Freer Trade Could Fill the World’s Rice Bowl

NYTimes.com
Freer Trade Could Fill the World’s Rice Bowl
Sunday April 27, 11:39 am ET
By TYLER COWEN


RISING food prices mean hunger for millions and also political unrest,
as has already been seen in Haiti, Egypt and Ivory Coast. 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.

So when the price goes up — indeed, many varieties of rice have
roughly doubled in price since 2007 — this highly segmented market
means that the trade in rice doesn’t flow to the places of highest
demand.

Poor rice yields are not the major problem. The United Nations Food
and Agriculture Organization estimates that global rice production
increased by 1 percent last year and says that it is expected to
increase 1.8 percent this year. That’s not impressive, but it
shouldn’t cause starvation.

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 in rice-producing countries like India,
Indonesia, Vietnam, China, Cambodia and Egypt.

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.

Export restrictions send a message to farmers that their crops are
least profitable precisely when they are most needed. There is little
incentive to plant, harvest or store enough rice — or any other crop,
for that matter — as a hedge against bad times.

This tendency to skew supply and demand is also apparent in the
Philippines, where the government is tracking down and arresting rice
hoarders, who, of course, are simply storing rice for the possibility
of even harder times to come.

In commodity markets, it’s not uncommon for high demand to cause sharp
increases in prices; on short notice, it’s often hard to match the new
demand with more supply. The question is whether supply, and trade,
can grow to offset market tightness.

Restrictions on the rice trade run the risk of making shortages and
high prices permanent. Export restrictions treat rice trade and
production as a zero- or negative-sum game where one country’s gain
comes at the expense of another. That’s hardly the best way to move
forward in a rapidly growing world economy.

This lack of support for trade reflects a broader and disturbing
trend. An increasing percentage of the world’s production, including
that for agriculture, comes from poor countries. Over all, that’s good
for rich countries, which can focus on creating other goods and
services, and for the poor countries, which are producing more wealth.
But it can slow the speed of adjustment to changing global conditions.

For example, if demand for rice rises, Vietnamese farmers — who remain
shackled by many longstanding regulations of communism — aren’t always
able to respond quickly. They don’t even have complete freedom to ship
and trade rice within their own country.

Poorer countries also tend to be the most protectionist. To make
matters worse, about half of the global rice trade is run by
politicized state trading boards.

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, including some in Africa, 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.

The ability of a country to grow rice depends not just on its weather,
but also on its institutions. Burma, now Myanmar, was once the world’s
leading rice exporter, but it is now an economic basket case and many
of its people go hungry.

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.

.

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