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More subsidy will be counterproductive

More subsidy will be counterproductive
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First Published: Tue, Apr 29 2008. 11 01 PM IST
Updated: Tue, Apr 29 2008. 11 01 PM IST
Michel Barnier, France’s farm minister, suggests that implementing equivalents of the European Union’s common agricultural policy, or CAP, in Asia and Latin America would ease world food shortages. That seems unlikely.
A reduction—not an increase—in subsidies and trade barriers, coupled with tighter money and global buffer stocks, stands a better chance of preventing shortages.
Barnier’s claim that current shortages are “the result of too much free market liberalism” is a nice try. He represents French farmers, still the principal beneficiaries of CAP, which has resulted in subsidised overproduction in Europe and barriers to market entry for potential food exporters in poor countries.
CAP’s current formulation expires in 2013, so French farmers are beginning the campaign to extend it, probably against British opposition. Claiming universal applicability for its principles punts the ball down the field for the farmers.
The anti-market case does have one merit. For industrial products, if prices rise too far, consumption can be deferred until they fall. That is not possible with food. Furthermore, the very poor, worst affected by shortages of basic foods, have little money and only a small economic voice.
Assuming their lives have value beyond their monetary earnings, it makes sense for governments to distort markets to avoid inventory stock-outs.
But CAP doesn’t even succeed on that count. By blocking imports and dumping surpluses, it depresses global prices, preventing poor country food producers from competing. And in times of global dearth, EU surpluses are consumed domestically, so are not available to the world market. Other market-distorting subsidies such as the US ethanol programme worsen the problem.
Beyond scarcity, loose monetary policy in the US and elsewhere has fuelled speculation that has pushed food prices up. Tightening that could be part of the answer.
Another part could be a global system of buffer stocks, modelled on the US strategic petroleum reserve. That would provide more food inventory than a truly free market would demand, providing a margin of safety against shortages.
Barnier’s CAP idea, however, isn’t the answer. It might bring him political benefits, but economically it would be counterproductive.
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First Published: Tue, Apr 29 2008. 11 01 PM IST