad Zoellick is highlighting the food price increase, which is becoming a very scary situation with few signs of relief in the near future. Doha is not a solution to this problem, although some elements - like reducing rich country agriculture subsidies - could contribute the longer-term development in poor countries.

btw - love your blog.

[The Sustainable Development Blogger]

Thanks for the interesting post that show how many decision-makers does not understand neither what is going on in agricultural markets nor what will be the impacts on development and poverty of high prices.
In fact, we should remember three elements:

1)High food prices are caused by biofuels and emerging countries growing demand but also by speculation on commodities markets.

2) 2/3 of the poor lives in rural areas and depends on agriculture and many of the urban poor are former peasants.

3) Many developing countries, even if they are net importing countries, have still an important potential in expanding their agricultural production.

These elements mean that high agricultural prices are positive for most poor in developing countries but the risks are very high because urban poor uprising (caused by high food prices) can destabilize several developing countries.
This mean that we need to find solutions to reduce these risks and the adjustment costs. Developing countries need neither more food aid (which often create many problems) nor laissez-faire. Developing countries need active rural development policies (founded also through Aid), which will increase their agricultural production (also by helping urban poor to come back to rural areas that they leaved) and some policies to decrease food prices in urban areas (notably by creating food stocks filled by national production). These policies need important resources that should be provided by bilateral and multilateral donors. The problem is that, even after the last World Development Report, I do not see an upward trend in Aid dealing with rural development and food policies in developing countries.

For more analyses (also on agricultural issues) maybe you will find interesting my blog: http://sustainabledevelopmentforall.blogspot.com/

[Pietrek]

I have a question regarding the possible scenarios under liberalization (I am very confused here).
First: liberalization is
cutting down on subsidies and on tariffs and both of those lead in opposite directions (prices up and down).
Second: let's say the prices will go up (because of decreased supply because of lack of subsidies), but for farmers in developing world that would be good because they could produce more (or even start producing) and not rely on food imports for food security.
Third: with current boom in commodities markets does it still hold that many food producers in developing world meet world prices (induced by developed countries subsidies) that are lower than their cost of production?