Fried Rice

by on April 28, 2008 at 6:13 am in Economics | Permalink

Dani Rodrik offers some criticisms of my piece on free trade in rice:

Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices.  He is probably right about the first, but not about the second.

Angus offers some good responses plus see the comments section on my blog and his.  I'm with the guy who wrote: "I read the piece, Cowen never commits the fallacy."  Adam Smith weighs in too.

I'll put the rest under the fold...

The main point of my piece is that inter- and intra-national
restrictions on trade in rice are bad, not that free trade reduces
the price of rice for everyone.  Consider a simple analogy: if the quality of
Interstate 95 declined, the price of barbecue in North Carolina might
fall, namely because people like me wouldn’t drive to go eat there.  Yet few
people would argue that a nation can do better feeding itself by
lowering the quality of its roads or for that matter littering its
harbor with dangerous rocks or for that matter imposing export restrictions.  It doesn’t knock down the trade argument, as an empirical claim, to cite the existence of pecuniary externalities.

Maybe Rodrik has in mind the commonly-heard argument that eliminating the agricultural subsidies of rich countries would produce vast benefits for poor countries.  I’ve criticized that claim myself; my column is careful to argue that the poor countries are the worst protectionists, often internally as well as externally.

Here is a related part of Rodrik’s critique:

Freer trade would reduce prices of food (relative to other prices) only
in countries that are food importers.  Food exporters would experience
a rise in the relative price of food, and there is simply no way of
escaping that reality.

The great strength of Rodrik’s work is how much he stresses the
context-dependent nature of economic arguments and how "one size fits
all" is often an oversimplification.  So beware when anyone writes "there is simply no way of
escaping that reality."  Increasing returns are one way of escaping that reality.  Would the price of cars be lower in Japan today, if the Japanese had placed heavy export restrictions on Toyota autos?  Probably not.  (Constant returns, by the way, are another means of escaping from that reality.)  Now rice production may or may not be subject to increasing returns, but surely rice trade is a positive-sum game and also has broadly pro-egalitarian effects.

Trade really is an issue where a) economists have something to say and b) human lives are on the line.  If Rodrik wishes to argue, "Indonesia should ban the export of rice," then by all means he should just come right out and say so.  Let’s have that debate.  But if not, I wonder if he could see his way toward using his considerable influence and writing eight simple words:

"The world should have free trade in rice."

1 tsonevski April 28, 2008 at 8:28 am

A brilliant analysis of free trade and its positive effects.

2 mobile April 28, 2008 at 9:09 am

I’m confused. Which one of you is supposed to be the fundamentalist?

3 alisa April 28, 2008 at 9:33 am

Does anyone have information on how to quantify how much of the increased price of rice is due to trade restrictions? Other factors increase the price of crops: poor harvests due to recent floods, decreased supply as farmers switch to ethanol-producing corn, increased demand for meat and grain as the developing world gets richer. There are so many potential causes behind the food crisis that we actually need to compare their relative impacts. Honestly: has anyone seen figures?

I do know protectionism has terrible costs. I don’t know how much things could get better even if we had freer trade.

4 Melvin April 28, 2008 at 11:01 am

So what you´re saying is that the price of rice will rise as the demand for rice rises, but more problems will arise if the rise of rice prices moves countries to raise rice export taxes?

5 ideogenetic April 28, 2008 at 1:48 pm

“Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin ”

[Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk. …`It’s the best of times for somebody speculating on grain prices, but it’s not the best of times for farmers,” said Niemeyer, 59. “The demand for futures exceeds the demand for cash grains.”…“We have a fundamental problem with the markets,” said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Montana, and a former Montana State University economist. “It is very difficult to operate a grain business when the cash prices are below the futures” by such a wide margin, he said.]
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDZej7GJjpjM&refer=home

Oh when will the world learn that market fundamentalism is not the answer?

6 Grant April 28, 2008 at 3:25 pm

Bill, I don’t think you need a banker of last resort, because rice isn’t credit. If the reserve stock is low, you may get a “run” until a market-clearing price is reached. The difference between banks, the ’70s gas lines and rice is that the later’s price can adjust, while the cost to withdraw funds from a bank is always zero, and the ’70s were a time of price controls on gasoline.

If an institution could be created that was less prone to panic, certainly it would be able to operate at a profit trading in rice futures? I don’t see where the ire against speculators comes from? All prediction of the future is speculation. Numerous studies have shown how futures markets produce better estimates of the future than other forms of speculation, especially democratic forms.

7 Barkley Rosser April 28, 2008 at 3:57 pm

Dani,

Just what is it that “we know reasonably well” that would indicate that a freer market in rice would raise its real price? Did you not agree in your own posting that freer trade would increase global supplies? How does this lead to a higher real price?

Also, is it not the case that the countries that are experiencing the dangers of outright famine are the poorest of the importing countries, which are severely hurt by these export limits being put on by Argentina, Ukraine, and so on? Are any of those exporting countries in danger of experiencing famine, with the possible exception of certain sections of India?

8 Grant April 28, 2008 at 5:25 pm

Bill, I understand that supply is inelastic in the short-term, but thats true for nearly anything. I’m not following on why markets wouldn’t clear in the short-term, though? Supply adjusts slowly, but prices adjust quickly as speculation shifts demand.

9 cs April 28, 2008 at 5:54 pm

“Trade really is an issue where a) economists have something to say and b) human lives are on the line.”

