Export Restrictions and the Food Crisis

Rising food prices, particularly prices for grains like rice, wheat, and corn, gave way to a global crisis over the past year. For many Americans, the crisis amounts to paying extra for a side of rice with their chicken masala. For the world's poorest citizens, however, the sharp increase in prices seriously hampers health and well-being.

As Paul Krugman outlined in April, the factors behind rising grain prices include growing demand for meat (the production of which requires grain-based animal feed), growing demand for oil (a key input in the production and transportation of grains), some bad luck with weather, and massive public subsidies for biofuels such as the U.S. government's support for corn-based ethanol.

The crisis posed unusual challenges for middle-income countries, like India, that are also major grain exporters. In such countries, higher prices jeopardize the food security of low-income families even as they substantially boost the incomes of farmers. Faced with this predicament, India, Argentina, Russia, Vietnam, and many other countries chose to curb rising prices at the expense of farmers' incomes, imposing export restrictions on key crops such as soybeans, wheat, and rice.

As expected, the export restrictions reduced the incomes of farmers in the restricting countries. Without access to global markets and foreign buyers, domestic farmers ended up receiving lower prices and selling less than they would have in the absence of the restrictions. The restrictions did provide some relief to domestic consumers who ended up paying less and buying more than they would have in the absence of restrictions.

To see why, consider a graph showing the domestic supply (Sd) and demand (Dd) curves for a wheat exporter. Before the restriction, domestic consumers buy 2 million bushels of wheat per month at the going world price (Pw) of $7 per bushel, but domestic farmers sell 8 million bushels of wheat per month. The difference between domestic consumption and production represents exports to the rest of the world (6 million bushels per month). If the government restricts exports to 2 million bushels per month, the domestic price of wheat falls to $5 per bushel (Pr). After the restriction, domestic farmers sell fewer bushels (6 instead of 8 million) at lower prices and domestic consumers buy more bushels (4 instead of 2 million) at lower prices. Domestic farmers lose and domestic consumers gain.

The export restrictions may have kept food prices down in domestic markets of major grain exporters, but from a global perspective, the restrictions undoubtedly prolonged the food crisis. As major grain exporters restricted the amount of grain leaving their borders, the global supply of grains declined, leading to higher grain prices and reduced availability in the rest of the world.

Discussion Questions

1. Recently, several major food exporters have decided to scale back their export restrictions. How will these decisions impact food consumers and farmers in the countries that are removing the restrictions? How will these decisions impact global food prices and availability?

2. Clearly, biofuel subsidies played a role in destabilizing global food markets. Even with biofuels subsidies, though, we might expect higher food prices to give farmers an incentive to bring more land into production or use existing land more efficiently. How do food export restrictions dampen those incentives?

3. How can countries ensure food security for people who are vulnerable to rising food prices without contributing to the food crisis at the global level?

Sacking Mugabe

The path to growth remains elusive for many of the world's economies. Prescribing effective growth policies is exceedingly difficult. The unique features in each of the world's economies defy formulaic approaches to growth—it's not necessarily clear that Japan's path will work for Cambodia. Economic history offers a bit more clarity when it comes to what won't work. Of the more recent episodes of economic collapse, Zimbabwe's is perhaps the starkest. The Mugabe regime's mismanagement of the Zimbabwean economy reads like a step-by-step guide to economic ruin.

In 2000, Zimbabwe's autocratic ruler, Robert Mugabe, implemented a clumsy and often violent land redistribution program. Mugabe forcefully seized white-owned farmland and gave it to black farmers unfamiliar with commercial farming practices. The absence of any cooperative knowledge transfer between white and black farmers led to a precipitous fall in agricultural output. The failure of the agricultural sector caused a severe contraction in overall economic output, creating massive unemployment. The collapsing economy sapped Mugabe's regime of the tax revenues necessary to pay soldiers and finance government outlays. An autocrat's reign is only as secure as his army is brutal—hungry, underpaid soldiers aren't much for intimidating political opponents or scaring the populace into submission. To maintain his government's outlays, Mugabe turned to borrowing. Of course, the loans would eventually need to be repaid. Lacking the tax base to repay the loans, the government resorted to the capstone of many economic disasters: printing money.

