Sunday, April 13, 2008

Rice shortage due to government intervention

First of all, while many people who try to analyze the current food price hikes phenomenon call this as "rice or food crisis", I do not believe that it is already in a crisis situation. A "crisis" situation is where you have a 50-50 chance of either surviving or dying in a particular condition, say a patient in an intensive care unit (ICU). I'd go along with a few who simply call this a "rice shortage" problem that can be solved by more rice supply, both in the short- and long-term.

Most of the literatures that come out recently analyzing the problem in the Philippines and abroad blame the government for "not doing enough" -- ie, not intervening enough -- in earlier years. They mean the government did not: build more dams and irrigation canals, more warehouses and other post-harvest facilities; did not undertake more research and extension work; did not produce more subsidized fertilizers and hand tractors; did not provide more agri credit; did not reforest enough watershed areas; etc.

The list can be endless, depending on how statist the person who is talking of writing. That is, the more statist and socialist-oriented a person is, he's likely to say that government should "provide everything" for agriculture and the farmers. Of course they won't say that they also advocate that the government should also "take everything" from the people to finance those "provide and subsidize everything" projects.

I am of the opinion that government should not provide everything and take everything; not even provide many things and take away many taxes and fees. The reason why rice -- and other food crops' -- supply has not kept up with demand is precisely because of too many government intervention. People respond to incentives and shy way from disincentives. If there is not much profit from producing rice, then there will be less people who will produce rice, and there may be less land that will be devoted to planting rice.

When governments say they are increasing the budget for agriculture, the first thing that they increase is the number of personnel, consultants, and officials in their respective Ministry or Department of Agriculture, plus those in related agencies like Ministry or Department of Agrarian Reform, state agricultural colleges, etc. And those plenty of personnel will require more salaries, more bonuses, more offices, more trainings, more travels, more cars, and later on, more pension and retirement funds. Then some local governments follow suit, and expand their own local agriculture bureaucracies, financed from their local taxes and fees.

I think one of the important moves if societies are to improve their agricultural and food production capacities, is to abolish those Agriculture Ministries or Departments, and cut the taxes that the state collect from the private sector that finance those expensive bureaucracies. Since rational people would not want to be jobless for long and die hungry, many of those currently in government agricultural and related bureaucracies will likely become farmers themselves or become traders and/or processors of raw agricultural products. And this expands rice and food supply. When supply grows faster than demand, then the price will go down, and people will have lots of food at cheap and affordable prices, and there will be less hunger and malnutrition in society.

But when government Agriculture Ministries or Departments are abolished, who will build the dams and irrigation canals? The warehouses and post-harvest facilities? Who will do more rice and agri crops R&D? Who will provide cheap credit, and so on?

Good question, and the quick answer is -- the productive people themselves. For one, many of those infrastructure and facilities are currently being provided by the private sector, and they are being operated despite zero taxes financing, at least in the Philippines.

When people know that there is an agency whose job is to provide lots of subsidies to them and they won't go to prison if they cannot pay back those subsidized credit, subsidized fertilizers, seeds and hand tractors, then they will get and abuse those government services without necessarily raising their farm output. For instance selling a few bags of fertilizers and seeds to other people and use the proceeds to drink and party.

Okay, abolition of those monster Ministry or Department of Agriculture is unpalatable and unacceptable due to big political risks. Then the next move will be drastic reduction of those bureaucracies, including privatization of some of their attached agencies and bureaus. In the Philippines for instance, the privatization of the government grains trading monopoly, National Food Authority (NFA) has long been proposed and discussed. The cost to taxpayers, as well as price distortion due to its trading monopoly function -- for many years, it is the grains importation monopoly; and in some municipalities, it is the single biggest buyer of farmers' palay (unmilled rice) output.

Rice shortage that result in high rice prices will naturally create incentives for farmers of other crops to shift back to producing rice. And other investors, including micro- and small businessmen, will flock to a sector (like rice) that experience high prices and high profitability, and leave those sectors that experience low income, if not losses.

Market failure, as some statists call this, always invite and create market solutions. The "failure" or displacement is temporary, the same way that high profitability in one sector is also temporary once entry of other players and competitors is not hindered -- a contestable market situation.

It is government failure that needs to be corrected by going back to the market, and not by "more government" intervention.

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