How can such disagreement exist? Dani Rodrick (in his excellent blog) wrote a while back about a contradiction in the way people talk about the impact of food prices on the poor. The crux of the contradiction is that some poor people mostly buy food and some poor people mostly sell food. Obviously if you spend most of your money on food and you sell labour, higher food prices make you poorer. But if you sell food and mostly eat your own produce, higher prices make you richer. So higher prices aren’t unambiguously a bad thing (indeed, much of the argument in the Doha round at the WTO is about reducing subsidies to agriculture with the specific objective of raising world food prices!) For me, whether a price change is good or bad revolves around two factors:

1. Is the price real or manipulated? When rich countries subsidise agricultural exports and dump food in developing economies, the incentives created are not sustainable, nor are they efficient. Similarly, when developing countries place tariffs on food, the incentives aren’t efficient. The short term impact on prices may be the same as the impact from a some natural event (drought, new technology, shift in aggregate demand etc) but if the incentives are created artificially, they will lead to inefficient outcomes.
2. Rawls’ Second Principle of Justice. This focuses on “the greatest benefit to the least advantaged members of society”. If a rise in prices pulls more people out of poverty than it pushes into poverty, then its a good thing. This is possible if a higher number of poor people are dependent on food prices for income than the number for whom food represents the majority of their expenditure.

These are, broadly speaking, cause (1) and effect (2). In the context of the current situation, there is considerable disagreement regarding the cause, but there is wide agreement that the effect of current high prices is a negative impact on a large number of the least advantaged members of society. This is revealed as sufficient to generate agreement that something needs to be done. What that something might be, depends significantly on the causes of current high prices. There’s a tendency for people to blame their favorite “whipping boy”. Some people blame biofuel production. Brazil takes offence and points to rising demand. China points to trade barriers… the duel goes on. Fortunately the FAO maintains a clear head. The FAO (in their backgrounder for today’s conference [pdf]) refer to a “confluence of different forces”:

• Weather related production shortfalls (particularly in Australia and Canada but also other major exporting countries)
• Gradual reduction of food stocks (mainly of cereals) since the 1990s. This is a bad thing to have in combination with the above. Cereal stocks are expected to be at their lowest level in 25 years by the end of this year.
• Increasing fuel costs. Fuel is a factor of production for agriculture, but it has a double effect in this case because…
• Biofuels: this has pushed demand for sugar, maize, cassava, oilseeds and palm oil, pushing up their prices. Farmers have been diverting land to produce these crops in stead of other crops to take advantage of the higher prices. The result is lower supply of other crops, which, in turn, pushes the price up their prices. Biofuels are also the subjects of large subsidies. (The possibility that these are politically motivated angers many people, but the FAO didn’t dwell on motivations).
• Changing structure of demand. This is an obtuse way of saying China, India and others are getting richer, and can afford more and better food. It manages to make the point without appearing to blame these countries for their success. When so many people begin spending more money on something, obviously the price will go up. The FAO points out that this doesn’t account for the “sudden spike that began in 2006”.
• Some other factors which, while having influence don’t appear to be as important (financial derivatives and US$ exchange rate among them).

So the debate will go on this week. We will likely see an urgent World Bank and UNFAO led food aid drive extending over the next year or two. From the FAO News Room

:

Noting that the time for talk was over and that action was urgently needed, FAO Director-General Jacques Diouf today appealed to world leaders for US$30 billion a year to re-launch agriculture and avert future threats of conflicts over food.

I hope Dr Diouf is successful. He’s going to need all the help he can get. —————- Update: Yesterday, Ross Garnaut gave a presentation at the ANU titled Measuring the Unmeasurable. Shiro’s post today:

Ross, in response to another question, observed that high food prices unambiguously reduce the welfare of the poor in developing countries.

This might seem to contradict the comment from this post: “higher prices aren’t unambiguously a bad thing.” My comment is meant in a theoretical sense. While I (regrettably) missed Ross’ presentation last night I suspect he was making an empirical comment; that given who the poor are, what they do for income, and what they spend their money on, high food prices have an unambiguously negative net impact on poor in developing countries. The two claims contain no contradiction.