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Fried Rice
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."
Posted by Tyler Cowen on April 28, 2008 at 06:13 AM in Economics | Permalink
Comments
A brilliant analysis of free trade and its positive effects.
Posted by: tsonevski at Apr 28, 2008 8:28:44 AM
We may well want free trade in rice, but I doubt it would be for the reasons Cowen adduces in his NYT piece. Free trade in rice would do little to alleviate the food crisis we are facing, and in fact would probably make it worse in the short run as it would result in a further increase in the real price of rice on world markets (according to World Bank and other estimates). One can of course tell all kind of dynamic stories related to scale and long-term investment effects that might reverse the impact effects. But I suggest we start with what we know reasonably well before we speculate.
Posted by: Dani Rodrik at Apr 28, 2008 9:06:19 AM
I'm confused. Which one of you is supposed to be the fundamentalist?
Posted by: mobile at Apr 28, 2008 9:09:21 AM
Change is constant. Dani, rather than pretend that higher prices will not change the supply of rice, how about acknowledging that the supply will increase and the price drop again? Please? If you want us to believe that you're a Real Economist?
Posted by: Russ Nelson at Apr 28, 2008 9:16:09 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.
Posted by: alisa at Apr 28, 2008 9:33:26 AM
So, what's the actual claim here about free trade and the short-term price of rice in poor countries that have a shortage of rice?
If trade in rice were freer, as Cowen advocates, would the price of rice go up in poor countries that have a shortage of rice? In the short term (let's say the short term is one year), would more people starve, or would fewer people starve?
Posted by: Cardinal Fang at Apr 28, 2008 10:15:29 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?
Posted by: Melvin at Apr 28, 2008 11:01:34 AM
It seems weird to me that an economist would call an assertion that rice production increases in response to higher prices a "speculation". I would think that we know, reasonably well, that free trade in a commodity is a good thing. I might trust the speculations of economists if they put their money where their mouths are, such as in conditional futures markets.
Posted by: Grant at Apr 28, 2008 11:50:24 AM
"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?
Posted by: ideogenetic at Apr 28, 2008 1:48:07 PM
I think the "crisis" is akin to a run on the banks--people and countries have become aware of the fact that reserve stocks (i.e., bank capital) are low and are panicking. We saw the same phenomena in the 1970's gas lines--we panicked and created scarcities out of tight supplies. Throw in the speculators who see the chance for profits and you have a mess.
Unfortunately, while freer trade internationally and intranationally would improve the efficiency of the rice production system over the long run, I don't see where it would obviate the possibility of panic. Where's the institution that's going to act as a banker of last resort?
Posted by: Bill Harshaw at Apr 28, 2008 1:50:45 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.
Posted by: Grant at Apr 28, 2008 3:25:53 PM
One can of course tell all kind of dynamic stories related to scale and long-term investment effects that might reverse the impact effects. But I suggest we start with what we know reasonably well before we speculate.
Dani,
What part of the NY Times story on Argentina don't you understand? Argentina has massive export restrictions on food, farmers understandibly are refusing to invest more like they would have if Argentina wasn't obtuse.
Higher prices means added supply. Lower prices means less supply than otherwise. I don't see how this is speculation, unless you are calling the NY Times reporter a liar.
Unfortunately you are influential on the world stage, and thus you are effectively encouraging countries to make things worse, not better. That is deeply disturbing.
Posted by: happyjuggler0 at Apr 28, 2008 3:31:23 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?
Posted by: Barkley Rosser at Apr 28, 2008 3:57:05 PM
Grant: The problem with food is demand is relatively inelastic, particularly so for rice. (Corn, soybeans, and wheat are a bit more interchangeable.) Supply is also inelastic, because rice needs water and level fields, which take money and time to develop. So it takes a while for markets to clear. In the meantime, lots of room for panic, for misguided hoarding, for speculation, etc. I understand the rationale for speculators, but no one who grew up on a farm ever thought speculation was work a person with any self-respect would do. The idea is called "producerism". :-)
Posted by: Bill Harshaw at Apr 28, 2008 5:16:34 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.
