Does the food price crisis enhance the case for self-sufficiency?

The rise in food prices and the costs it generates have been aggravated, some say, by policies of import liberalization and subsidy removal which the World Bank and economists advocated around the developing world in the 1980s and later.  If developing country policies supporting food crops had not been dismantled, this argument goes, poor people in these countries would not have been left in the throes of volatile world market forces and they would not have suffered as much recently.

A Bloomberg news story cites the plight of Honduran farmer Fidencio Alvarez:

Honduran farmers like Alvarez can't compete in a global marketplace where the costs of fuel and fertilizer soared and rice prices doubled in the past year. The former breadbasket of Central America now imports 83 percent of the rice it consumes -- a dependency triggered almost two decades ago when it adopted free-market policies pushed by the World Bank and other lenders.

The country was $3.6 billion in debt in 1990. In return for loans from the World Bank, Honduras became one of dozens of developing nations that abandoned policies designed to protect farmers and citizens from volatile food prices.

...

Rice farmers in Honduras were protected by the highest import tariffs in Central America when former president Rafael Callejas took office in 1990 with the economy stalled. The trade barriers that helped the country meet more than 90 percent of domestic demand were dismantled under an agreement for a World Bank loan in September that year, allowing cheaper imports to flood the market.

The requirements for the loan included eliminating import restrictions and surcharges and reorganizing the agricultural finance system, according to Eurodad, a network of 54 European non-governmental organizations that was granted access to the World Bank's loan database to monitor loan conditions.

Prices paid to farmers fell by 13 percent in 1991 and 30 percent more in 1992, according to the Food and Agriculture Organization in Rome.

In August 1993, the World Bank advised Honduras to adopt a second round of economic changes as part of another loan, according to Eurodad. Those conditions included eliminating all price controls and cutting tariffs further.

``Remaining trade and price controls should be eliminated,'' bank officials said in a 1994 internal report. ``The program of privatization of state silos should be completed; and the use of a grain reserve for price stabilization should not be reinstated.''

The report's author, Daniel Cotlear, now a World Bank economist for Latin American and the Caribbean, declined to comment for this story.

The bank pushed the policies because food prices fell in real terms for at least two decades, and few economists expected that to change, said Mark Cackler, manager of its Agriculture and Rural Development Department. Free trade and open markets remain the best path to competitiveness, he said.

I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight.  If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices.    

Unless that is you believe in a combination of dynamic learning effects with externalities, in which case temporarily high prices may be worth it because they result in low prices eventually. But it would be hard to make this case for food crops.

So the answer to the question in the title seems to me to be "no".

Comments

[Tucker]

I think the real issue is that food prices on the international market were unsustainably low due to: production subsidies in the US, EU, Canada, Japan, and Australia; and low oil prices. In addition strategic grain reserves, while they are protection policies, do not reduce total demand. But basically the efficient producers of the 90s are not so efficient with high oil prices.

[Chandan]

Is it not for some form of self-sufficiency that the US, Japan, and the EU are sticking so hard with subsidies (to not entirely wipe out their agricultural base)? I don't know the reason but I think agriculture is one of the sectors where full liberalization would bring more volatility than we are seeing right now. Striking the right balance is already a major challenge in the WTO Doha Round.

[Say What]

"That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers."

Um, Dani, you know very well that some of the big exporters in the 80's were not demonstrably more efficient -- they were subsidized. Perhaps the question should be: If tariffs and import restrictions were the norm worldwide, would the transfer from US and EU coffers to developing country governments have changed the political dynamics of agricultural subsidies?

[Say What]

If tariffs and import restrictions were the norm worldwide, would the transfer from US and EU coffers to developing country governments have changed the political dynamics of agricultural subsidies? And making possible multilateral tariff/subsidy/import restriction reductions in the future.

As it is the unilateral disarming by the developing world in the 80's has put it in an extraordinarily weak bargaining position today.

[jeremy]

Prices paid to farmers aren't the same as food prices. There is a lot of oligopoly in food distribution. Countries that have given up domestic production of staple foods are at the mercy of these highly monopolistic markets, and lack the ability to pursue policies that balance food prices for consumers and prices paid to farmers.

[John Bunting]

I suspect there are many ways of defining efficiency. Most of the efficiency gains in modern agriculture are tied with increased fossil fuel inputs.

Then there is the problem concentration of power in the hands of a few global players. Exactly where does their special competence in determining efficient allocation of resources?

Prudence may be a better course than efficiency when it comes to food.

[Gulzar]

The problem with foodgrains (rice and wheat, in particular) trade is that unlike other commodities, the demand for these are inelastic, and more so for the poorest.

It was fine to open up agriculture to trade when the prices were low, and the consumers benefitted from lower prices. However, this led to many developing countries (and multi-lateral agencies) becoming complacent and neglecting investment and research in agriculture. Now, when the prices have risen and domestic production has declined (as in case of Honduras), they are left with retrieving an almost impossible situation.

