Author: Jeffrey Frankel, Harvard
I recently listed some policies and institutions with which various small countries around the world have had success — innovations that might be worthy of emulation by others. Of course there are plenty of other examples of policies and institutions that have been tried and that are to be avoided. The area of agricultural policy is rife with them. Many start with a confused invoking of the need for ‘food security.’
The recent run-up in wheat prices is a good example. Robert Paarlberg wrote an excellent column in the Financial Times recently, titled ‘How grain markets sow the spikes they fear.’ Grain producing countries point to the high volatility of prices on world markets and the need for food security when imposing taxes on exports of their own grain supplies, or outright bans, as Russia did in July. The motive, of course, is to keep grain affordable for domestic consumers. But the effect of such export controls is precisely to cause the price rise that is feared, because it removes some net supply from the world market. The same could be said when grain importing countries react to high prices by enacting price controls, because that adds some net demand to the world market.
The current run-up in grain prices is reminiscent of the even higher spike in food prices in 2008. As Paarlberg argues, many of the other explanations that were put forward for that episode don’t fit this time. The importance of export controls is now clearer.
In 2008 Argentina imposed export tariffs to prevent its grain farmers from taking advantage of high world prices. This case seemed particularly irrational in that, unlike the usual case, the strongest political pressures came from the growers. At the same time, on the other side of the world, India put on export controls to prevent its rice farmers from selling their product on world markets to take advantage of high rice prices. Controls imposed by Argentina, India, and others were important contributing factors to the global spike in food prices.
Are governments indeed being completely irrational? The commodities we are talking about are staples in the consumption of ordinary households. For simplicity, let’s assume it is an absolute constraint that governments cannot allow grain prices to go above a certain threshold. Perhaps there will be riots in the streets otherwise. In this case might it make sense to put on export controls when the price threatens to go above that level? One can see the motivation in the short run. But, thinking in the long run, across complete cycles, controls are not a good answer.
One can imagine various sensible long-term policies that might assure that this constraint is not violated, such as stockpiling, although in practice many policies sold as ‘food security’ are not in fact applied in a sensible way.
One solution may be for major countries that are active in the market for wheat or rice to get together and agree not to impose controls. The result would be to stabilise prices: no more alternation of price spikes and price collapses. Each country could then rely more on the world market to cover shortfalls than it can now, when trade is made less dependable by the threat of controls by others.
The case of rice controls was nailed in a paper on food security written last year by two students in Harvard’s MPAID program (Masters in International Development), Naoko Koyama Blanc and Diva Singh. In their model, it can indeed under certain conditions be rational for India to follow the practice of imposing controls when the price goes up, under a regime where volatility is high because others impose controls.
But it would be more rational for India to negotiate a no-controls regime with other countries, because under that regime volatility would be lower, the controls would not be needed, and everyone would be better off.
Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at the Kennedy School of Government, Harvard University.
This article was first published here at Jeffrey Frankel’s Weblog.