With the price of grain increasing by 154 percent between 2006 and 2008, food prices have become a pressing issue in the developing world. Despite the global recession, prices rose again in 2009, and the UN Food and Agriculture Organization predicts that prices will remain well above the long-term average throughout the decade. The increases in food prices exposed serious deficiencies in the world food market; exporters have abandoned trade and importers are desperately searching for alternatives. Food insecurity in the developing world induces inefficient responses by both exporters and importers, causing enormous human suffering due to price spikes and food shortages in importing countries.
Importing countries in the developing world and the U.S. should enhance the food security of the developing world by creating an open and predictable market. Such efforts should advance on two fronts. First, the developed world should recognize its distortionary role in world food markets and eliminate biofuel and agricultural subsidies. Second, the U.S. should work through international institutions and with exporting countries to mitigate the price increases in ways that do not hamper trade.
The dysfunctional food market has caused extreme food shortages and political conflict. When food prices spike, the poor and those who feed them cannot afford as much food. The UN’s World Food Program and the U.S. Agency for International Development have announced cutbacks in food aid in response to rising prices, while undernourishment has increased globally by roughly 20 percent since 2006. Rising food prices have also caused political instability in the developing world. In 2009 riots against food and fuel prices left nearly 40 dead in Cameroon, and food-related instability led to the Haiti’s prime minister and Madagascar’s president.
The food market faces two obstacles: long-term structural distortions stemming from Western policy, and short-term instability caused by exporting nations. A properly functioning global food market could allow direct investment in the most productive land and let net-importing countries focus on their comparative advantages. While the rise in food prices is partly due to growth in demand from developing nations, the recent drastic price increases owe much to misguided policies.
The West’s agricultural policies play a large part in the troubles of the global food market. The primary culprits are agricultural subsidies and biofuel subsidies. While subsidies are supposed to increase output and decrease global food prices, they divert private investment toward Western agriculture and away from underdeveloped countries, where the potential gains in productivity are greater. This counterproductive diversion of resources distorts investment patterns and reduces spare production capacity when prices are high. Biofuel subsidies encourage farmers to shift production away from food and toward ethanol, decreasing the supply of food and driving up prices. The U.S., by far the world’s largest producer and exporter of corn, may soon use half of its crop for ethanol.
These subsidies are also wasteful for Western countries. Subsidies are a blatantly inefficient case of special interest favoritism; the government will spend over $21 billion next year on “farm income stabilization.” Biofuel subsidies and regulations have become a boondoggle—estimated to cost the U.S. between $5 billion and $9 billion—that fails to reduce CO2 emissions.
The heart of the problem is the enormous political importance of food prices in developing countries. In countries where food makes up a large part of household expenditures, price increases can be devastating for voters and treacherous for governments. While facing political pressure to reduce food prices, several major food producers, including Argentina, Thailand, Kazakhstan, and Vietnam, restricted exports to ensure adequate domestic supplies. These restrictions further increased the price of food traded on the international market, causing additional pain to importing nations.
The trade restrictions have important disadvantages. First, they reduce income to farmers while their products’ prices are high, thus stifling investment and production when greater supply is most needed. Second and more damaging is that importing nations begin to fear that the market will no longer suffice to meet their needs. They rush toward panicked and inefficient responses, particularly those that increase production on their own land. Saudi Arabia, an extreme example, spent billions to achieve self-sufficiency in wheat production by turning desert into farmland; the drain on the country’s aquifers and its pocketbook forced Saudi Arabia to abandon the experiments.
Both of these trends steer investment toward unproductive land in importing countries and away from fertile land in exporting countries. Saudi Arabia, with enormous oil reserves and virtually no water, could export oil and import food rather than try to grow wheat in the desert. Its newest strategy for food security, along with countries such as China, the United Arab Emirates, and South Korea, has been to buy huge tracts of land in Africa, Asia, and Eastern Europe to assure long-term food security in fertile lands. While this may be an efficient investment in certain cases, the opacity and size of the deals has led to complaints of neocolonialism and corruption. Furthermore, this trend demonstrates the strategic disadvantages of global food insecurity for the United States.
The developed world must take the first steps to bolster the global food market, by eliminating agricultural and biofuel subsidies to enhance the food security of developing countries. More importantly, the United States must prevent nervous exporters from diverting food supplies inward. The first step is to alter the terms of the World Trade Organization compact to explicitly declare export bans (or extremely high export taxes) to be contrary to the principles of free trade and subject to penalty. While many exporting countries would oppose such a move, they might make this concession if the U.S. eliminates its agricultural subsidies—a long-sought goal that would make their own exports more competitive in return. Removing the subsidies could advance trade talks, since these subsidies were largely responsible for the breakdown in 2008 of the World Trade Organization’s Doha Development Round of negotiations to lower trade barriers.
It will be difficult to design international rules sufficiently compelling to overcome the political pressures attendant with rising food prices. Equally important will be policy advice to developing exporter nations to mitigate the effects of price increases as an alternative to market manipulation. As food prices rise, exporting nations gain income overall. The downside for such countries lies in the transfer of income from consumers to farmers. Governments, during times of high-prices, should assess farmers a lump-sum tax and distribute the revenue to the poor. Carefully calibrated redistributive measures could keep countries satisfied. A push for global regulation and policy changes would give less developed countries and their citizens the stability they need for security and economic growth and development.
