Saturday, May 10, 2008

Stiglitz argues against inflation targeting

Joseph Stiglitz argues against inflation-targeting and as always shows skepticism over the prospect of free trade, especially due to the existence of farm subsidies and other price distortions in the West.

Advocates of trade liberalisation touted its advantages; but they were never fully honest about its risks, against which markets typically fail to provide adequate insurance. Over a quarter of a century ago, I showed that, under plausible conditions, trade liberalisation could make everyone worse off. I was not arguing for protectionism, but rather sounding a cautionary note that we must be aware of the risks and be prepared to deal with them.

When it comes to agriculture, developed countries, such as the US and European Union members, insulate both consumers and farmers from these risks. But most developing countries do not have the institutional structures, or the resources, to do likewise. Many are imposing emergency measures like export taxes or bans, which help their own citizens, but at the expense of those elsewhere.

If we are to avoid an even stronger backlash against globalisation, the west must respond quickly and strongly. Biofuel subsidies, which have encouraged the shift of land from producing food into energy, must be repealed. In addition, some of the billions spent on subsidising western farmers should be diverted to help poorer developing countries meet their basic food and energy needs.

Most importantly, both developing and developed countries need to abandon inflation targeting. The struggle to meet rising food and energy prices is hard enough. The weaker economy and higher unemployment that inflation targeting brings won't have much impact on inflation; it will only make the task of surviving in these conditions more difficult.

Food Crisis: Lessons from Uganda

Pascal Zachary argues for some form of protectionism to buttress domestic agriculture by giving an example from Uganda, which imposed restrictions on rice imports and encouraged domestic farmers to grow more rice. This has enabled Uganda to increase production, stabilize prices at a time when food prices are rapidly rising, and, most importantly, achieve self-sufficiency in a sector that would directly determine the scale of starvation and hunger. The secret of Uganda's rice farming, according to Zachary, is that it ignored neoliberal principles on trade openness and shunned Western advice in key sectors. But, taking this as an argument for protectionism at full scale is not well suited. Selective intervention in key sectors for a short period of time (until a project attains sustainability or is able to compete with market forces) is acceptable but intervention should not be dragged on and on. It breeds corruption, bad governance, and political instability. See this one as well.

Consider the case of Uganda. The country’s rice output has risen 2½ times since 2004, according to the Ministry of Trade. Rice production is expected to reach an astonishing 180,000 metric tons this year, up from 135,000 in 2006 and 102,000 in 2005. Consumption of imported rice, meanwhile, fell by half from 2004 to 2005 alone, and by half again from 2005 to 2007.

Uganda’s importers, seeing the shift, have invested in new mills in the country, expanding employment and creating competition for farmer output, thereby improving prices. New mills, meanwhile, lowered the cost of bringing domestic rice to market. While people in developing countries across the globe are clamoring about the sharp rise in food prices, Ugandans are still paying about the same for rice as they always have. And Uganda is poised to start exporting rice within East Africa—and beyond.

The secret of Uganda’s homegrown success? Ignoring decades of bad Western advice.

Embracing a new variety is only part of the working-smarter formula. Once rice output began to expand, Bukenya and other Ugandan politicians played another card: They stumped for a duty of 75 percent to be imposed on foreign rice. The legislature passed the duty, which stimulated domestic rice production further.

Uganda’s success in expanding its rice production is especially interesting because the people of sub-Saharan Africa spend nearly $2 billion a year on rice grown outside Africa. The amount Africans spend on rice alone equals the national budgets of the governments of Ghana and Senegal combined. With the help of wise policies, African farmers could grow much more rice on their own, maybe even enough to eliminate virtually all imported rice. Eliminating rice imports would benefit Uganda by ensuring a local supply as Asian rice is becoming less available and more expensive.

What Uganda recognized is that the world’s major rice exporters actually practice the opposite of what the World Bank and IMF preach. Much of the rice grown in Pakistan, Vietnam, and especially the United States is stimulated by subsidy payments to farmers. Then the rice is “dumped” into African markets at low prices—sometimes below the cost of production. These producers also maintain stiff duties against imported rice, contradicting free-market ideology but helping protect domestic farmers against global competition. And for good reason: Virtually every successful Asian economy was built on selective trade barriers—and in China and India, the world’s two fastest growing economies, such barriers remain in force. Even South Korea and Japan maintain massive duties on imported rice simply to protect the livelihoods of their own rice farmers. Rice duties are working in Uganda—and also in Nigeria, where rice output is also soaring. In both countries, the value of imported rice is declining and locally produced rice is winning the hearts and minds of ordinary consumers.