Mon 31 Jan 2011
UPDATE: Marc Bellemare pointed out some issues with this post, which I have addressed here. These issues, though, strengthen the argument about strategic deglobalization . . .
There have been an interesting series of blog posts going around about the issue of price speculation in food markets, and the impact of that speculation on food security and people’s welfare. Going back through some of these exchanges, it seems to me that a number of folks are arguing past one another.
The most recent discussion was spurred by a post on the Guardian’s Global Development blog by John Vidal that took on the issue of speculation in food markets. In the post, Vidal argues that food speculation is a key driver of price instability on global food markets, which results in serious impacts for the poorest people in the world – a sort of famine profiteering, as it were.
The weakness of this post, as I see it, are twofold. First, it doesn’t take the issue of price arbitrage seriously – that is, how speculation is supposed to function. Aid Thoughts, via one of the comments on Vidal’s post, takes Vidal to task for this. As Aid Thoughts/the commenter point out, the idea behind speculation is to pull future price impacts of shortage into the present, stimulating responses to future shortages before they occur. Thus, a blanket condemnation of speculation makes very little sense from the perspective of one who wants to see food security enhanced around the world – without speculation, there will be no market signal for future shortage, creating a world that addresses shortages in a reactive instead of proactive manner. This is a completely fair critique of Vidal, I think.
However, neither Vidal nor those responding to him actually address the evidence for significant market manipulation, and the intentional generation of instability for the purposes of profiteering. This evidence first emerged in a somewhat anecdotal manner in Fredrick Kaufman’s “The Food Bubble: How Wall Street starved millions and got away with it.” In this article, Kaufman uses a fairly limited number of informants to lay out a case for the intentional manipulation of wheat markets in 2008. It is an interesting read, though I argued in an earlier post that it suffers from trying to be a parable for the pervasive presence of complex investment vehicles in the modern world. And in the end, its findings can hardly be called robust.
Though Kaufman’s argument might, by itself, be less than robust, it received a serious empirical boost from the International Food Policy Research Institute (IFPRI) in the fall of 2010. In a discussion paper that remains underreported and under-considered in food security circles (trust me, it is difficult to get anyone to even talk about speculation in program settings), Bryce Cooke and Miguel Robles demonstrate quantitatively that the dramatic price rises for food in 2008 is best explained by various proxies for speculation and activity on futures markets. Now, we can argue about how large an impact that activity had on actual prices, but it seems to me that Cooke and Robles, when taken in concert with the Kaufman piece, have demonstrated that the speculation we see in the markets right now is not merely a normal market response to potential future shortage – indeed, the Food and Agricultural Organization (FAO) of the United Nations has been arguing for months that there are no likely supply issues that should be triggering the price increases we see. In other words, while it is foolish to simply blame price arbitrage for food insecurity, it is equally blind to assume that all of those practicing such arbitrage are doing so in the manner prescribed in the textbooks. Someone will always try to game the system, and in tightly connected markets, a few efforts to game a market can have radiating impacts that draw in honest arbitrage efforts. There is need for regulatory oversight. But regulation will not solve all our food problems.
But this all leaves one last question unanswered: what is the impact of price instability, whether caused by actual likely future shortages or by efforts to game markets for short-term profits, on the welfare of the poor? Vidal, Kaufman and many others assume that the impacts are severe. Well, maybe. You see, where matters (again – yep, I’m a geographer). In a very interesting paper, Marc Bellemare (along with Chris Barrett and David Just) demonstrates that, at least in Ethiopia:
contrary to conventional wisdom, the welfare gains from eliminating price volatility would be concentrated in the upper 40 percent of the income distribution, making food price stabilization a distributionally regressive policy in this context.
This finding may be a shock to those working in aid at first glance, but this finding is actually intuitive. In fact, in my book (out tomorrow!) I lay out a qualitative picture of livelihoods in rural Ghana that aligns perfectly with this finding. In Bellemare et al, I would bet my house that the upper 40% of the population is that segment of the population living in urban areas and/or wealthy enough to be purchasing large amounts of processed food. Why does this matter? This is the segment of the population that typically has the most limited options when food prices begin to get unstable. On the other hand, the bottom 60% of the population, especially those in this cohort living in rural areas (it is unclear from the study how much of an overlap between poor and rural there is in the sample, but I am betting it is pretty high), has a much more limited engagement with global food markets. As a result, when food prices begin to spike, they have the ability to effect a temporary partial, or even complete, disengagement from the global market. In other words, much as I saw in Ghana, this study seems to suggest that temporary deglobalization is a coping strategy that at least some people in Ethiopia use to guard against the vagaries of markets. Ironically, those best positioned to effect such a strategy are the poorest, and therefore they are better able to manage the impact of price instability on food markets.
In short, I would argue that Marc’s (and his co-authors’) work is a quantitative empirical demonstration of one of my core arguments in Delivering Development:
2. At globalization’s shoreline the experience of “development” is often negative. The integration of local economies, politics, and society into global networks is not the unmitigated boon to human well- being presented by many authors. Those living along the shores of globalization deal with significant challenges in their lives, such as degrading environments, social inequality that limits opportunity for significant portions of society, and inadequate medical care. The integration of these places into a global economy does not necessarily solve these problems. In the best cases such integration provides new sources of income that might be used to address some of these challenges. In nearly all cases, however, such integration also brings new challenges and uncertainties that come at a cost to people’s incomes and well- being. (pp.14-15)
I’m not suggesting Marc endorses this claim – hell, for all I know he’ll start throwing things when he sees it. But there is an interesting convergence happening here. I’m glad I met Marc at a tweet-up in DC a few weeks ago. We’re going to have to talk some more . . . I see the beginning of a beautiful friendship.
In summary, while efforts to game global food markets do exist, and have very serious impacts on at least some people, they do not crush everyone in the Global South. Instead, this instability will be most felt by those in urban areas – in the form of a disaffected middle and upper class, and a large cohort of the urban poor who, lacking alternative food sources, might be pushed over the brink by price increases. The policy implications are clear:
- We need to be watching the impact of price increases on urban food insecurity more than rural insecurity
- Demanding that rural producers orient themselves toward greater and greater integration with global markets in the absence of robust fallback measures (such as established, transparent microinsurance and microsavings initiatives) will likely extend the impact of future price instability further into the poorest populations.
- We need to better understand the scope of artificially-generated instability and uncertainty in global food markets, and establish means of identifying and regulating this activity without closing price arbitrage down entirely.