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Politics, Astrophysics, Missing

News & Issues > How to Solve the Global Food Crisis
 

How to Solve the Global Food Crisis



How to solve the global food crisis




Kaushik Basu

By Kaushik Basu
Professor of economics, Cornell University



A Pakistani woman prepares an evening meal
Even small price rises can hit the poor hard

The world economy has many problems but none more pressing than what is happening to food prices.
There have been food riots in Haiti, the Philippines, Ethiopia, Indonesia and several other nations.
Twenty thousand desperate textile workers in Bangladesh went on
a rampage, giving rise to fears of wider instability, since the garment
industry accounts for three-fourths of the country's exports.
Global food prices have been rising over the last three years; but in the last few months they have spiralled out of control.
Over the last 12 months the average price of food has risen by
56%, with wheat rising by 92% and rice, the staple of half the world,
by 96%.
This has given rise to the spectre of famine; and the crisis is being made worse through misdiagnosis.
Some commentators have remarked how this is all a matter of
supply and demand and if governments do not interfere in trade, the
price rise will bring a supply response, which will cause prices to
level out.













If the state can bail out Bear Stearns, it surely can help poor consumers stave off famine










Sure, demand and supply play a role, but there is much more to the
current crisis. Understanding this is not easy since we have not seen a
food-price surge like this in 30 years.
There is no doubt that demand for food is rising as the
world's population increases and there is new prosperity in India and
China. Moreover, as people switch to greater meat consumption this
causes greater demand for grain, since rearing cattle and poultry is a
particularly grain-intensive activity.

There is also the increase in the production of biofuels in
industrialized nations. This has caused over 20% of corn and rapeseed
production in developed countries to be diverted away from food.

Small triggers
But all these changes have occurred over a long time and cannot explain the price spiral of the last few months.








Egyptian police in Cairo
Egyptian police prepare for trouble at a protest against food inflation





A more proximate cause is the severe drought in Australia and
shortfall in the production of staples in Ukraine and Kazakhstan. These
are, however, not big enough to explain the large inflation.
To understand the latter we have to analyse how these small
triggers have caused speculative moves and given rise to a complex brew
of corrective measures.
India, Argentina and other food-exporting nations have, in
response to global inflation and in order to protect their own
consumers, imposed restrictions on exports.
This is an understandable move, but it exacerbates inflation in food-importing countries.
Moreover, the policy of holding prices down for the benefit of
consumers can dampen farmer incentives. In Pakistan this year farmers
have used about 600,000 tonnes of fertiliser, which is a drop of about
50% from earlier levels. This is bound to mean less on wheat
production.
Massive aid
In thinking about global policy, we have to distinguish between the short and the long run.








Bangladeshis gather for subsidised rice
Bangladeshis gather for subsidised rice





In the immediate scenario there is no escape from massive
government and international agency intervention in the form of aid
from rich nations and subsidies to at-risk consumers.
If the state can bail out Bear Stearns, it surely can help poor consumers stave off famine.
Many economists will tell you that the ideal intervention to
help the poor is to simply give them money (a negative income tax) -
that shores up their income - rather than directly controlling prices.
In general, this is correct advice; but not in this case.
Suppose we collect $1000 from the rich and hand this out to
the poor. Since the rich spend a tiny fraction of their money on food
and the poor a large fraction, this transfer will cause food prices to
rise.
In general, this would not matter since the price was being
driven up by the greater purchasing power of the poor. But in the
present precarious situation, the risk is that if the negative income
tax does not reach all the poor, then the ones who are left out will
see their position deteriorating as prices rise further.

No escape
In the Bangladesh famine of 1974, it was the government's
success in protecting the urban poor from food shortages that
exacerbated the problems of the rural population.
Therefore, in a crisis like the present one, there is no
escape from holding consumer prices down. Ideally, we should drive a
wedge between the price that producers get and the price that consumers
pay.
None of this can be a long-run policy, since it will cause
food production to decline and governments to go bankrupt. Long-run
policy has to be more market-oriented, creating incentives for
producers to increase output and boosting the incomes of the poor.
Relative price fluctuations are an unavoidable part of an
efficient economy. This becomes worrying when some people are so poor
that a small rise in price becomes a life and death question for them.
This crisis therefore should also be a reminder that the level of inequality that prevails in the world today is untenable.

posted on Apr 29, 2008 7:42 AM ()

Comments:

Sorry about the formatting. I attempted to clean it up a bit and remove the excessive breaks between images, etc., that the advanced editors is in love with but I, obviously, removed some other code that has made it look the way it looks now!

Hey, at least it's readable!
comment by whereabouts on Apr 29, 2008 7:48 AM ()

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