Greed and dogma fertilize food crisis
By Sameer Dossani
For those following economic trends, the past 18 months are notable primarily
for two reasons. First, the US housing market, long seen as overvalued finally
went from boom to bust. Over the span of a few months, housing in some markets
depreciated by as much as 30%, and some economists estimate that losses may
ultimately reduce value by as much as 50% in some cities.
Second, the market for commodities, especially food and oil has been growing at
an alarming rate. While the per-barrel price of crude oil has been rising since
about 2005, the upsurge in food prices has been even more rapid. Rice, the
world's largest staple crop, has more than doubled in value since January of
this year
alone, with wheat prices not far behind.
Economists are citing many reasons for the upsurge in grain prices, including
increased demand in developing countries, especially India and China, as well
as poor harvest due to adverse weather conditions in some places.
While changing consumption and production patterns due to things like global
warming and wasteful consumption patterns (particularly in the developed world)
may be a worry, in most of the world grain stores are still more than
sufficient to handle these fluctuations. With the exception of East Africa,
where there are genuine shortages and a genuine danger of famine, the rise in
global food prices can't be explained solely in terms of supply and demand.
Economists also agree that speculation is playing a role in pushing up global
food prices. They argue that many investors are engaging in hoarding or other
kinds of speculation, anticipating that they will receive bigger returns on
their investments in the future than what they could make now. According to
this mainstream argument, speculation is a secondary or less important reason
for the price boom, with supply and demand factors and rising fuel costs being
the primary factors.
While the story of rising food costs is no doubt complex, the sudden rise of
commodities prices and the simultaneous collapse in many financial markets is
unlikely to be a coincidence.
Markets in crisis
While many economists maintain that speculation can be a way to increase demand
to keep markets flexible, the global economy depends on speculation to a
dangerous extent. In the past two decades, we have seen two examples of that
dependence on speculation crashing around us, first with the dot-com bubble of
the 1990s and more recently with the housing bubble.
In each of these cases, speculation bred more speculation as investors sought
to cash in on seemingly endless growth until the bubble burst and they dumped
their holdings. In the case of the housing bubble, deregulation meant that
mortgages could be broken up, sold and resold to small and large companies,
making it difficult for investors to track sound from unsound loans.
In this case, some of the worst disasters could have been averted or at least
detected earlier if analysts had been interested in asking the right questions.
Those who did ask those questions, including many progressive economists, were
ignored. As Chuck Prince, head of Citigroup at the time, famously stated, "When
the music stops, in terms of liquidity, things will be complicated. But as long
as the music is playing, you've got to get up and dance."
That's a deeply troubling attitude. The willingness of investors and companies
to go along with speculative bubbles and the prevalence of a huge amount of
speculative capital in the global economy generally may have grave
implications. These conditions suggest that the bubbles may not be the disease
in themselves, but the symptoms of something much deeper. The market may be so
based on speculation, and speculative investors have such a tendency to herd
together, that we are in a chronic bubble economy. The economic bubble of the
day may change - "emerging markets" bonds one day, tech stocks the next, and
home mortgages the day after that - but the presence of a bubble may be
ubiquitous.
Using this hypothesis, the food crisis becomes a little easier to understand.
Commodities, including food, are seen as relatively safe investments. One can
imagine situations where most of the world's population stop buying houses or
computers, but it's hard to stop buying food. The World Bank and the
International Monetary Fund (IMF)have pushed for the deregulation of trade in
agriculture, and therefore it is much easier today for the private sector to
invest in a global food market. Once big investors and analysts begin to act as
though food commodities are a safe bet, the herd mentality kicks in, more and
more investors join the fray and eventually you have an over-inflated food
market in the same way as you had an over-inflated mortgage market.
The real and imagined food crises
So to what extent can we blame the current state of affairs on a severe and
collective bubble of the financial markets? While speculation has almost
certainly been underplayed by mainstream analysts, it's far from the whole
story.
The so-called demand-side arguments for increases in food prices - that
consumption, especially consumption of meat and dairy has gone up in China and
India - ignore a crucial point. While it's true that changes, sometimes
significant changes, have occurred in the diets of the middle class of both of
those countries, the middle class in each constitutes a small minority. Other
segments of the population, especially in India, often consume less than they
have historically and suffer from chronic malnutrition. According to the Indian
economist Jayati Ghosh, both China's and India's per capita grain consumption
have been more or less constant for the past 20 years. With this in mind, it
seems unlikely that the dramatic rise in prices has anything to do with
increased demand.
There are other factors not directly related to speculation that have no doubt
played a role. For developing countries, these factors include International
Monetary Fund policy "advice" to reduce or eliminate grain reserves, the
elimination of tariffs on food coming from Europe and the United States and the
removal of subsidies for fertilizer and other agricultural inputs, and at the
behest of the IMF and World Bank.
