Lamy Muses on Free Trade and Food Security

Observers of the goings-on in the arena for international trade sometimes carry different views about the reason for the failure to complete the Doha Round. To my mind though, it is clear that one of the reasons that I discount is the claim that the WTO has not had truly capable leadership. In many respects, Pascal Lamy and his colleagues in Geneva are faced with the political problems that depress the possibility for substantial freeing of trade. 

One sees further evidence of the thought leadership and clear understanding of the fine but clear distinctions between the political and economic barriers to liberalization among countries. Addressing a policy audience during the Economist Conference early this month, Pascal Lamy ably dissects the issue of food security and the potential of trade to ease price shocks and shortages. The most poignant points in my mind is that very little food is traded across borders to begin with and further that governments are wont to respond to shocks by cutting off the movement of food across borders and thereby exacerbating that problem of supply and prices. Having observed that most food exports come from a ridiculously small number of countries, he unequivocally states that international trade in food is necessary to diversify sources by increasing competition and ensuring that supply comes from the most efficient producers. 

This is a very succinct summary of the state of agriculture products in world trade and good primer for introducing thinking around the benefits of trade. There is an obvious paradox that while the vast majority of the world's households derive livelihoods from agriculture, the proportion of their production that is traded stands at 7%. It cannot be difficult to figure out that the reason is the absence of free trade around agriculture. An old profession that is yet to be substantially freed from political encumbrances. 

Stop Blaming the Speculators

Most commentaries about the rise in commodities prices are more interested in assigning blame to speculators, US alternative fuels policy or on the growth of China and India and the pressure on supply. I see much less in terms of the apposite responses that corporations, households and governments in terms of pubic policy.

Two articles here and here by David Koenig and Robert Samuelson respectively are taking the discussion forward by reporting on different aspects of the issue. To start with Koenig's piece in Business Week shows how the more astute managers of Southwest Airlines took to hedging against the volatility in prices of fuel by hedging intelligently. The idea behind this is quite clear because it proves that an understanding of the underlying economics and cost structure for running an airline would identify the idea of fuel price volatility as a major risk area. As the report states, they are not only far ahead of the competition in this approach but also that they paid US$ 1.89 per gallon of fuel whereas their competitors are paying in the US$ 2.73-2.83 range. To my mind, it demonstrates the fact that airlines need not be protected or offered public finances to make profits because the right advise should ensure that more of them utilize such financial instruments.

On the other hand, Robert Samuelson is justifiably animated that the correct analysis fr the rise of prices is being forgotten for the purpose of political convenience. Speculators are a convenient excuse for the rise in prices and so both presidential candidates are busy trying to impress the public with regulatory proposals ostensibly meant to reduce the adverse effects from speculation in commodities. This is in spite of the fact that the reason for the rise in commodity prices is clearly about the dynamics of supply and demand. This does seem to be an unduly simple answer for the political season when voters can demand to have their cake and eat it too.

Food Crisis: Old Ideas Still Valid

Continuing the discussion about the causes of the food crisis and what the appropriate role of governments should be requires some reference to this dated but largely sound piece at the Foundation for Economic Education. E.C. Pasour argues argues cogently against the fallacy of that "Malthusian Spectre" and the danger that governments may react by restricting trade in food through price controls and control on land sizes.

Since it is three decades since this article was written, one would hope that the lessons have been learned. My worry though is that the worst ideas come to the fore at such times because of the inescapable panic that result from an increase in food prices. No need to preempt the piece but it makes the clear argument that reduction in the property rights of producers of food through uninformed state intervention causes a reduction in supply. Adding the point stated by Amartya Sen in the book Poverty and Famines, he reiterates that contrary to popular contention starvation and hunger are not necessarily the results of a reduction in supply of food but often the inability to purchase adequate food supplies. essentially therefore, hunger is best viewed as a problem of income.