EconTech

I’ve been working through the welfare effects of the recent policy changes in world food import/export policies in response to rising food prices. It is telling that the subject was not broached in my course on international trade, though perhaps it is more telling that the professor had never heard of trade diversion and was instructed by the department to use a more advanced text (apparently Krugman and Obstfeld’s text is below UofC undergraduate standards, though it too, in addition to Feenstra, references trade diversion). Clearly, he was gone by the beginning of the next year. On a positive note, on the tail end of one of the papers he assigned, I just found the beginning of a model of welfare-reducing inventions, which I want to see in the context of health care markets and rising prices there. Anyway, after that random tangent, here’s Dani:

Syncretic Zoellick

World Bank president Bob Zoellick gave an interesting speech at the Center for Global Development a couple of days ago in which he laid out four big challenges to development and the global economy.

Challenge number one, he said, is high food prices. In his words:

As financial markets have tumbled, food prices have soared. Since 2005, the prices of staples have jumped 80 percent. Last month, the real price of rice hit a 19-year high; the real price of wheat rose to a 28-year high and almost twice the average price of the last 25 years.

The good news for some farmers adds a crushing load to the most vulnerable – children, as young as four or five, forced to flee the safety of their rural communities to fight for food in teeming cities; food riots threatening societal breakdown; mothers deprived of nutrition for healthy babies. The World Bank Group estimates that 33 countries around the world face potential social unrest because of the acute hike in food and energy prices. For these countries, where food comprises from half to three quarters of consumption, there is no margin for survival.

Challenge number two, he said, is concluding the Doha round of global trade negotiations:

If ever there is a time to cut distorting agricultural subsidies and open markets for food imports, it must be now. If not now, when?

Wait a second. Wouldn’t the removal of these distorting policies raise world prices in agriculture even further? And in fact aren’t these price effects the main channel through which agricultural trade liberalization in the North is supposed to benefit the South?

Don’t take my word for it Here is a chart from Zoellick’s own World Bank, taken from its recent World Development Report on agriculture:

These estimates show that prices of coarse grains, wheat and rice will rise between 4 and 7 percent (relative to all other prices) if there is a successful trade round with complete removal of all restrictions.

So challenge number one is that world food prices are too high, but challenge number two is the need to get rid of developed country policies so that food prices can rise even more?

As it so happens, Zoellick was at the HKS yesterday and I expressed my puzzlement to him. His answer was that he didn’t think economists really understood how agricultural liberalization would work, he doubted that the effect on world prices would be to raise them (no matter what the WDR says), and that in any case import liberalization within developing countries would help reduce domestic prices. But if Zoellick really believes that Doha will lower food prices in developing nations, he has just articulated a new doctrine that upends years (nay, decades) of research on the subject. The truth, I fear, is that Zoellick’s faith in trade agreements has little to do with the underlying economics and like many ideological free traders he is willing to latch on to the economic arguments only when they serve the cause (and to discard them just as easily when they no longer do).

As for the real impact of food prices on poverty, we can avoid much confusion by recognizing the diverse and heterogeneous effects that food prices have on poverty around the world. The impacts depend on whether you are a net seller or a buyer of food (which is determined in part by whether you live in urban or rural areas), as well as on net supply elasticities (a large enough price increase can turn you into a net seller even if you were not one initially).

Now repeat after me: it depends…