Since about 1980, international financial institutions have attempted to
eliminate the mechanisms whereby governments can control food supplies. In
their absence, national and international private companies have stepped in and
have been dictating food policy in the interests of their profit margins. In
times of stress, the mechanisms whereby governments could protect their
citizens from the impacts of fluctuating prices often no longer exist.
While this analysis is absolutely correct and the international financial
institutions do deserve their share of the blame for the current crisis in that
they have limited the possibility of remedial measures, the analysis does not
satisfactorily account for the sharp increase in food prices in such a short
time. The liberalization measures of the IMF and World Bank have been applied
since about 1980, and for much of this period the only visible effect has been
a decrease in global commodity prices, including food prices.
Other real factors, especially the rise in oil prices and related rises in
transportation and fertilizer costs, have certainly played a role in the spike
in food prices. But these increases to the cost of some inputs cannot account
for the whole picture.
Beyond the bubble
Though speculation may be the main driving factor behind the current surge in
prices, all was not well prior to the current crisis. Since about 1960, global
food production has been transformed from a primarily local activity, albeit
with the import and export of luxury foods, to a primarily global business.
International trade rules reward those who produce their goods for export over
those who produce for local consumption. Though farmers in British Colombia and
California both grow tomatoes in the summer, it is more profitable for them to
ship those tomatoes over the border than to sell them domestically. Aside from
the obvious ludicrousness of the situation, the increased transportation costs
of shipping goods by truck across vast distances adds even more expense.
In Asia, Latin America, North America and some parts of Europe, small farmers
are becoming increasingly rare. The industrialization of agriculture through
monocropping and over-reliance on chemical fertilizer and pesticides has
effectively created economies of scale such that it is almost impossible for
small farmers to succeed. Genetic modification of seeds adds yet another layer
to that industrialization, ensuring that large agribusiness companies including
Monsanto, Archer Daniels Midland, and Cargill continue to post record profits.
A solution that some countries have already begun implementing is to
de-liberalize their agricultural sectors. So far this has mostly been done in a
knee-jerk and unplanned way, which is understandable given the circumstances.
So India has banned the export of certain crops, while eliminating some export
tariffs; China has introduced some price controls and increased its tariffs on
some grains to discourage exports. More than 25 countries and the European
Union, which has temporarily suspended import duties, have taken similar
measures.
These measures are necessary, but they are not solutions. They may lessen the
impact of soaring food prices, but they will do nothing to reverse the trend.
Real solutions will involve the remaking and "de-globalizing" of the global
agriculture market. Some steps may include the following:
Food sovereignty is food security. Countries that are serious about food
security should take measures to increase their production for domestic
purposes. In cases where it is not feasible or desirable to be 100%
self-sufficient in staple crops, trading deals should be negotiated within the
region. If more trade were regional, it would not only cut down on
transportation costs, it would help promote regional growth and development.
Undo trade agreements. Food sovereignty will not be possible unless all
talk about agriculture agreements at the World Trade Organization or through
bi-lateral trade agreements is suspended. Such trade deals are designed in the
context of a global agricultural market, where one country should fine tune its
agricultural sector based on comparative advantage and market need. Such a
strategy makes no sense when people in countries all over the world are
demanding better and cheaper access to staple foods.
Increase taxes on speculation. In order to promote domestic production,
subsidies and other government-sponsored programs are a must. But many
governments are already having difficulty raising money for basic
infrastructure and other essential services. There's no easy answer here, but
one possibility may be to find ways to impose taxes on speculation. If this
were to be done along the "Tobin tax" model (named after the 1981 Nobel
laureate James Tobin and originally related to currency transactions) - with a
small tax on every transaction made and administered globally - this could
generate a lot of money and could be administered by the UN Food and
Agriculture Organization. Alternatively countries could tax their own futures
and other commodity markets where they exist.
In the final analysis, the food crisis is actually a convergence of two crises.
The first is the crisis of speculation, characterized by a chronic bubble
economy. Increased regulation and taxation of speculation of all kinds is the
only long-term solution to this crisis.
The second is a crisis that has been a long time coming, the crisis of global
agriculture, which has been in many ways been a planned and calculated crisis.
When agricultural policy is not made by citizens and their elected
representatives but rather by international financial institutions and their
market fundamentalist policies and by big agribusiness whose primary concern is
their own bottom line, it is a recipe for disaster.
Sameer Dossani is the director of 50 Years is Enough and blogs at
shirinandsameer.blogspot.com. This commentary is adapted from an article to be
published in Spanish by "Am้rica Latina en Movimiento," a monthly
magazine edited by the Latin American Information Agency (ALAI).
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