Government policies all over the world are distorting the market for agricultural products and discouraging their production at a time when there is a global shortage of them, said Gary Becker, a Professor at the University of Chicago and a Nobel laureate.
In response to soaring food prices (and the fears of social unrest that come with it), governments of developing countries have enacted market-distorting food policies.
Russia recently banned wheat exports. Ukraine, India, Pakistan, Egypt, and Kazakhstan have enacted policies to restrict the exporting of various agricultural products like corn, barley, sugar, cotton, and rice. China recently enacted price controls on various vegetables, a decision that may even be worse than restricting exports, said Becker.
Price controls and restricting exports both achieve one thing: pushing down the price farmers fetch for selling their goods while making it cheaper for domestic consumers.
Free markets would normally use soaring food prices to incentivize and enable investment in higher food production in the future. However, when the government limits the price paid for agriculture goods, they unwittingly dampen the future supply of them.
Worldwide food demand will only increase as the growing middle class in large emerging market economies like China and India indulge in food quantities and types that were previously out of their reach. Moreover, some crops are now used for biofuels.
Free market supply and demand mechanisms can efficiently assign producers to meet this growing demand. However, with government distortion, the demand will instead be met by producers whose resources would have been better utilized for other purposes.
While developing countries are distorting policies this year, U.S. and Europe have actually distorted global agricultural markets for years by limiting imports from developing countries. For some of these developing countries, food production is precisely the main source of income and the best way for them to rise out poverty.
From this perspective, farmers in poor countries are put at a great disadvantage by distorted policies from both their own governments and foreign governments.
The refusal to abandon distortive food policies is perhaps the biggest unresolved contention that stands in the way of completing the Doha Round of the World Trade Organization (WTO) negotiations. In this regard, both developing and developed countries are guilty.
Nevertheless, WTO director-general Pascal Lamy remains optimistic. In a speech this month, he said G20 and APEC leaders' provided a clear signal that they expect the Doha Development Round to be a deliverable next year.
However, judging by the protectionist and unilateral policies in agriculture witnessed so far this year, the issue is as contentious as ever.
Becker said if policymakers are concerned about their citizens' ability to afford food, a better idea is to subsidize the purchase of the food but still allow the free trade of it.
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