Chris Blattman

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Duflo on the food price crisis

MIT development economist Esther Duflo explains the need for food price variability insurance in the VOX blog.

Esther makes a number of worthwhile points. I think this is the most interesting factoid in the comment:

Because the main consumers of rice are also producers, the volume of rice traded is low compared to the volume of rice produced (only seven percent of produced rice is traded).

Restrictions by big producers (such as India) can thus have large impacts on the world price of rice, since they affect a large proportion of the volume of rice traded. It keeps the prices in India relatively insulated from what is happening on the world market, however.

The basic thrust of her argument in the short term fluctuations are bad for net consumers, but in the medium term price fluctuations are bad for the poor in general. She highlights the major options open to governments:

Beyond emergency relief, which the world community is scrambling to organise at the moment, it is essential to establish effective insurance against variability in food prices for the poorest.

Many argue now that the way to do it is to stop trade and encourage countries be “self sufficient” in food. This seems of course a third best solution, since the countries would then be entirely dependent on the vagaries of the weather at home. It is also not clear what countries that are net food importers would do (in the long run, the argument goes, they will improve their productivity… however, given Senegal’s climate, producing rice there will always be much more expansive than doing it in Thailand).

The traditional method used by developing country governments – maintaining large stockpiles of grain by buying when the price is low and selling when the price is high – has its share of problems. In India, it was said that at some point that there were enough bags of rice in those storage facilities to go to the moon and back. The losses in storage and to corruption were important.

Alternatively, the governments can manipulate prices using taxes and subsidies. Or perhaps it is time to be creative and make the international financial services actually work for the poor: governments could provide price insurance for the poor (in the form of transfers to some when price are high, and others when price are low). Countries that are neither net sellers nor net buyers could do this internally, and countries that are either net sellers or net buyers should be able to sell this insurance on the world market.

There is nothing straightforward about these solutions. The key point, however, is that it is urgent to think of something.

3 Responses

  1. I have been spending a lot of time over the last few weeks thinking about this food crisis. My first thought seems to have been the first thought of Peter Timmer of CGD and Thomas Friedman of NYT: the increase in meat consumption around the world. I am of course biased, I do a lot of work on the environmental impact of meat and a long time ago was trying to argue there’s also an important economic impact, since 1 pound of beef takes 7 pounds of inputs (mostly cereals) to produce.

    The more I look into this though, the more I am convinced that this is not the problem today. I can in fact find no connection between beef consumption and cereals in the data. This is mostly explained by the fact that production of meat has been growing relatively slowly, and so the market has been able to adjust with some foresight. Yes, it takes more to make meat, but producers have also been making more.

    There has been some comment on decreasing cereal stocks, but if you look at the trends, there’s nothing to them that suggests producers haven’t still been making optimal choices for production.

    So I think the key to the problem is not increasing consumption, but unforeseen shocks. These shocks have been exacerbated by bad policies, and it is the bad policies have hurt the people, not higher consumption.

    So, other than as a vague suggestion of how increased consumption has hurt the world, does anyone have any concrete data or facts to support it?

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