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Wednesday, April 30, 2008

Strategic Rice Reserves

With "higher and higher" gas prices the public wants change, and ready or not, here come the politicians. The increases have already caused discussion of populist and protectionist policies, in the media and from presidential candidates. The issue has sky-rocketed to become the number one concern of American voters. Considering gas makes up a only a small portion of American incomes, it isn't hard to understand why there are widespread riots around the world because of rising food prices. The global food crisis is sending governments (and their politicians) into panic. The results are populist policies. Not only is this the result, it is also the cause... continuing the vicious cycle.

One of these problems is trade. Tyler Cowen, the Professor of Economics, examines this component in his article for the New York Times. Disruptions in the market for rice, such as export restrictions, subsides and other forms of intervention have both caused and worsened this crisis. India, Indonesia, Vietnam, China, Cambodia and Egypt all have made recent restrictions on rice exports. These policies have contributed to a decrease in the international trading of rice by 3%. This creates the terrible problem of sending the "message to farmers that their crops are least profitable precisely when they are most needed". Consequently, supply will not increase, keeping prices high and quantities low. One interesting action being taken is the "hording" of rice. Several Asian countries are cracking down on hoarders, charging them with "economic sabotage", which carries a life sentence in the Philippines. The irony here, however, is many Asian governments use what we might call a "Strategic Rice Reserve". How is this different from "hoarders"? Indeed, Cowen notes that these hoarders "are simply storing rice for the possibility of even harder times to come"

Yet another problem is when governments disregard the importance of using prices as a conservation mechanism. Egypt illustrates this idea unfortunately well. The staple food for the poor is bread, and the government subsidizes it heavily. Due to these subsidies, the price of one loaf of "baladi bread" is less than one U.S. cent. Accordingly, people consume inefficiently large amounts, as one Egyptian woman says, she buys "40 to 60 loaves" at a given time.

On the bright side of things, there is evidence that leaving market signals alone can help. In Africa, rice is not consumed nearly as much as in Asia. Consequently, the price has been able to rise, and people are now substituting spaghetti, which conserves rice. Hopefully, the world can learn the value of free trade and free markets. If not, the problems may just be beginning

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