Food Price Kerfuffle: Sen Weighs In

The grandaddy of welfare economists, Amartya Sen, chimes in with his view on the causes of the Food Price Kerfuffle in an NYT OpEd. Sen identifies 3 factors behind the global rise in food prices (and no, none of ‘em are “Americans need to go on a diet“)

(1) Short term (supply shocks) -

The recent rise in food prices has largely been caused by temporary problems like drought in Australia, Ukraine and elsewhere.

(2) Longer term (new wealth = increased demand; the argument that got dubya in so much trouble with the Indian Press & Politicians) –

The rapid economic expansion in countries like China, India and Vietnam tends to sharply increase the demand for food.

(3) Politics (US Ethanol mandate) –

Misdirected government policy plays a part here, too. In 2005, the United States Congress began to require widespread use of ethanol in motor fuels. This law combined with a subsidy for this use has created a flourishing corn market in the United States, but has also diverted agricultural resources from food to fuel. This makes it even harder for the hungry stomachs to compete.

Sen & I generally agree about these causes but differ on the solutions… probably reflecting our different political proclivities. True to his intellectual roots, Sen tends to recommend intervention on the consumption / demand side (“find effective policies to deal with the consequences of extremely asymmetric expansion of the global economy”). That type of attack could be things like food vouchers for the extremely poor, potentially rations for the rich, and other forms of direct welfare, for ex.

By contrast, I tend to focus on the production / supply side. That’s more stuff like finding ways to replicate Brazil’s food production miracle in other countries and bring down prices via the market so even the extremely poor can afford food.

In either case, it’s a good OpEd and makes a bunch of interesting points (his summation of his Nobel Prize winning theory on the Bengal famine, for ex., is particularly concise and readable).

16 thoughts on “Food Price Kerfuffle: Sen Weighs In

  1. On the solution side, Sen & I are of different political proclivities.

    When I read this OpEd and again on rereading, I do not get the impression that Sen implies or feels that increase in production is a part of the problem or that he would be against it. However, I think he is coming from a more holistic point of view, that is that things can and do go wrong from time to time to create some perfect storm or the other. Thus while your solution will be one to tackle this issue in particular, a solution where disparity in income and or better from an economic point of view, consumption potential will result in a wider base of humanity to be better equipped to weather such inadvertent storms.

    and bring down prices via the market so even the extremely poor can afford food.

    I would think he would be very well aware of the relationship of pricing to demand supply imbalance.

    That said, I am glad he is not tagging along to the view that speculative hoarding is a part of the problem. Though I still think that rise of energy prices also affect food prices.

  2. Sen implies or feels that increase in production is a part of the problem or that he would be against it.

    Make that – Sen implies or feels that increase in production is not a part of the solution or that he is against it.

  3. Free markets work in the long term, but when they break in the short term, in the real world, there are human consequences that need to be dealt with immediately and we can’t afford to tweak a little and then wait for the market to correct itself. The food crisis, like the credit crisis, isn’t a part of the ebb and flow of the market, but are times of damage control and it’s important to make that distinction and be able to help people without fearing some populist slippery slope.

  4. i meant to say, “we can’t afford to only tweak a little and then wait for the market to correct itself.”

  5. Deepal,

    Who gets to decide how much tweaking needs to be done? All tweaking costs money – who pays for it? Is it possible to ensure that the tweaking process is not rigged to favor special interests? Is it possible to get an accurate measure of ROI on the tweaking process? Is it possible to ensure that only those who are targetted to benefit from the tweaking process are the ones benefitting from it?

    Once tweaking is done, if the root causes persist (falling home prices, rising food prices), should the tweaking process be repeated? If not, wouldn’t we be re-creating a moral hazard?

    Tough questions or distractions?

    M. Nam

  6. 5 · MoorNam said

    Deepal, Who gets to decide how much tweaking needs to be done? All tweaking costs money – who pays for it? Is it possible to ensure that the tweaking process is not rigged to favor special interests? Is it possible to get an accurate measure of ROI on the tweaking process? Is it possible to ensure that only those who are targetted to benefit from the tweaking process are the ones benefitting from it? Once tweaking is done, if the root causes persist (falling home prices, rising food prices), should the tweaking process be repeated? If not, wouldn’t we be re-creating a moral hazard? Tough questions or distractions? M. Nam

    Tweakers are known to subsist on little food. I propose that nations of the world amplify their production of crystal methamphetamine which will have the double-plus good effect of stabilizing the volatile antihistamine market while also solving the world’s hunger problems. Furthermore, those tweaked-out poor (no longer hungry) people will be able to work longer hours, thereby raising worldwide productivity to unprecedented levels.