The results were predictable: hyperinflation reached roughly 4 million percent per year as of June 2008. At these levels of inflation, even the most mundane daily transactions involve considerable uncertainty and frustration. Mugabe's response to the hyperinflation that he himself initiated could not have been worse. The government imposed price ceilings, threatening to jail shop owners if they charged more than the official price. The price ceilings led to massive shortages of necessities like bread and milk. Many firms shut down production, escalating an already high unemployment rate.

You don't have to be an economist to recognize the first step to improving Zimbabwe’s economy: get rid of Mugabe. But removing Mugabe from power is easier said than done. Opposition presidential candidate Morgan Tsvangirai gave it an impressive go during this year's elections, but widespread violence against opposition supporters caused Tsvangirai to withdraw from the presidential run-off. At this point, Mugabe remains president.

Discussion Questions

1. Mugabe is 84 years old—why doesn't he just step down? Charlayne Hunter-Gault's article in The Root suggests that Mugabe has strong incentives to maintain his grip on power given the fate of other overthrown tyrants. Hunter-Gault raises an interesting dilemma for freedom-lovers all over the world: we want to get rid of brutal dictators, but the dictators may do everything they can to retain power precisely because they fear what we'll do to them once they're out of office. Should we offer Mugabe amnesty just to get him to step down?

2. In a recent Wall Street Journal editorial, former World Bank president and U.S. Deputy Secretary of Defense Paul Wolfowitz suggests a way to pressure Mugabe out of office. Wolfowitz calls on the international community to very publicly declare promises of aid and debt relief for Zimbabwe under the condition that Mugabe is removed from office. Do you think this strategy would succeed?

3. Mugabe's land redistribution program was catastrophic for Zimbabwe's economy, but as this NPR story points out, several neighboring countries attempted to benefit from the displacement of white farmers in Zimbabwe. How could the Zimbabwean government have balanced the goals of efficiency of the farming sector and equity for the black population that suffered a history of oppression by a ruling white minority?

China’s One-Child Rule, Post-Earthquake

Right on the heels of Cyclone Nargis in Myanmar came news of another equally shocking and destructive natural disaster in China. The very first reports of the devastating earthquake centered on the destruction of schools and the resulting loss of many young lives. The quake left many families without children—particularly because China enacted a policy in 1979 that restricts families to having just one child in an attempt to help ease the pressures of a fast-growing population. The Chinese government is now ensuring that families who had a child killed or disabled by the earthquake understand that they are allowed to have one more child, as reported here.

Why was China’s birthrate so high before this policy was implemented? Japan has no one-child policy, yet its birthrate is relatively low. What is the difference between these two countries in this regard?

In a developing country (as China arguably still is to an extent), markets for retirement savings and pension funds are often absent. To compensate for this, parents must count on their children for support later in life. And a couple must decide how many children they need to have in order to be reasonably certain they will be supported. This is determined in part by the couple’s attitude towards risk, and when it comes to security in old age, it is reasonable to assume that most people will be quite risk averse. To assess the risk of ending up alone and destitute in their old age, they need to estimate the probability, given current economic and social factors, that any single child will provide old-age support. Assuming the child lives into adulthood, he or she must earn enough income to be able to provide support, as well as being willing to do so. Furthermore, if only men have the earning potential needed to provide financial assistance, the necessary number of children will double. Facing these risks, couples in developing economies often choose to have larger families than needed for the sake of old-age security, leading to relatively high birthrates. China’s one-child policy was meant to curb this trend.

Discussion Questions

1. The opportunity cost of raising children is another factor that influences birthrates. Women in China (particularly rural China) face fewer employment opportunities, and at lower wages, than women in Japan. How does this help to explain the disparity in desired number of children between the two countries?

