Silent Tsunami
Peg on Apr 23 2008 at 9:56 am | Filed under: Developmental economics, Economics, Peg's Page
As an update to this previous post, be sure to read this from The Economist.
Governments ought to liberalise markets, not intervene in them further. Food is riddled with state intervention at every turn, from subsidies to millers for cheap bread to bribes for farmers to leave land fallow. The upshot of such quotas, subsidies and controls is to dump all the imbalances that in another business might be smoothed out through small adjustments onto the one unregulated part of the food chain: the international market.
For decades, this produced low world prices and disincentives to poor farmers. Now, the opposite is happening. As a result of yet another government distortion—this time subsidies to biofuels in the rich world—prices have gone through the roof. Governments have further exaggerated the problem by imposing export quotas and trade restrictions, raising prices again. In the past, the main argument for liberalising farming was that it would raise food prices and boost returns to farmers. Now that prices have massively overshot, the argument stands for the opposite reason: liberalisation would reduce prices, while leaving farmers with a decent living.
There is an occasional exception to the rule that governments should keep out of agriculture. They can provide basic technology: executing capital-intensive irrigation projects too large for poor individual farmers to undertake, or paying for basic science that helps produce higher-yielding seeds. But be careful. Too often—as in Europe, where superstitious distrust of genetic modification is slowing take-up of the technology—governments hinder rather than help such advances. Since the way to feed the world is not to bring more land under cultivation, but to increase yields, science is crucial.
The record of governments trying to manage markets is woefully poor. Free markets assuredly are not free from their own anomalies and swings; witness our current real estate difficulties. Nevertheless, even with all their flaws, free markets are superior to the alternatives.
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This is a bit too dogmatic for the real world. Subsidies are only one of many contributing factors to the food crisis (the Economist ignores the role of massive crop failures in major exporting countries such as Australia, as well as the extreme cost of fuel for shipping). Similarly, one could look at a Keynesian-style regulated market as the reason we’re all so fat and wealthy compared to our Great-Grandparents.
Regulation is not pure evil to growth and innovation, just a limiting factor. To a point. Many dogmatic free marketeers with a Bachelor’s understanding of economics like to debate the merits of a perfectly deregulated environment without realizing that one already exists in Somalia. The result is not pretty.
Some regulation, in other words, actually does yield tremendously positive results. Over-regulation, on the other hand, is absolute poison (which I think is what they’re getting at). Our own experience with relative deregulation under Reagan and relative overregulation under Nixon/Carter is ample proof of this delicate balance.
As far as this relates to the food crisis, I’ve looked a bit at the role over-protectionism has played in deepening the crisis in Central Asia. This is generally of a piece to that, but The Economist, as usual, lacks critical nuance in its analysis.
One problem in discussing this issue with other people, is a mistaken understanding of what is meant by a “free market.” Personally, I’ve always taken this to mean a market where supply and demand is not managed by a central authority. That doesn’t mean there isn’t any regulation of the products produced, or how a product is produced.
Subsidies and ethanol mandates must end.
Kieth, I very much agree — the terms used are usually fuzzy enough to promote misunderstanding, rather than clarity. And I agree fully: subsidies must end if we’re to address the food crisis in a reasonable manner.
Well, good news today, is that India is having a bumper crop of wheat.
It’s kind of interesting following these stories, since where we live now is surrounded by farms. They’ve just started plowing and fertilizing. Not sure what crops are going to be planted, but everything’s been dusty and smelly for the last week.
A much better short term transportation energy solution is a switch-over to diesel and diesel hybrids. I expect a big boon in diesel sales once manufacturers complete the change-over to the new diesel emission regs. And then we’ve got interesting vehicles coming down the pike like this one.