Ripple Effects in the Food Trade

by Joshua Foust on 4/15/2008 · 3 comments

When last I touched on the global food crisis and how it is impacting Afghanistan and the rest of Central Asia, I noted that countries continuing to ban wheat exports would make the problem worse by restricting the global market, driving up prices even more, and limiting national coping mechanisms. One of the countries producing a glut of wheat this year was Kazakhstan, whose farmers were enjoying rather handsome profits from the wheat trade. Until now.

Kazakhstan joined other Black Sea grain exporters in curbing shipments on Tuesday, suspending wheat exports until Sept. 1 to combat double-digit inflation in Central Asia’s largest economy.

Analysts said they expected the ban, which excludes flour and will take effect 10 days from now, to cause a short-term spike in world wheat prices as supplies from Russia and Ukraine are already constrained by export limits or tariffs.

This is not insignificant. While Kazakhstan couldn’t lower world prices too much with Australia in a serious rut, an export ban not only fuels price hikes (which are affected by perception as much as supply), but is seriously bad news for poor people trying to feed their families everywhere. As notes:

The other four Central Asian countries all import Kazakh grain, and the poor in all countries have been hit severely by recent price surges… Much of the region’s southern arable land is primarily used for growing cotton and cannot easily be converted into growing food crops.

Let’s hope that global food price inflation will come down during this year so that the Kazakh export ban really only has to last until September.

Yes, let us hope. Ben linked to some other interesting local anecdotes about how grain prices are adversely affecting quality of life in most of Central Asia, and they’re worth a read.

Kazakhstan’s behavior is confusing: though it is a much better reaction than a price freeze, an export restriction is of dubious benefit for combating inflation. Inflation is caused when money and credit increase out of proportion with an economy’s ability to produce goods and services. An export ban effectively limits the amount of goods Kazakhstan can produce by harming exporters—the Reuters report speculated it could potentially cause $800 million in losses.

There are better ways than export restrictions. If memory serves, other countries that have faced high or even runaway inflation rates, like Brazil in the early 90s, have successfully curbed inflation through trade liberalization, not restriction. In Russia, Vladimir Putin has expressed an explicit desire to curb his country’s rising inflation rate through membership in the World Trade Organization and lower import tariffs. Last year, India addressed the problem through deliberate and rapid appreciation of its currency. According to Indian economic analyst Ajay Shah, this sudden change was a shock response to a long period of export restrictions making inflation worse (it’s a bit more involved, and I suggest reading the article in full, but you get the idea).

So in the bigger picture, Kazakhstan’s decision to ban wheat export as an inflation combat measure is non-sensical. The Central Bank raised the interest rate by two points to 11% in December of 2007, then earlier this month decided to keep them there. This has been ineffective in arresting inflationary pressures because raising interest rates is only one method of handling inflation, and its effectiveness tapers off if the government spends excessively. The Kazakh banking system has gained a bit of notoriety for its massive liquidity problems, which have prompted a government intervention to help repay foreign loans. This indicates the driver behind inflation is sloppy policy, not excessive cash or credit—which would imply that the high interest rate is actually hurting the overall economy, and not helping cub inflation. High interest rates curb economic growth— and growth combats inflation. Moreover, India’s many bad experiences with controlling food exports indicates that banning the export of high-profit food staples will only drive interest rates higher. The problem is in fiscal policy, in other words, and not food.

I’m not versed in economics well enough to speculate much further. But given how much Kazakhstan’s neighbors west and south of her depend on her wheat, this could have enormous consequences. While the government is not banning the export of flour, and thus might become a kick in the pants to the milling companies, this doesn’t address the base problem. Banning wheat is clearly not a measure to reduce inflation—everywhere else, including just to the north in Russia, export restrictions have a proven track record of failure when it comes to dealing with inflation.

Unless the Kazakh government is terribly naïve, which is, unfortunately a possibility, this smacks of adopting a shallow knee-jerk reaction to both inflation and food prices. Which is fine, but they shouldn’t pretend they’re trying to combat inflation either… and they should recognize the serious consequences this will have over the next six months.

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This post was written by...

– author of 1848 posts on 17_PersonNotFound.

Joshua Foust is a Fellow at the American Security Project and the author of Afghanistan Journal: Selections from His research focuses primarily on Central and South Asia. Joshua is a correspondent for The Atlantic and a columnist for PBS Need to Know. Joshua appears regularly on the BBC World News, Aljazeera, and international public radio. Joshua's writing has appeared in the Columbia Journalism Review, Foreign Policy’s AfPak Channel, the New York Times, Reuters, and the Christian Science Monitor. Follow him on twitter: @joshuafoust

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Seyitbek April 16, 2008 at 1:01 am

People should switch their staple from breads to rice, healthier and cheaper.

Fabius Maximus April 16, 2008 at 7:40 am

Great analysis. Esp nice that you mentioned the link between food prices and monetary policy. “Inflation is always and everywhere a monetary phenomenon.” Milton got the Nobel for that, but seems to too complex for journalists.

The other problem, which you hinted at, with export bans and direct price controls: they disrupt the economy’s adaptation mechanism. Sky high prices produce more supply.

Unfortunately, when inflation appears to this extent is it deeply embedded in the economy, and all solutions are painful. Politicos prefer to listen to snake oil salespeople offering easy solutions. This, of course, allows inflation to become even more deeply embedded.

Astonishing that each time inflation appears it is regarded as a new thing, and these basic lessons must be learned over and over. The places that remember these lessons, like Germany, seldom get serious inflation.

Oldschool Boy April 16, 2008 at 11:56 am

The problem with economics and its ‘rules’ of market economy, that it is not really a science and it does not work for everyone, and if it works it works only to the benefit of reach people.
Kazakh government tries to protect its people. The bread prices in Kazakhstan is still lower than in most countries in the world. Certainly, current high wheat prices will benefit the grain traders, but the export in this case will either drive all the wheat out of the country or will raise the wheat products prices in the country before any “market mechanisms” will lower them. When there is a threat of hunger in your home, nobody will care for “free market”.
Nobody in the world now follows free market rules. By the way, India has banned export of rice.

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