| By Gavin Chait,
on 02 November 2008
|
 Fields of Gold Quick quiz. Which is better: keeping food prices low right up till the point when it runs out, or allowing high prices to cause shock and horror?
We already tried keeping prices artificially low with electricity. What happened is that we ran out and then had to ration supplies to make sure that everyone gets a little of what is left. That may be bearable with electricity, but try and imagine the despair that queuing for your daily ration of dry wheat and maize would cause.
The political response to high food prices and the drama of public protests has been a tale of botched brinkmanship and petty squabbling. The Doha trade-round at the World Trade Organisation collapsed precisely over attempts by all to protect food production.
Despite the failure of politicians to act, the UN's Food and Agriculture Organisation (FAO) forecasts that "world cereal production in 2008 stands at a record 2,180 million tonnes (including rice in milled terms), up 2.8 percent from 2007." The biggest gain is in wheat, "which is forecast at 658 million tonnes, representing a significant (8.3 percent) increase from 2007."
How did this miracle happen, even without any help from politicians?
Welcome to the miracle of the free market, where price fluctuations are critical to ensuring that investment takes place appropriately.
Food production is a business, like any other. When food prices go up by 30% in one year, you think "inflation". Business people look at that number and go, "profits". That is the central signal that gives us our daily bread, along with our daily iPod.
As cereal production increases, prices will start to come down. That is an inevitable, if slow, process. It's like an end-of-fashion sale. At the beginning, everyone wanted one, but – once everyone has one – prices come down to get rid of the extra. Maybe it won't happen fast enough for the many who may starve. That is a great sadness, but it is not the fault of investors or farmers.
When prices are artificially lowered through government-mandated rules, then businessmen find something else to invest in that offers better returns. You may not like this, but it continues to be impossible to legislate how people should spend their own money.
Countries that have legislated how investors are supposed to operate soon find they have no investors to legislate.
Most of the people who are currently suffering from famine or food shortages were suffering these problems long before food prices started to rise. And they are suffering these shortages largely as a result of price-fixing and import tariffs; the very topics that politicians at the WTO failed to reach agreement on.
The FAO's list of the countries most at risk of a food crisis includes Zimbabwe, Somalia, Burundi, Ethiopia, Iran and Turkmenistan. None of these are countries where it can be said that the free market or the rule of law are widely respected. Zimbabweans, Turkmenistanis, Somalians, and their ilk would still be impoverished, subject to daily outrages and unable to afford food, even if the price of a kilo of maize-meal halved.
In the made rush to complain that high prices require legislation, it would be good to remember that politicians invariably make a hash of things. Threats to give the department of Minerals and Energy powers to legislate the energy efficiency of household appliances are likely to result in higher prices for consumers, just as the Eskom mess has penalised the whole country.
Whereas the high prices of energy are already creating incentives both to supply cheaper, alternative energy, as well as more efficient appliances. International investment in new forms of energy production rose 30% in 2008, to over $ 100 billion.
Higher prices do more for stimulating innovation, new capacity and lowering future prices than does any amount of political meddling. |
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