Prices have increased steadily in the last three years, but matters really came to a crunch this year. Since January, the price of rice has gone up by 141 percent, while the price of wheat has almost doubled in one year. In a world in which the poor spend three-quarters of their budget on food, that means potentially a life-or-death situation for the 1 billion human beings who live on the equivalent of $1 dollar a day.
When the price of something shoots up, one can infer that the supply is not keeping up with the demand. In the wake of todays food shock, many people have focused on the causes of the rise in the demand for food. All of themfrom the growing wealth of China and India to the explosion of grain-derived biofuels in rich nationssound very plausible. Less attention has been paid to why, in the era of globalization, in which products can move quickly from manufacture to market, and with the advances in biotechnology, the supply of food is not meeting the demand.
Many governments, multilateral bodies, nongovernmental organizations and pundits are failing to answer that basic question. Instead, they postulate solutions that would either compound the problem or constitute at best a short-term palliative. The real solution will be the removal of the causes of the shortfall. Those causes have little to do with economics or demographics, and everything to do with the politics of governments and those who use governments to serve their intereststo the detriment of the general public.
Few areas of the economy are more strewn with protectionist laws than agriculturein rich and poor countries alike. A panoply of quotas, subsidies, tariffs and prohibitions designed to win votes and, essentially, bribes has discouraged the much-needed increase in food production. In normal free-market circumstances, the slightest signal that prices were going up would have been enough to ensure that masses of capital were invested in farming for food. In the current mess, it is not surprising that investors are not pouring money into food production: Farmers in Europe are paid to keep their land fallow because of a scheme called the Common Agricultural Policy; farmers in Argentina are being asked to give up 75 percent of their earnings through various taxes; farmers in the United States are more interested in feeding SUVs than in feeding people because the U.S. Congress has mandated a fivefold increase in the use of biofuels; and farmers in Africa are not experimenting with genetically modified crops because they are banned in many of the countries to which they might be able to export them.
British economist and African expert Paul Collier wrote recently that the most realistic way is to replicate the Brazilian model of large, technologically sophisticated agrocompanies that supply the world market.... To contain the rise in food prices we need more globalization, not less.
I would add that small farmers in developing countries would also team up and create economies of scale if they were not hampered by domestic laws designed to protect consumers and by international commercial laws designed to protect producersor if peasants in, say, China were allowed to fully own their land.
According to The Economist magazine, of the 58 countries whose reaction to the crisis has been researched by the World Bank, 48 have imposed price controls, consumer subsidies and export restrictions. A problem that was originated by protectionism has elicited a protectionist response from most countries. A century and a half after Cobden and Bright defeated protectionism in Britain, their ideas are more powerfully relevant than ever.