[1631] Of a silver lining behind the food crisis

The Doha Round is a trade negotiation on a global scale which seeks to lower trade barriers with the ultimate goal of promoting free trade among members of the World Trade Organization. The birth of the Round was difficult and development surrounding the Round is riddled with seemingly insurmountable challenges. In Cancun, Mexico for instance, a trade talk famously collapsed only after 4 days of negotiation.^[1] There are several major hurdles all WTO members have to overcome but with the current buzzword being the “food crisis”,^[2] farm subsidies enjoyed by farmers in the US and EU are of special interest and it has been associated with developmental issues in Africa.

The agricultural subsidy distorts the market by bringing the cost of production artificially down, artificially increases supply from the developed world and artificially drives prices down.^[3] Some quantity of the artificially low-priced food is then exported to impoverished countries where it will compete with locally grown food which is more expensive than imported food.^[4] Along with cheap food being flooded in the local market by aid groups which further depresses local food prices,^[5] it simply does not make sense for farmers in the countries to be involved in food production. African farmers are unable to utilize their possible comparative advantage under free market while farmers in the developed world are investing in sectors which they do not have comparative advantage. Thus, African countries have little incentive to build their capacity in sectors which they are best positioned to take thrive under free market.

A solution to this problem is the removal of farm subsidies in the developed world. The removal will see the agriculture industry in the developed world to decline in importance. The vacuum will then be taken over by farmers in poorer countries with comparative advantage in agriculture. These poor countries could build up its food production capacity while creating the much needed employment opportunities for the local. Through this, poor African countries have a chance of pulling themselves up rather than relying on aids that bring limited opportunity for economic growth.

The issue with this solution is that while on a very big picture narrative, it allows greater efficiency in resources utilization, the move will increase food prices paid by Africans, possibly beyond the means of the poor despite giving local producers the signal they need to seriously invest in food production industry. With the agricultural subsidy in the developed world gone, prices will immediately go up to free market prices of food produced in the developed world. Quantity of food produced will also drop until replacement farms are up and running. And even if changes occur immediately — where the agriculture industry in the developed world would die off immediately and instantaneously replaced by new farms in Africa — cost of food produced could possibly still be higher than the ones subsidized though it would still be cheaper than food originating from unsubsidized farms in the developed world, with everything else constant.

Yet, the pain suffered is only short term in nature; capability building will slowly bare fruits that will fuel the economy, setting the stage for a brighter future.

Price is an important signal in decision-making processes. Higher crude oil prices have encouraged energy companies to conduct explorations for the black gold in remote places all over the world. Similar to the trend seen in the oil and gas sector, higher biofuel prices have encouraged expansion of palm oil plantation in Indonesia and sugar cane in Brazil. The same trend is applicable to the food sector.

Food prices have been steadily increasing for the past couple of years due to several factors. The increase has proven to be sufficiently high that the IMF has cautioned the world community that we are facing a food crisis. Riots related to food availability have occurred at a number of places across the world. It is clear that food supply needs to increase or else, Malthus would have a day in the sun.

It is unclear how much food would be produced however if the relevant farms migrated from the developed world to African countries as well as to countries with agriculture as their comparative advantage. Four factors are crucial in answering that question on quantity: labor, land, capital and technology. A free market world is the one with free flow of capital and labor but that is an idealistic world. Our world, for now, is characterized with capital flowing more freely than labor though labor, especially in the more globalized part of the world, is increasingly becoming more mobile. The developed world has plenty of capital and high technology related to farming but they lack the labor and in many places, land. The third world such as African countries has plenty of labor and land but most definitely lacking the capital and the know-how. Given difference in endowment, which should go where?

I am in the opinion that the more mobile factors should move and that means relocation of farms from the developed world to the third world. Labor and land do not go around easily but the contrary is true for capital and technology. With all four factors concentrating at a focus point, it is possible for food production to increase on the net with full utilization of comparative advantage.

As a recap, higher priced food should attract more players into the agriculture industry, including in Africa. If there is enough pressure on market prices to increase higher than production cost, poor farmers suffering from developed countries’ agricultural subsidy policy should be able to begin to build their capacity in food production. Now, these local farmers could compete with foreign subsidized competitors.

If that is so, perhaps the removal of food subsidy might not be so central in the issue of African development anymore. This however does not justify agricultural subsidy policy in the developed countries. What this means instead is that the farmers in Africa may bow have an avenue to pull themselves out of poverty in spite of market distorting subsidy enjoyed by farmers in the developed world. A respect for comparative advantage and the market meanwhile should increase food production until a point where all four factors meet the ultimate point of diminishing returns to scale.

^[1] — See Doha Development Round at Wikipedia.

^[2] — WASHINGTON (AFP) — Rising food prices and their threat to political stability and development gains captured the attention of world economic leaders meeting here, with a call to arms launched by the World Bank. [Food crisis moves up global agenda at IMF, WBank meets. AFP via Google News. April 14 2008]

^[3] — See Agricultural subsidy at Wikipedia.

^[4] — Further complicating aid programs is a debate at the World Trade Organization over concerns that the United States has used food aid to dump surplus commodities in foreign countries where the supply has undercut local farmers’ earnings. [U.S. Cutting Food Aid Aimed at Self-Sufficiency. New York Times. December 22 2004]

^[5] — The delivery of food aid to developing countries seems like an uncontroversial policy — a straightforward effort that helps the poor and underscores the generosity of donor nations. Yet, economists have long debated the merits of food aid. By increasing the local supply of food, such aid may depress prices and thus undercut the income of rural farmers in the recipient nations, for example; it also may discourage local production. And, since the poor often are concentrated in rural areas, food aid in fact may disproportionately hurt the poor. [Does International Food Aid Harm the Poor?. Carlos Lozada. National Bureau of Economic Research. Extracted April 26 2008]