The Upside of High Food Prices

The rapid rise in food prices has caused unrest in the developing world and near panic in the developed world. People are talking about a looming deficit, the suffering of people in the poorest countries and the need for speedy humanitarian aid.

There are basically three reasons for the recent spike of inflation in food prices.

The first is the sharp rise in demand for grain in China. The Chinese are increasing the quantity of meat in their own diet. (Meat production requires significant input of grain.)

The second reason is the promotion of alternative sources of energy -- primarily ethanol -- by the governments of developed countries, which has significantly cut into the supply of grain in the world market.

Finally, the ongoing droughts in Australia have contributed to a further decrease in supply.

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But who suffers the most from the dramatic rise in food prices, and what countries are they living in? And is it really the food prices that cause the pain?

You should not worry too much about the 1.5 billion Chinese people. If the increase in prices is caused primarily by the increase in meat consumption in China, this means that the quality of life has improved there. If things had gotten worse for them because of their increased meat consumption, they would have ceased to eat meat. In that case, prices would have dropped, and they would have gone back to living as before.

You also should not worry about the people in the United States or Europe. All the U.S. government has to do to solve the problem is to reduce subsidies to its farmers, including payments for nonuse of farmland, and prices will drop substantially. To be sure, the agriculture lobby in the United States is very powerful, and even touching the issue is dangerous for Congressmen, but the overwhelming majority of Americans are not producers of grain, but consumers.

At some point, the rise in food prices will pressure the government to stop fulfilling the lobbyists' requests to limit agricultural supply. In this case, an increase in competition and production among producers will lead to sharply lower grain prices.

Almost the same thing can be said about Europe. The European governments have also protected their own producers by limiting production and instituting trade barriers to keep producers from developing nations out of their markets. (Actually, if the Europeans lowered trade barriers, they would be providing more assistance to the developing world than any humanitarian aid program could ever do.) This means that there is a significant grain reserve that has been artificially repressed. Once these barriers are removed, prices will drop.

Of course, rising food prices adversely affect people from countries that import grain. But most of the poorest countries in the world do not import food, despite their typically low level of labor productivity in the agriculture sector. Domestically, of course, producers win and consumers lose from high food prices, but each of these countries as a whole benefits from rising prices. The benefits have not trickled down to all citizens, as recent riots clearly demonstrate. This means that the government has failed to properly redistribute the windfall from higher prices. Inefficiency, corruption and simple mismanagement on the government's part might lead to political instability and even to civil war, but a rise in the prices of food prices by itself is not a cause for instability in grain-exporting countries.

For countries that significantly depend on food imports -- including Russia -- this logic does not apply. These countries are adversely affected from a rise in global prices, but the flip side of this situation is that higher prices make the agriculture sector more profitable. For these countries, this is a chance to increase investment and enhance productivity in the agricultural sector.

Konstantin Sonin, a professor at the New Economic School, is a columnist for Vedomosti.