The Speculators Driving Food Price Rises
Paris, April 15, 2008 -- The meetings last weekend of the International Monetary Fund and the World Bank, both under new leaders – Dominique Strauss-Kahn of France and the American Robert Zollick – made news principally on the question of world food price rises and shortages, an unwelcome development at a moment when the international credit crisis has banks on their knees, and western finance ministers under great pressure.
The food crisis is a real one, with rice – basic to the diet in much of Asia – rising in price by 75% in two months, and the rise in wheat, equally important to most western countries, rising by 120% over the year. This risks famine in vulnerable countries.
Already 100 million additional people are considered by the World Bank to have been forced into extreme poverty, and there are food riots in Egypt, Haiti and elsewhere. Hence the urgency in proposals for new funds to support food aid programs.
The conventional explanations for the flare in prices are population growth, (misconceived) diversion of corn and soybeans to bio-fuel production, rising Asian and Middle Eastern demand for high-value foods, higher transport costs, and crop failures. Oddly little has been said about the role of speculation in the rise in commodity prices generally and specifically in food.
On the Chicago CME Group market, which deals in some 25 agricultural commodities – it is a merger of the former Chicago Mercantile Exchange and Chicago Board of Trade – the volume of contracts has increased by 20% since the start of the year and now has reached the level of a million contracts a day. This will soon exceed the rate of growth reached in all of 2007.
The hedge funds are now active in commodities and are playing the futures contracts, where upwards of 30 million tons of soybeans for future delivery are contracted for every day. They are also buying the companies that stock grains.
The argument sometimes is made that this speculation is unimportant because the futures speculators will never take delivery; but this is precisely the problem. It is why this speculation is highly destructive of the true market.
Futures purchases of agricultural commodities classically have been the means by which a limited number of traders stabilized future commodity prices and enabled farmers to finance themselves through future sales.
Speculative purchases have no other purpose than to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer. Even the general public can now play the speculative game; most banks offer investment funds specializing in metals, oil, and more recently, food products.
It is astonishing in the present situation that the international financial institutions and government regulators have done little to control or banish this parasitical and anti-social practice. The myth of the benevolent and ultimately impartial market prevails against all contrary evidence.
It does so in the seemingly unrelated area of development. The Social Science Research Council in New York, sponsor of interdisciplinary academic research, has just given general circulation to an analysis of Latin American growth which demonstrates that the market-friendly policies recommended by the World Bank and IMF often hold nations back.
The author is Dani Rodrik of the Kennedy School at Harvard. The conclusion of his analysis is that the countries in Latin America that applied the IMF-World Bank "Washington Consensus" program formulated in the 1980s have done poorly, measured against other countries, other regions -- and against their own previous performances.
Rodrik finds that in 1960-1980, prior to the formulation of the Washington Consensus, the Latin American countries overall did slightly less well in growth than countries in East Asia and the Pacific, but had more than twice the average growth than countries in South Asia.
In the decade of 1980-1990, those Latin American countries that adopted Washington Consensus policies registered negative "growth" of -0.8%. East Asia and the Pacific had 5.6% average growth, and South Asia 3.3%.
Between 1990 and 2000 the Latins following Washington recommendations grew by 1.0%, South Asia by 3.3% and East Asia and Pacific by 6.4%.
What Latin American countries benefited most from globalization? Argentina, Bolivia, Brazil, Chile, El Salvador, Mexico and Uruguay. Every one of them practiced "nonstandard" policies. All of them developed by faster rates than other Latin American countries, and also more rapidly than China, India or Vietnam.
All had bigger increases in inward investment along with rapid overall economic growth, despite IMF-World Bank disapproval of their methods. Their policies varied according to different national choices, demonstrating that they knew better than Washington what suited their needs and economies. This would seem to deliver a serious blow to consolidated "best practices" and standard solutions. As Rodrik observes, the "just privatize, liberalize, stabilize" commandment doesn't work; you need to know the terrain and the political and economic culture of the country.
Rodrik's findings appear in the winter-spring issue of the SSRC quarterly publication, Items & Issues. The website is http://www.ssrc.org. Declaration of interest: I was for several years a member of the SSRC board of directors.
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