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Starving the World's Poorest

Mises Daily: Wednesday, May 28, 2008 by

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World food prices have increased dramatically, by almost 60 percent on average since March of last year, according to the index compiled by the World Food and Agricultural Organization, and there's no sign yet that they're going to substantially fall back in the near future. With record prices on the Chicago Board of Trade for futures contracts on agricultural commodities, it seems very likely that the high food prices are here to stay for the next few years.

Naturally, governments all over the world now feel compelled to rectify the situation and are busy enacting or preparing to enact various measures that they believe will help ease the rise of food prices. In general, however, they only succeed in making things worse.

In some places, like Argentina, Egypt, India, Kazakhstan, or Indonesia, for example, local governments have imposed new export tariffs in order to protect the domestic food market from rising international price pressures, thus setting the stage for endemic shortages. In other places, like Russia or China, things have gone much further, and export tariffs have been coupled with price controls on basic foods such as bread, milk, and eggs.

The Mexican government, on the other hand, has reacted by mixing one bad idea — namely, price controls for food — with a good idea rather a little too late: lowering import tariffs for various agricultural products. Governments in several other countries from Latin America, Europe, Africa, and Asia, including the European Union — despite protests from the French minister of agriculture — have lowered or even suspended import tariffs for various agricultural commodities coming from certain trading partners. While this is far from the ideal of an immediate abolition of all tariffs — and it's as distortionary as politically managed trade can be, even in time of crisis — it is certainly a small step in the right direction and might help ensure a smoother supply of food in some places.

All in all however, there seems to be little that can be done in the short term for the world's poorest people. The hundreds of millions of people who live on the border of poverty, who spend almost all their income on food, are now faced with the threat of starvation. Already, in more than seventeen countries around the world, from Mexico to Indonesia, from Argentina to Mongolia, and from Mozambique to Morocco, the hungry poor have sparked riots and civil unrest in the wake of higher food prices that they cannot afford. The anger felt by these rough but fragile people, the fruit of desperation born out of the usual mixture of poverty and oppression that characterizes the underdeveloped parts of the world, can sometimes be misguided; but in its most fundamental expression, it is just, courageous, and even commendable.

But how did this happen? With hundreds of billions of dollars spent each year on development aid and various antipoverty programs in the so-called third world, with an array of governmental and intergovernmental agencies designed to lift the planet's poorest out of earthly misery, and with no notable natural disaster affecting crops and agricultural production, how can a food crisis that threatens millions with starvation have come about?

Undoubtedly, rising prices for oil and oil-derived fertilizers did have an impact on food prices, but oil prices cannot entirely account for the soaring food prices observed. It is certainly true that increased demand from emerging markets, such as China and India, has also put pressure on prices. Moreover, the increased demand for meat and dairy emanating from these countries — a result of diets moving away from more traditional vegetarian foods, in favor of more western-style meals — must have triggered a process of adjustment along the capital structure that necessitates some time before it is capable of supplying the additional specific demand.

However, the pressure from both higher oil prices and higher grain consumption in emergent economies pales in comparison with the recent increase of industrial demand for grain in the production of various types of biofuels that occurred during recent years.

Thus, almost all additional US corn production between 2004 and 2007, for instance, has been diverted to the production of ethanol, while the European ethanol production more than tripled during the same period. The increased use of grains for ethanol production has led to a fall in the supply of grains relative to overall demand during the last seven years (with the exception of 2006, which was compensated by the use of grain stocks, now at the lowest level globally in a quarter century). This situation is not, however, a natural market phenomenon, but the direct result of various government programs — usually in the world's most developed economies, although developing countries are catching up — that aim to promote more environmentally friendly energy technology or energy self-sufficiency by subsidizing and mandating the diversion of a growing percentage of agricultural commodities such as corn, sugar cane, wheat, and so on, to the production of bioethanol and biodiesel.

The increased production of biofuels in the United States, Brazil, Europe, and elsewhere is thus effectively obtained at the expense of food production — or, as it turns out, potentially at the cost of the lives of millions of the world's poorest inhabitants who are now priced out of the market for food.

Contemplating the grotesque potential side effects of bioethanol subsidies in the world's most developed economies is almost unbearable. While everyone is affected by higher food prices, for some people they mean only giving up a new pair of shoes or a night out. For others, however, the more costly food puts their very subsistence into question. No doubt, the politicians who came up with the idea of subsidizing the diversion of grain to the production of bioethanol did not intend to starve the world's poorest people; but the fact that the consequences were unintended does not absolve them of responsibility.