Food Prices: Good Intentions, Bad Outcomes

We welcome 2015 confronting an all-too-familiar reality: there are still people in the world without access to sufficient and nutritional food. One in eight people go hungry every day, according to the United Nations, including an estimated one in six children under the age of five who is underweight.

The situation is especially dire for those living in extreme poverty, whose inadequate access to technology, land, water, and other agricultural inputs routinely imperils their ability to produce or secure food for themselves and their families, especially as world food prices have risen in recent years.

On a scale of one to something-must-be-done-now, tackling this problem and ensuring food security remains among the most pressing development issues of our time. The good news is the first Millennium Development Goal (MDG) to eradicate world hunger is achievable and the target to halve it by the end of this year is close to being met. But governments have too often failed to meet their obligation to nurture an enabling environment for food security, and in some cases have actually made it worse.

Trade policy can be a proactive rather than a reactive tool in helping to ensure greater food security. Although world food prices have risen in real terms in recent years after three decades of decline, there is no global shortage of food. The problem is one of moving food, often across borders, from areas with a production surplus to those with a deficit, at prices that low-income consumers in developing countries can afford.

That is, in today’s world, the mechanisms that threaten global food security often persist in the form of barriers prohibiting the efficient movement of food not the existence of the food itself highlighting the pivotal role played by political factors and institutions in distributing food. In fact, the notion that food may be available even in instances of perceived food shortage or high prices, but the poor simply have no access to it, has been around for decades.

Many countries restrict imports of food or discourage exports for one simple purpose: to keep domestic markets isolated from international price changes. Exporting countries can use export restrictions to lower their domestic prices relative to world prices, while importing countries may raise import or consumption taxes on food to protect their domestic farmers from foreign competition.

The tripling of world rice prices in 2007/08 provides a good example. Alarm over the drastic price increase provoked unilateral bans on rice exports, panic buying and hoarding in many Southeast Asian countries.

But these policy actions had little or no basis in the actual state of regional rice supply and demand the region’s output of milled rice at the time was the highest it had been in the 21st century and nearly six percent above its 2006/07 total. But the governments were basing their actions on a set of long-standing and seemingly rational calculations that using trade measures would not only be effective in stabilising prices, but less costly than using storage policies alone.

In a theoretical sense, they were right. Export controls or import barrier reductions can be shown to be an effective way for an individual country to stabilise prices.

But the problem is of collective action if countries act simultaneously. Even countries not keen on instituting such trade measures often find themselves compelled to do so in response to the actions of other countries. In attempting to insulate their markets against world price increases in this way, countries wielding restrictive trade measures shoot themselves in the foot. Both export restrictions in exporting countries and import tariff reductions in importing countries push up world prices. So with every country simultaneously seeking to reduce its price by the same amount, world price increases become exacerbated by the stabilisation policies themselves.

Conversely, more open trade and increased integration could be an excellent buffer for domestic fluctuations in food supply, thus stabilising food prices, boosting returns to farmers, and reducing the prices faced by consumers. This is because worldwide output of a given food commodity varies much less than does output on a country-by-country basis -with fewer barriers at the global level, more food could be imported in times of shortage and exported in times of plenty.

As the Doha Round of World Trade Organisation (WTO) negotiations continue, taking concrete actions to promote food security could play a key role. The WTO’s Agreement on Agriculture seeks a more level playing field in terms of food accessibility and availability by both ensuring that governments retain policy choices to support their agricultural sectors while also limiting the scope for countries to implement destabilizing policies abroad. It is important to continue to apply these existing WTO disciplines, but more needs to be done, particularly by reducing the scope for trade-distorting support, increasing market access, and strengthening disciplines in areas such as export competition.

Above all, governments must become more adept at understanding the international repercussions of their agricultural policy actions, something deeper trade integration can only encourage.

Despite the wave of trade and market liberalisation that has swept world trade since the 1980s, food commodity markets often remain highly distorted as a result of the misuse of certain trade policies. As the new book shows, this can cause many governments to often inadvertently aggravate agricultural price woes. Fortunately, the effect of price changes on food insecurity in developing countries can be mitigated through appropriate, better informed, and more outward-oriented integration policies.

By Amir Fouad

Amir Fouad, a research analyst for trade and competitiveness at the World Bank and Ian Gillson, a senior trade economist at the Bank.