2. Will a grown child be able to support two elderly parents any better than a single parent could provide for him- or herself and two young children? How might this problem be magnified further with multiple generations of only children?

3. Has China’s one-child policy been a success? Why or why not? What unintended consequences might result from this policy?

Resource Management, Post-Apocalypse Style

So suppose—and I’m not trying to get you down here—that an asteroid were to hit the earth, wiping out 90% of known species. (Or, if you prefer, that a combination of deforestation and our fascination with only growing a few key crops achieves the same outcome.) How could we regain our current biodiversity?

In case these kinds of things keep you up at night, you can rest easier thanks to the Svalbard Global Seed Vault that opened yesterday in Arctic Norway. There’s a great blog post about it on the New York Times website. The vault is a step up from existing seed banks, which are threatened by political instability or a lack of funding.

The post points out, though, that a group called grain.org has criticized the seed vault. Read their criticism here.

Discussion Questions

1. The post asks, “How much of this intergovernmental work help[s] sustain farming diversity, as opposed to museum-style genetic diversity?” Another way of asking this is as follows: producing food requires land, labor, and capital. The seeds themselves are just part of the equation. What happens if farmers, after hundreds of years of not farming these crops, lose the skills associated with their use? What can be done to preserve knowledge of how to maintain a species that is no longer actively farmed?

2. The seed vault acts as a centralized mechanism, much like a kidney donor list, that describes who is entitled to the seeds in the vault and under what circumstances. How does that mechanism compare to a market mechanism? Is it true, as grain.org argues, that the wrong stakeholders are given priority in this system? What rights do (and should) farmers have, as opposed to governments?

Remittances and Global Poverty

As a recent Marketplace story points out, the largest source of aid for poor people in developing countries is family members working abroad. According to a report by the UN's International Fund for Agricultural Development, approximately 150 million migrants worldwide remitted roughly $301 billion to relatives in less developed countries during 2006. Unlike traditional aid, which typically filters through government and other institutions before reaching the poor, remittances go directly to families in developing countries. While traditional aid may end up financing bureaucracy rather than poverty alleviation, the impact of remittances is concentrated and immediate.

Increasing international labor mobility, legal or otherwise, fuels the increase in global remittances. As remittances rise, their economic importance in recipient countries rises as well. In smaller Asian economies such as the Philippines, Nepal, and Tajikistan, remittances represent between 20% and 70% of income per person. The cost of sending money home varies from region to region. In Latin America, the business of money transfer is highly developed and competition between financial institutions keeps the cost of sending remittances relatively low—about $10 to send $200 to the region. By contrast, the cost of sending remittances to Africa is much higher because of restrictions on the types of institutions that can handle money transfers. As a result, African families receive a smaller percentage of the before-transfer-fee remittance.

Discussion Questions

1. How do immigration policies in developed economies like the United States affect the size of global remittances? How will the transactions costs associated with remittances differ between legal and illegal immigrants?

2. How might global aid organizations help to reduce the transactions costs of remittances? What can governments in less developed countries do to encourage the flow of remittances?

3. Poor people in less-developed countries often have very limited credit access. How might remittances change credit conditions for poor families? How might remittances impact other important development indicators such as food security, school enrollment rates among children, or health outcomes like life expectancy and infant mortality rates?

4. How would foreign aid be different if developed countries simply gave cash vouchers to individual poor families, mimicking the flow of remittances?

U.S. Food Aid Practices: Help or Hindrance?

A recent article in the New York Times and a subsequent editorial suggest that U.S. food aid policies are good for American farmers and charitable nongovernmental organizations, but bad for the people in low-income countries the charitable groups aim to assist. How can this be the case?

