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

[Pietrek]

I forgot to add that all of my points are questions and I'd be glad to here from You all.
Also I forgot to add that in point 2 I am not forgetting about consumers facing higher food prices. However, I wonder if these consumers are not the same food producers who benefit from higher prices and expanded production.

[thejesse]

The notion that trade liberalization will lower food costs in developing nations is based, in large part, on the assumption that those nations have the resources, particularly water, to increase food production. The fact is that many developing nations DO NOT have the water resources to make significant increases in food production and therefore must import food from nations who do have those resources.
Many of the people posting comments here seem to have a good grasp of economic theory but no understanding of agriculture whatsoever. China, India, and the United States are the worlds biggest grain producers because of geography, not because of government subsidies. All the economic theory in the world is not going to help a sub-Saharan farmer grow more grain if he has the wrong soil, the wrong climate, and insufficient water to do so.

[wmartin573]

Dear Dani

It was nice to see that your blog cited the Anderson, Martin and van der Mensbrugghe (AMM) numbers on estimated increases in world prices from full global trade liberalization.

If, for a moment, we ignore the difference between a potential Doha agreement and this full liberalization scenario, we see from the graph that the prices of cotton, oilseeds and dairy products go up by 21, 15 and 12 percent respectively. The cotton price increase would be extremely good for some very poor countries. This is a pure cash crop, so producers gain on all their production and very poor consumers are not likely to be greatly hurt. Increases in the prices of oilseeds and dairy products are not such an unmixed blessing, but they are likely to be less adverse in their impacts on poor people than increases in the prices of basic staples. For the staple grains, the estimated increases in the prices of rice, wheat and coarse grains are 4, 5 and 7 percent-- quite small relative to the increases of over 100 percent we’ve seen recently.

Further, global trade reform would lower protection and prices of these staples in many developing countries. In the AMM study, tariffs on agricultural and food products in developing countries averaged 14.2 percent, implying a potential reduction in domestic prices of food relative to world prices of 12 percent.

Turning to a potential Doha agreement, it seems clear that the draft modalities would involve some serious liberalization of agricultural distortions in the industrial countries. But, even there, the tariff reductions appear likely to be greatly diminished by exceptions. Given all of the exceptions, it seems likely that the cuts in agricultural protection, and increases in world prices, would be more like 20-30 percent of those under global trade liberalization. Later stages of the negotiations might, however, bring some progress on the biofuel duties and export taxes/bans that are contributing to the current dramatic increases in world prices.

The DDA is an incredible challenge-- trying to get agreement by consensus between 150 very different members. There are many weaknesses in the draft agreements, but concerns about resulting increases in world prices of staple foods don't look as though they should be central to assessing a potential agreement.

Will

[Hamza]

It seems to me that a necessary corollary to a complete liberalization should be an increased access to capital/credit for farmers in developing countries. Otherwise, how would they afford to increase their output? if food prices go up but farmers in the global south are unable to increase the supply, then i don't see the benefits for any one. It is probably an easy thing to say but Mr. Rodrik is right about our uncertainty regarding the outcomes of liberalization..."it depends".

[David]

The commodity prices cannot control in increasing. It is mainly because there are supply of basic commodities that is really needed by the people and we cannot avoid that. The population is increasing too, so, the more people needed the commodities the more the demands in the market it’s because sometimes they are also experiencing the same dilema in scarcity of the products. But then the consumers especially the parents wants to feed their kids with nutritious food. But how it would happen if the basic commodities will increase in price? Sometimes even if you made your weekly plans sometimes it really ruin your budget. Because of some unexpected cases like this.