Shooting Ourselves in the Food

Images of people rioting in many countries to protest high prices are vivid reminders of the ongoing food crisis. Rising food prices are eroding the real income of people all over the world, undoing some of the last decade's progress in combating poverty. More than 100 million people in developing countries are now at risk of once again falling below the poverty line. Global grain prices have more than doubled since early 2006, with over half the jump in prices occurring this year. Record food and oil prices are coupled for the first time in 35 years, threatening to end the golden period of low inflation that has been enjoyed practically worldwide for the past several years. The specter of stagflation haunts us as the cost of food and oil continue to rise, and we have yet to glimpse any light at the end of the tunnel of the current financial mess.

Protectionists haven't missed the opportunity to blame free markets for the crisis. The absurd goal of "food sovereignty" has made a comeback in a number of countries both poor and rich and is being used as an argument to resist and cancel the liberalization of agricultural markets. This position – most clearly exemplified by France – is ironic because agricultural protectionism, not freer markets, is what has aggravated the problem.

Blame Policies, Not Markets

Increasing demand for grains in emerging countries such as China and India and two successive years of severe drought in Australia, an important contributor to world supply, could never in and of themselves have caused the huge price hikes we're experiencing. World demand for grain for food use increased only 1.3% annually between 2000 and 2007--only 0.3% annually, in fact, in all of East Asia, including China. Australia's droughts reduced global grain exports by 4% in 2006 and 2007. Consequently, one must look at other factors to understand the spike in food prices: high energy costs, increased fertilizer prices and the weakening of the U.S. dollar. But to get the complete picture, one cannot ignore the severe protectionist distortions, both new and old, that have crippled the much needed supply response in world food markets.

By reducing the incentive for domestic farmers to increase production, controls over grain exports in some developing countries have worsened shortages instead of alleviating them, thus contributing to higher world prices. This has been the case, for example, with the recent restrictions in rice exports by China, India and Vietnam and wheat exports by Argentina and Kazakhstan.

It is clear, however, that the most damaging distortions in agricultural markets originate in rich countries. There's little doubt that the present spiral in grain prices is closely linked to U.S. and EU policies enacted to boost production of biofuels. The American and European governments subsidize the production of biofuels, limit their import and mandate their use. The exact extent to which these policies have impacted food prices is still a matter of contention, but not even the most enthusiastic proponents of ethanol can deny that by inducing a greater allocation of agricultural resources toward biofuel production, the amount of grain available for food has been reduced. According to the World Bank, while global production of corn increased by 51 million tons from 2004 to 2007, biofuel use of corn in the U.S. alone increased by 50 million tons, thus leaving no margin to satisfy the increase of 33 million tons in global consumption for other uses during the same period. This explains why some respectable experts, such as the former chief economist for the U.S. Department of Agriculture and a top World Bank agricultural economist, have imputed a large proportion of the rise in food prices to the growing use of food crops for fuel.

Wrongheaded biofuel policies constitute only one aspect of the complex and expensive web of protectionist agricultural policies practiced by most developed countries that the WTO Doha Round was supposed to fix. The leading trading countries have repeatedly failed to commit to real reform, with short-term political convenience overriding their own national long-term interests. The latest example of this anomaly is the new Farm Bill approved by the U.S. Congress in May. Instead of reducing agricultural subsidies, this bill provides for bigger and more distorting ones. Even more than the 2002 Farm Bill, this one has eroded U.S. credibility and leadership at the WTO trade talks and given the other key players yet another excuse to evade their own responsibility to make the Round successful – responsibility that in the EU's case consists of accepting truly meaningful cuts in all the tariffs it applies to agricultural products.

Given the American and European resistance to serious agricultural reform and the developing countries' own counterproductive protectionism, it should come as no surprise if the latest attempt to conclude the Round this year delivers – if anything – a deal so full of loopholes that it ends up perpetuating the present inefficient and unfair system. It seems that the world's vast potential to produce food will continue to be held back by agricultural protectionism. In other words, countries will persist in causing harm to themselves.