For simplicity, let's assume that U.S. agricultural price subsidies take the form of price supports. The U.S. government effectively sets a price floor for certain agricultural commodities, such as crude soybean oil. At the guaranteed price, U.S. agribusinesses produce more soybean oil than consumers wish to purchase. The U.S. government purchases the excess supply and donates it to charitable organizations operating in low-income countries like Kenya. The charitable organizations then sell the surplus crude soybean oil in Kenyan markets in order to finance anti-poverty programs aimed at Kenyans.

The charitable organizations represent additional sellers in the Kenyan market for soybean oil. The supply of soybean oil in the Kenyan market rises, leading to a reduction in soybean oil prices. The lower price of soybean oil can impact local farmers in a couple of different ways. If a local farmer produces soybeans, the decrease in price obviously reduces her profit margin and directly lowers her income. However, the impact need not be so direct. A local farmer producing a substitute for soybean oil, such as sunflower seed oil, will see the demand for his product decline as well due to the decrease in soybean oil prices.

The result is the same—lower income for Kenyan farmers producing products that somehow compete with the subsidized commodities that the charitable groups sell to raise funds. Keep in mind that the percentage of the Kenyan population employed in agriculture is much higher than in the United States.

Discussion Questions

1. At worst, food aid programs like those described in the article lead to higher food product prices in the U.S. and lower incomes for people employed in the agricultural sectors of low-income countries. Considering how the costs and benefits of the programs accrue to different parties, why do you think such programs have met with little to no political resistance in the U.S.?

2. In what way does the current system of financing aid undermine the efforts of charitable organizations that teach farmers in low-income countries to use more productive agricultural methods?

3. CARE's decision to quit the business of selling surplus U.S. commodities to raise funds is a source of controversy among charitable operators in less-developed countries. Charities that continue to endorse the practice argue that they bring food price stability to low-income countries without compromising the ability of local farmers to earn income. Even if we assume this argument is correct, what can you say about the efficiency of the current system compared to a system where the U.S. government forgoes farm subsidies and passes the cash savings directly on to the charitable organizations that currently sell subsidized U.S. farm products abroad?

4. CARE has decided to stop accepting donations of food from the U.S. government altogether. But what if they just stopped selling it, and instead gave the food away for free? What would the effects of that policy be?

Will Microcredit Reduce Poverty?

Most people in developed countries can easily use their assets to secure credit. With a stable source of income or a bit of collateral, like a house or a car, an American can take out a loan to start a business, remodel the bathroom, or buy an engagement ring.

Access to credit in relatively poor developing countries is far scarcer.

Poor peoples' incomes are inherently less stable and often too low to qualify for lending. The ill-defined property rights in many developing nations make it difficult for poor residents to prove that they own the housing or land that they occupy. Lacking both income and legitimate titles to what little collateral they actually have, the credit prospects for most of the world's poor seem bleak.

Enter microcreditors. As Tyler Cowen describes in his latest Economics Scene column for The New York Times, microcreditors are non-profit, for-profit, or government organizations that lend small sums to people in poor communities. The microloan recipients open businesses, improve their homes, or pay medical bills--using the loans to invest or consume as they see fit. Read Cowen's commentary to find out more about the benefits and controversies surrounding microcredit in India.

1. According to Cowen, microlenders like Spandana offer poor Indians better rates than traditional money lenders. How do the lending practices of microcredit organizations differ from the practices of traditional money lenders? How does Spandana use community pressure to maintain high repayment rates among its loan recipients? What other incentives encourage borrowers to repay the microloans?

2. Why do some state officials in India oppose the practices of microcreditors like Spandana? According to Cowen, what would legal caps on interest rates do to the solvency of microcreditors? How might legal caps on interest rates change the borrowing habits of India's poor?

3. Cowen visited Hyderabad--a metropolis of over 6 million residents. He suggests that microlending works fairly well for poor people in this urban setting. How might the feasibility of microcredit change in a rural setting? Rural residents in developing countries earn income from farming--a relatively risky vocation because of price volatility and unpredictable weather. Would repayment rates among rural residents likely be higher or lower than those among urban residents? How would traveling to rural settings affect the way microcreditors monitor repayment?