Ripple Effects in the Food Trade
Joshua Foust on Apr 17 2008 at 4:52 pm | Filed under: Developmental economics, Economics, Foreign affairs, regulation
Posted first at Registan.net
When last I touched on the global food crisis and how it is impacting Afghanistan and the rest of Central Asia, I noted that countries continuing to ban wheat exports would make the problem worse by restricting the global market, driving up prices even more, and limiting national coping mechanisms. One of the countries producing a glut of wheat this year was Kazakhstan, whose farmers were enjoying rather handsome profits from the wheat trade. Until now.
Kazakhstan joined other Black Sea grain exporters in curbing shipments on Tuesday, suspending wheat exports until Sept. 1 to combat double-digit inflation in Central Asia’s largest economy.
Analysts said they expected the ban, which excludes flour and will take effect 10 days from now, to cause a short-term spike in world wheat prices as supplies from Russia and Ukraine are already constrained by export limits or tariffs.
This is not insignificant. While Kazakhstan couldn’t lower world prices too much with Australia in a serious rut, an export ban not only fuels price hikes (which are affected by perception as much as supply), but is seriously bad news for poor people trying to feed their families everywhere. As friend-of-Registan.net neweurasia.net notes:
The other four Central Asian countries all import Kazakh grain, and the poor in all countries have been hit severely by recent price surges… Much of the region’s southern arable land is primarily used for growing cotton and cannot easily be converted into growing food crops.
Let’s hope that global food price inflation will come down during this year so that the Kazakh export ban really only has to last until September.
Yes, let us hope. Ben linked to some other interesting local anecdotes about how grain prices are adversely affecting quality of life in most of Central Asia, and they’re worth a read.
Kazakhstan’s behavior is confusing: though it is a much better reaction than a price freeze, an export restriction is of dubious benefit for combating inflation. Inflation is caused when money and credit increase out of proportion with an economy’s ability to produce goods and services. An export ban effectively limits the amount of goods Kazakhstan can produce by harming exporters—the Reuters report speculated it could potentially cause $800 million in losses.
There are better ways than export restrictions. If memory serves, other countries that have faced high or even runaway inflation rates, like Brazil in the early 90s, have successfully curbed inflation through trade liberalization, not restriction. In Russia, Vladimir Putin has expressed an explicit desire to curb his country’s rising inflation rate through membership in the World Trade Organization and lower import tariffs. Last year, India addressed the problem through deliberate and rapid appreciation of its currency. According to Indian economic analyst Ajay Shah, this sudden change was a shock response to a long period of export restrictions making inflation worse (it’s a bit more involved, and I suggest reading the article in full, but you get the idea).
So in the bigger picture, Kazakhstan’s decision to ban wheat export as an inflation combat measure is non-sensical. The Central Bank raised the interest rate by two points to , then earlier this month decided to keep them there. This has been ineffective in arresting inflationary pressures because raising interest rates is only one method of handling inflation, and its effectiveness tapers off if the government spends excessively. The Kazakh banking system has gained a bit of notoriety for its massive liquidity problems, which have prompted a government intervention to help repay foreign loans. This indicates the driver behind inflation is sloppy policy, not excessive cash or credit—which would imply that the high interest rate is actually hurting the overall economy, and not helping cub inflation. High interest rates curb economic growth— and growth combats inflation. Moreover, India’s many bad experiences with controlling food exports indicates that banning the export of high-profit food staples will only drive interest rates higher. The problem is in fiscal policy, in other words, and not food.
I’m not versed in economics well enough to speculate much further. But given how much Kazakhstan’s neighbors west and south of her depend on her wheat, this could have enormous consequences. While the government is not banning the export of flour, and thus might become a kick in the pants to the milling companies, this doesn’t address the base problem. Banning wheat is clearly not a measure to reduce inflation—everywhere else, including just to the north in Russia, export restrictions have a proven track record of failure when it comes to dealing with inflation.
Unless the Kazakh government is terribly naïve, which is, unfortunately a possibility, this smacks of adopting a shallow knee-jerk reaction to both inflation and food prices. Which is fine, but they shouldn’t pretend they’re trying to combat inflation either… and they should recognize the serious consequences this will have over the next six months.
* Note: This is a complex issue, and I am not at all certain I have it down right. This is what I think. I’m more than willing to admit I got something wrong. So let’s have a discussion!
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The View From the Bluff: Lance’s Economic and Finance Blog
I think you have it right. Inflation in general is a monetary phenomena. Too much money chasing too few goods. Thus restricting growth does not in and of itself slow inflation. Declining growth can reduce inflation, but that is because the velocity of money can fall, basically because lending is reduced. Obviously this is a poor trade. Lower growth to combat inflation. Rapid growth not fueled by increasing the money supply, either through reserve creation or by increasing leverage, does reduce inflation. Same amount of money chasing more goods means lower prices.
Of course a particular area suffering from inflation, such as food, can increase due to lack of supply. As you point out, decreasing trade does not help that at all. It just reduces the total supply of goods, and thus can fuel inflation generally.
Here in the US we are seeing how a slowing economy is increasing inflationary pressures, even as we face the possibility of deflation. Slowing growth combined with a falling dollar is pressuring food and import prices. Meanwhile, deflation is hitting asset prices such as housing. All things being equal, if asset prices fall consumer goods prices should rise. The kicker is that the debt crisis may end up crushing credit creation, leading to a decline in the velocity of money severe enough to cause outright deflation down the road. Scylla and charibdas.