  7. Price of commodities going up has a huge component of institutional investors (pension funds and other large investors) speculating in commodities index funds. Michael Masters, a hedge fund manager in front of a congressional committee on a hearing on this subject said the following:

    “You have asked the question ‘Are Institutional Investors contributing to food and energy price inflation?’ And my unequivocal answer is ‘YES.’ In this testimony I will explain that Institutional Investors are one of, if not the primary, factors affecting commodities prices today. Clearly, there are many factors that contribute to price determination in the commodities markets; I am here to expose a fast-growing yet virtually unnoticed factor, and one that presents a problem that can be expediently corrected through legislative policy action.”

    here’s his entire testimony before congressional committee on homeland security and govt. affairs

    Masters suggests transperency and regulation on commodity exchanges.

  8. By contrast, I tend to focus on the production / supply side. That’s more stuff like finding ways to replicate Brazil’s food production miracle in other countries and bring down prices via the market so even the extremely poor can afford food.

    your solution needs time to be implemented. while that is a great long-term measure, what of the people starving now?

  9. Sen implies or feels that increase in production is not a part of the solution or that he is against it.

    FTA, Sen seems to be for it

    However, a demand-induced problem also calls for rapid expansion in food production, which can be done through more global cooperation

    (Actually I kinda prefer a combination of changing eating preferences and moderate growth in production. Rapid growth has its drawbacks. Rapid growth in food production => more industrial farming => more dependence on oil, fertilizer and mono-cultures => less diversity, faster depletion, and more prone to shocks)

  10. 11 · Ennis said

    I read that as “Let them eat methi” and I thought … yummmmm …. methi!

    You haven’t lived until you’ve tried my mom’s meth di roti. She grows it in her own backyard garden lab. One meth di roti will satisfy your hunger pangs and give you energy to work for days. Days!

  11. I wonder why Sen didn’t talk about increased transportation cost due to oil price increase. This is one of the most direct and noticeable factor.

  12. I think he wanted to emphasize the basic growth assymetries which are causing the food crisis, oil prices being a supporting cause ie the food crisis was inevitable independant of the oil situation

  13. Caution: Tentative comments. I have no expertise in this area. Improvement in the short term; Center for Global development reported on May 9 http://www.cgdev.org/content/publications/detail/16028/ “Because of its WTO commitments under the Uruguay Round Agreement, Japan imports a substantial amount of medium-grain rice from the U.S. and long-grain rice from Thailand and Vietnam. Tokyo, however, seeks to keep most of this rice away from Japanese consumers (perhaps fearing a realization that the taste of foreign indica rice is not so bad and a bargain compared to the $3,900-per-ton locally-produced short-grain varieties of japonica rice). But under WTO rules, the government cannot re-export the rice, except in relatively limited quantities as grant aid. So the Japanese government simply stores its imported rice until the quality deteriorates to the point that it is suitable only as livestock feed and sells it to domestic livestock operators. Last year about 400,000 tons of rice were disposed of in this manner at a huge budget loss, displacing an equal quantity of corn exports from the U.S. and thus displeasing another constituency, the U.S. corn growers. Japan currently has over 1.5 million tons of this rice in storage, roughly 900,000 tons of U.S. medium-grain rice and 600,000 tons of long-grain rice from Thailand and Vietnam. Most of this rice is in good condition, and is incurring large storage charges. Japan would be very happy to dispose of this rice to the world market, but it cannot do so without U.S. acquiescence.(Technically, Thailand and Vietnam will also need to give approval for rice supplies originally imported from their countries to be released to world markets.)” Latest report says that CGD’s research and Arvind Subramanian’s testimony before the House Financial Services Committee have resolved this issue, rice prices have started coming down but more has to be done. See http://blogs.cgdev.org/globaldevelopment/2008/05/rice_prices_tumble_but_remain.php For the long term, as Sen says “The first task is to understand the nature of the problem”. Low food prices discourage farmers where as high food prices are disastrous for the urban poor. Food self-sufficiency with higher food prices vs rest of the development etc. If there are global instutions for food storage and distribution, many countries can focus on what they can do better with out worrying about self sufficiency in food. Such strategies need international co-operation which seems to come about mainly in times of crises. But sometimes food is used as a threat and weapon (I think that this happened during Indira Gandhi-Lyndon Johnson regimes). This sort of problems and global warming etc may be what Sen had in mind when he said that the first task was to understand the nature of the problem.