"The Perils of Efficiency"

James Surowiecki:

The Perils of Efficiency, by James Surowiecki: This spring, disaster loomed in the global food market. Precipitous increases in the prices of staples like rice ... and maize provoked food riots, toppled governments, and threatened the lives of tens of millions. But ... food prices, while still high, have come well off the astronomical levels they hit in April. ... But the recent price drop doesn’t provide any long-term respite from the threat of food shortages... Nor has it reassured anyone about the health of the global agricultural system, which the crisis revealed as dangerously unstable. ...

It wasn’t supposed to be this way. Over the past two decades, countries ... have moved away from their focus on “food security” and handed market forces a greater role in shaping agricultural policy. Before the nineteen-eighties, developing countries had so-called “agricultural marketing boards,” which would buy commodities from farmers at fixed prices (prices high enough to keep farmers farming), and then store them in strategic reserves that could be used in the event of bad harvests or soaring import prices. But in the eighties and nineties, often as part of structural-adjustment programs imposed by the I.M.F. or the World Bank, many marketing boards were eliminated or cut back, and grain reserves, deemed inefficient and unnecessary, were sold off. In the same way, structural-adjustment programs often did away with government investment in and subsidies to agriculture...

The logic behind these reforms was simple: the market would allocate resources more efficiently than government, leading to greater productivity. ... It was also assumed that, once governments stepped out of the way, private investment would flood into agriculture, boosting performance. ...

This “marketization” of agriculture has not, to be sure, been fully carried through. Subsidies are still endemic in rich countries and poor, while developing countries often place tariffs on imported food... And in extreme circumstances countries restrict exports, hoarding food for their own citizens. Nonetheless, we clearly have a leaner, more market-friendly agricultural system than before. ... Governments ... spending on agriculture has been cut sharply.

The problem is that, while this system is undeniably more efficient, it’s also much more fragile. Bad weather in just a few countries can wreak havoc across the entire system. When prices spike as they did this spring..., the result is food shortages and malnutrition in poorer countries, since they are far more dependent on imports... And, while higher prices and market reforms were supposed to bring a boom in agricultural productivity, global crop yields actually rose less between 1990 and 2007 than they did in the previous twenty years, in part because in many developing countries private-sector agricultural investment never materialized, while the cutbacks in government spending left them with feeble infrastructures. ...

The old emphasis on food security was undoubtedly costly, and often wasteful. But the redundancies it created also had tremendous value when things went wrong. And one sure thing about a system as complex as agriculture is that things will go wrong... If the just-in-time system for producing cars runs into a hitch and the supply of cars shrinks for a while, people can easily adapt. When the same happens with food, people go hungry or even starve. That doesn’t mean that we need to embrace price controls or collective farms, and there are sensible market reforms, like doing away with import tariffs, that would make developing-country consumers better off. But... Instead of a more efficient system, we should be trying to build a more reliable one.

Essentially, as in financial markets, we need to do a better job than we have in the past of measuring and insuring against infrequent, large shocks that hit all markets simultaneously. When production is widespread and shocks are small and idiosyncratic, then there is insurance in large, integrated markets since the idiosyncratic risk can be averaged out. But when production is concentrated, or when there are large shocks that hit many producers simultaneously, then the shocks no longer cancel each other out and the system becomes vulnerable to shortages (and excesses) if there is insufficient storage, or the inability to quickly redistribute existing supplies to where they are needed most. It is this latter type of risk that we need to handle better.