How bad government caused the food crisis

Julian Morris

31 May 2008

Julian Morris argues that recent shortages and price rises of staple food in Asia and Latin America have been caused as much by parasitical politicians as by poor harvests

Most of the world’s oil is owned and extracted by governments, not by private individuals or companies. So investments in the development of that oil do not follow normal market rules. In Iran, home to the world’s second largest oil reserves, inefficient production technologies mean that oil output, rather than rising in response to increasing demand, has been falling by about 10 per cent a year. Venezuela, Mexico and Russia face similar problems. Even Saudi Arabia is producing at well below its potential. The result: further price rises.

High oil prices have incentivised the production of substitutes — especially biofuel. On its own, this market response would not have had a significant impact on the production of food crops. But governments, responding to lobbying by vested interests and environmental groups, are now subsidising biofuel production — both directly and by mandating the use of ethanol in fuel.

The rising price of oil has also increased costs of agricultural production. Add in drought and diseases and you have a perfect storm in which food production has fallen temporarily even as demand has risen — driving up prices dramatically. Many basic commodities have doubled in price in the past year. Many millions of people are struggling to feed themselves and their families — especially those in urban slums.

Some governments have responded by imposing price controls and export restrictions, including bans. These policies may temporarily reduce the prices that local consumers pay for food, but they also reduce the profits from food production, incentivise farmers to switch to more lucrative products and drive up food prices globally. Export bans also directly raise the price importers pay for food. If continued, these policies could make next season’s food crisis even worse.

Others argue for subsidising inputs such as seed and fertiliser. For three years, Malawi has been experimenting with subsidies, part funded by the UK Department for International Development. But such policies have been widely employed in the past half-century, so we know what happens. In the short term, output increases — as it has in Malawi. But by distorting prices, the incentives to use the most cost-effective inputs are reduced, so efficiency suffers. In the long term, output suffers too because subsidies tend to go to vested interests, so farmers fail to adopt newer, better technologies. Crop yields in India, which continues to subsidise inputs, remain 30 to 50 per cent below those in the USA.

Instead of banning exports or providing subsidies, governments should be removing barriers to production and distribution, and letting the market respond effectively to changes in supply and demand. That is the best way to ensure that people are able to feed themselves, now and in the future.