In the absence of adequate social safety nets, the poorest feel the brunt of the high prices. Foodgrain production is not so much about efficiency, but about food security. It is dobtful whether trade can achieve that.

[robertdfeinman]

I think you may find this article in "The Nation" apropos:

"Manufacturing a Food Crisis" by Walden Bello

http://www.thenation.com/doc/20080602/bello

"The experience of Mexico and the Philippines was paralleled in one country after another subjected to the ministrations of the IMF and the WTO. A study of fourteen countries by the UN's Food and Agricultural Organization found that the levels of food imports in 1995-98 exceeded those in 1990-94. This was not surprising, since one of the main goals of the WTO's Agreement on Agriculture was to open up markets in developing countries so they could absorb surplus production in the North. As then-US Agriculture Secretary John Block put it in 1986, "The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available in most cases at lower cost.""

[Bert]

I agree with the argument you put forward--until very recently the internal prices of the "protected" countries was far higher than the world market. So countries such as Indonesia and the Philippines, which de facto either banned imports of rice or put high tariffs on it have kept food far more expensive than needed in the years before the recent spike in prices. As a result they kept more of their population in poverty only to briefly enjoy a lower price difference now. Apart from all the special interests that argue for protection of agriculture, though, people do seem to have trouble dealing with sharp price shocks, though, irrespective of the price level. The use of forward markets and stockpiles seem not enough to reduce the fluctuations, as becomes evident now, or is prohibitively expensive. So having a mechanism in place to protect the poor from the impact of price shocks may therefore be the best way to preserve openb markets in agriculture--or in anything else for that matter.

[Armando]

"Unless that is you believe in a combination of dynamic learning effects with externalities, in which case temporarily high prices may be worth it because they result in low prices eventually. But it would be hard to make this case for food crops."

Why not?
Prof. Pretty of Essex University has recollected a wide data base about sustainable agriculture projects: 208 cases from 52 countries for 8,98 milions of peasants and 28,92 millions of hectares.
For 4 millions of peasants under 1 hectare, crop production increased by 73%.
In the big farms of 90 hectares of mean in Latin America, production increased by 150 tons per familiar unit = + 46%.
The System of Rice Intensification (SRI) ha multiplied rice yields from 2 to 6. In Madagascar, where the system were developed, rice yields viaried between 6 to 11 tons per hectare, confronted to the national mean of 2 tons per hectar. In China, yield farmer has reached 11 tons per hectare, in comparison to a national mean of 6 tons.

See: Pretty J. e Hine R., Reducing Food Poverty with Sustainable Agriculture: A Summary of New Evidence, 2001, p. 98 e 122 and Jules Pretty, Agri-Culture, Reconnecting People, Land and Nature, Earthscan, Londra 2002.

[Derrill]

One of the things that is lost in the debate here is just how high these "high" prices are. Yes, food prices have increased sharply in recent years, but (as of April 2008) are still _below_ their real levels in 1984, and lower than in any year from 1900-1984.

Lowering the barriers to lower prices means that the poor net-buyers in Honduras (most of the poor population) have gained demonstrably over the last 20 years.

[kevin watkins]

Very thoughtful piece by Dani, as ever.

It strikes me that therere are two problems here, one related to market efficiency and the other to equity.

On the former, Dani suggests that import protection would have transferred production from more efficient to less efficient producers. Surely that assumes a broadly free market, in which exporters are trading a prices which reflect costs of production. That has clearly not been the case historically - and it was not the case with the EU and the US in the 1980s and 1990s. The loss of markets globally and locally experienced by producers in developing countries was, in part, a product of subsidised over-production.

Turning to equity it might be argued that this was good news for net food consumers - notably urban populations. Set against this, many low-income rural populations sustained lower prices for their produce and labour (admittedly with large variations conditioned by market structures).

The more fundamental problem relevant to the discussions in Rome, is that many countries were left highly dependent on food imports. The rapid loss of self-reliance in sub-Saharan Africa, parts of Latin America and East Asia has left many countries highly exposed to the type of market spikes on evidence over the past couple of years.

Might there not be a case for greater self-reliance based upon (i) capacity to sustain imports and (ii) creating dynamic linkages between urban and rural sectors (as in Vietnam).

Finally, Dani suggests that the classic import-substituting case - that is, raising productivity and lowering future prices through innovation - may not apply to food. I wonder if this is true. Surely, innovation in agriculture whether through investments in new types of seeds and technologies, labour allocation etc. is partly a function of price incentives (which were diminished by import liberalisation) and infrastructural investment. Isn't this one of the lessons from India's Green Revolution? Another lessons from India, of course, is that high growth and lower food prices do not always have an impact on malnutrition.