Posted by: Grant at Apr 28, 2008 5:25:56 PM
When Rodrik has previously made the argument that freer trade would increase food prices he has been specifically referring to the removal of agricultural subsidies in the US and other industrial countries. That presumably would increase food prices, at least in the short run. It would be helpful if he would clarify that this is what he means.
But, presumably that argument does not apply to rice, since 90% of rice is both produced and consumed in East and South Asia.
Posted by: mnbr at Apr 28, 2008 5:42:15 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.
Posted by: cs at Apr 28, 2008 5:54:49 PM
So is the questions then how can we compensate rice purchasers in rice exporting countries in the short run while more trade in rice lowers prices in the long run?
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 (too many countries, too many specifics)
From this base, it would seem that there is a little bit of moral calculus to perform: is this short term suffering ok? We know people will be better later -should we move slowly and gradually? Will a ten year plan to promote rice trade survive changes in political regimes.
The utilitarian calculus here seems simple, but the policy decision to pursue this course of action is fraught with difficulties.
Posted by: PolishAlice at Apr 28, 2008 7:09:59 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.
Posted by: cs at Apr 28, 2008 7:36:57 PM
Ramen noodles.
Made from wheat, not rice. Developed in Japan to feed the working class, as a way to provide cheap carbohydrates in a country that imposed high rice tariffs to protect its domestic rice industry as a matter of national culture and pride.
Log on to Netflix, rent "Tampopo" if you want to see the classic Western retold with the OK Corral as a ramen noodle restaurant.
Posted by: Bob Knaus at Apr 28, 2008 8:36:06 PM
[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.
Posted by: dsquared at Apr 29, 2008 6:16:26 AM
dsquared,
I don't think we have any disagreement. I most certainly do not dispute that once a crop is in, free trade can raise the price for the exporting countries. It does so, however, by lowering the price in the importing countries. Now, some importing countries are well off, e.g. Singapore. But probably the very poorest and most desperate countries are importers and are hurt. So, in the end my judgment is one about global income distribution, who is going to feel the pain the worst from a general global shortfall, which we are clearly experiencing due mostly to a combination of bad weather and the assinine ethanol program in the US.
Posted by: Barkley Rosser at Apr 29, 2008 8:37:53 AM
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.
Posted by: cs at Apr 29, 2008 12:21:20 PM
I never got the point that increasing our demand for poor people coming to the U.S will ever reduce the total supply of poor people.
It is one of those things where economists figure they can skip what they learned in school.
Posted by: Matt at Apr 29, 2008 12:37:32 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).
Posted by: Matt at Apr 29, 2008 12:43:08 PM
I don't think there's a problem of lack of free trade in agricultural products in West Africa. That aspect of the problem seems to be generated more by Latin American countries. West Africa's problem is the governments' willingness to allow subsidized low cost agricultural imports into the country without imposing a CAP like price adjustment.
Posted by: cs at Apr 29, 2008 12:53:49 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.
Posted by: Bill Harshaw at Apr 29, 2008 4:13:40 PM
"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."
Pro-egalitarian effects??? Are you kidding me? I see no such effect in my village or in other countries...also, if you are talking about food crisis, please start taking about the miseries faced by the residents of Burkina Faso, Nepal, Butan, Mangolia, etc. rather than intertwining it with the Toyota motors market. These two commodities have completely different world elasticity of demand and supply. Make no fallacy here...but you have! Thats a "one-size-fits-all" policy stretched too far in a linear fashion!...
I see nothing wrong with Rodrik's arguments...and your article was equally good but stretched too far to relate it with Friedman, which all know is not relevant anymore, at least in "one-size-fits-all" approach...
Posted by: Chandan at Apr 30, 2008 12:16:00 AM
