Food crisis

It is high time I did some explaining about the global food crisis. Macroeconomic relationships are complex, and I am in the midst of finals and a job hunt. However, I also need a break.

The graphic on the left shows the effects of projected food price increases on trade balances for 2008, and comes to us courtesy of an article by the International Monetary Fund. Not my favorite bunch of people, but not the worst of the lot as far as I know. Basically, countries in red are expected to import more food. Countries in blue are expected to export more. Deeper colors mean more imports/exports.

Let's consider the United States, which should increase its food exports slightly thanks to the price increases. The US does have a lot of arable land.

From the IMF article:

A rise in food prices of 48 percent since end-2006 is a huge increase that may undermine gains the international community has made in reducing poverty, IMF Managing Director Dominique Strauss-Kahn warned.

He told an April 10 news conference in Washington that policy responses to higher food prices have to be tailored to meet the needs of each country.

Strauss-Kahn said the IMF could take four steps to help address higher food prices in the short term:

• Support countries in designing appropriate macroeconomic policies to deal with shocks

• Provide advice and technical assistance for countries where rising food prices are eroding terms of trade, through targeted income support for the poor—without jeopardizing hard-won gains on economic stabilization

• In countries where price shocks are affecting the balance of payments, provide assistance through IMF lending facilities

• Work, along with other agencies and donors, to help countries mitigate negative impacts.

Open trade policies

Longer-term answers to the problem of higher food prices centered on removing obstacles to increased supply, Strauss-Kahn said.

The IMF cites increased trade as a policy option for mitigating the effects of higher commodity prices on national economies. IMF chief economist Simon Johnson told an April 9 World Economic Outlook briefing: "As a way to reduce global pressure on food and energy prices, more open trade policies in those products would be a good start. Less insular biofuels policy in advanced economies would help relieve some pressure. At the same time, we encourage countries to avoid raising taxes or imposing quotas on their food exports. These reduce incentives for domestic producers and also increase international prices."

The bit about some "advanced economies" instituting less insular biofuels policies is especially important. In the United States, corn ethanol is a scam. It costs more energy to produce ethanol than it provides as fuel. It is essentially a giveaway to agribusiness. Additionally, the US government should reduce its subsidies to agribusiness in general. Those subsidies artificially lower the price at which farmers here produce food. This makes it harder for African farmers to compete, even when we're talking about African farmers producing staple crops for Africans vs US farmers exporting those staple crops. The transition needs to be managed, and US farmers will need retraining and jobs, but this has to end.

The IMF and World Bank are free market institutions. Don't take everything they say as Gospel. That said, they are right that protectionism by nations affected by the food crisis is not a long-run solution.