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Sunday, April 27, 2008

"Freer Trade Could Fill the World’s Rice Bowl"

Tyler Cowen says if Milton Friedman had the authority to set trade policy, we wouldn't have to worry so much about food crises:

Freer Trade Could Fill the World’s Rice Bowl, by Tyler Cowen, Economic View, NY Times: Rising food prices mean hunger for millions and also political unrest... Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment hasn’t been easier. A big problem is that the world doesn’t have enough trade in foodstuffs.

The damage that trade restrictions cause is probably most evident in the case of rice. Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity. ...

The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports...

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive. ... Restrictions on the rice trade run the risk of making shortages and high prices permanent. ...

The reality is that many of today’s commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We’re accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in the modern age. In other words, the world’s commodities table is very far from flat.

Many poor countries ... could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice. ...

Of course, wealthy countries are partly at fault, too. Japan, South Korea and Taiwan all protect their native rice farmers; you’ll even see rice being grown in Spain and Italy, aided by European Union subsidies and protectionism. The United States spends billions subsidizing domestic rice farmers.

In the short run, these domestic rice producers mean less demand pressure on the world market, which might seem like a good thing. But, again, the longer-term effects are pernicious.

Low-cost rice production in countries like Thailand isn’t geared to meeting higher foreign demand, as it would be in a freer market. When more rice is needed, capacity is limited and the grains are slow in coming. And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries.

Lately, it’s become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman belong more to the past than to the future. The sadder truth is that when it comes to food production — arguably the most important of all human activities — Mr. Friedman’s free-trade ideas still haven’t seen the light of day.

Update: Dani Rodrik comments, "The "free trade reduces prices" fallacy yet again."

 

    Posted by on Sunday, April 27, 2008 at 01:17 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (97)

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