Tyler, it is precisely because this is absolutely true that economists have an obligation to carefully and thoroughly research a topic like the rice trade.

Your NYT article states: “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. …
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. …
And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries.”

Did you look at the data at the FAO website on rice production and trade, before you drew your conclusions? The US grew 10.5 million tons of rice in 2004. The US exported $1,168 million of rice. Using a price of $350 per ton, we find that 3.3 million tons were exported. In other words more than 30% of the US rice harvest was exported in 2004. Since the EU is another major exporter of rice (over 10% of world rice exports), I suspect that you will find similar data for the EU.

This “And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries” is factually incorrect. Read the newspaper: “According to Oxfam, American rice, which cost on average $415 (£220) a tonne to produce, is being sold in countries, such as Haiti, Ghana and Honduras at just $274 a tonne.”

The simple truth that economists who actually care about human lives should be screaming from the rooftops is that the US and the EU have dumping agricultural goods on developing markets for more than a quarter of a century. After the success of their predatory pricing policies have driven huge numbers of developing world farmers out of business, they have created a situation where the US and EU account for 50% of all agricultural trade and close to 25% of all rice exports (look at the FAO data), despite the fact that rice is tropical grain. Now when the US sneezes biofuels, the developing world starves.

This crisis was made in the US and the EU and your article reads as an apology for the gross market distortions created by the developed world. If you care about human lives, then you need to start researching the facts and telling truth to power.

10 cs April 28, 2008 at 7:36 pm

“It doesn’t seem like there is any way to compensate all the people who could be hurt in the short run by an increase in rice prices”

Oh, please, if the US and various European governments wanted to, they could write big checks to organizations like Oxfam that would be only to happy to pass the money on to developing world consumers. As long as the transfers were in cash and prices stayed high, local production in many African countries would undoubtedly grow by leaps and bounds.

11 dsquared April 29, 2008 at 6:16 am

[Just what is it that “we know reasonably well” that would indicate that a freer market in rice would raise its real price? Did you not agree in your own posting that freer trade would increase global supplies? How does this lead to a higher real price?]

Barkley, the World Bank estimates that Dani references are the best empirical work we have on this (rather important) question and they look pretty sound.

The global supply of rice is limited in the short term to the crop. Over the course of more than one growing season (a period of time during which it’s entirely possible to starve to death), freer trade in rice would tend to increase the supply. However, it is entirely possible for the following three states of affairs to hold simultaneously:

1) A larger global rice crop
2) A lower global price of rice in PPP terms.
3) In rice-producing countries, a higher relative cost of rice in terms of average wages.

(3) is clearly the problem, because it will lead to states of affairs where workers can’t afford to buy enough rice to eat. Which is what we call a “food crisis”, which was the whole motivating point.

Dani’s point is very clear here and quite obviously correct. An increase in the supply of rice doesn’t guarantee an increase in the ability of poor people to buy it. If rice is more expensive on the world market than it is in India, then if India opens up trade in rice, then the price of rice in India is going to go up. If Indonesia bans trade in rice, then the local price of rice is lower than it would be if Indonesian rice-growers were able to sell to Japanese rice-eaters instead of local peasants.

We might all, as Dani says, “want there to be free trade in rice”, but you pick your year for this sort of liberalisation, and you don’t pick a year in which the “adjustment issues” could involve hundreds of thousands of deaths from starvation.

12 cs April 29, 2008 at 12:21 pm

I just saw your link to Bellemare’s research summary and thought it wise to add the following to the discussion. I can’t speak for Latin America or even Kenya, but I know something about West Africa. In some West African countries (that have not experienced warfare), the trading infrastructure has been collapsing for years.

Why would you consider “poorly conceived irrigation systems, terrible or even nonexistent roads” to be “problems” that will not be easily addressed via the Coase theorem as soon as rural areas once again have an economically viable product? Neither of these items has high fixed costs (I’m assuming dirt roads here). Your argument seems rather an odd one for a free market economist to make. Even corruption should not prevent a viable agricultural sector from growing — it’s just likely that transportation networks will function as a tax on producers. I don’t believe that “insecure property rights, ill-considered land reforms” apply to West Africa.

Rural West African villages are turning into ghost towns with the natural effects on the surrounding infrastructure. This does not, however, mean that the collapse in infrastructure is the cause of their inability to market their produce.

13 Matt April 29, 2008 at 12:43 pm

Free trade increases the precision in which we can estimate trade flow. Hence, we can plan longer term and build trading structures (better roads).

14 Bill Harshaw April 29, 2008 at 4:13 pm

Grant: re: inelasticity of demand for food–I’m no economist but my impression is that’s the conventional wisdom supported by the big fluctuations in prices over the years. We get all excited over a drop of 10 percent in housing prices or a rebate on cars of 10 percent. Corn prices received by IL farmers went from $2.08 in 2005/6 to 3.07 in 2006/7. I assume rice has had similar variations.

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16 nana May 13, 2009 at 5:00 am

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17 nintendo ds March 6, 2010 at 12:04 am

It doesn’t seem like he actually says that lifting trade restrictions will always and everywhere lower prices. (The lede comes closest, but read literally, it doesn’t either.)
In fact, he writes, “Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed.” And implicit in that sentence is that the relative price of rice will go up in rice-exporting countries under freer trade.

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