Saturday, November 29, 2008

Ending the Food Crisis

. Saturday, November 29, 2008

Paul Collier says it's possible, but only if we get over our aversion to large-scale corporate farming, end domestic farm subsidies in the first world, and accept genetically modified food. This, he says, will allow us to capture scale returns, alleviate the supply-side shortages, and give farmers in the developing world competitive access to Western markets. These three policy actions can directly address the central cause of food shortages:

The root cause of high food prices is the spectacular economic growth of Asia. Asia accounts for half the world's population, and because its people are still poor, they devote much of their budgets to food. As Asian incomes rise, the world demand for food increases. And not only are Asians eating more, but they are also eating better: carbohydrates are being replaced by protein. And because it takes six kilograms of grain to produce one kilogram of beef, the switch to a protein-heavy diet further drives up demand for grain.

The two key parameters in shaping demand are income elasticity and price elasticity. The income elasticity of demand for food is generally around 0.5, meaning that if income rises by, say, 20 percent, the demand for food rises by 10 percent. (The price elasticity of demand for food is only around 0.1: that is, people simply have to eat, and they do not eat much less in response to higher prices.) Thus, if the supply of food were fixed, in order to choke off an increase in demand of 10 percent after a 20 percent rise in income, the price of food would need to double. In other words, modest increases in global income will drive prices up alarmingly unless matched by increases in supply.

In recent years, the increase in demand resulting from gradually increasing incomes in Asia has instead been matched with several supply shocks, such as the prolonged drought in Australia. These shocks will only become more common with the climatic volatility that accompanies climate change. Accordingly, against a backdrop of relentlessly rising demand, supply will fluctuate more sharply as well.

These supply shocks can be ameliorated by an overhaul of the regulatory regime and encouragement of technological improvement that, Collier says, will match increased demand with increased supply, thus keeping prices down. The entire article is interesting, and strongly challenges many first- and third-world ideologies and romanticisms. It is also a good object lesson in the the Law of Unintended Consequences.


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Ending the Food Crisis




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