The recent ban on paddy exports by India has sent bulls racing in global food markets. In Asia, rice futures prices have reached levels not seen since the 2008 global food crisis. The export moratorium comes at an already challenging time: the revocation of the Black Sea grain agreement has already constrained supplies, and adverse weather conditions have caused floods in China and El Nio conditions in significant food exporting nations such as Brazil and Australia. The ineffective dispute resolution mechanism of the WTO is also partially responsible for today’s “anything goes” trade policies, including the rise of agricultural protectionism.
India’s export ban in 2008 considerably contributed to the global food crisis fifteen years ago, and the country’s significance on global rice markets has only increased since then. In September of the previous year, India prohibited the export of damaged rice, causing problems for many impoverished rice-importing nations, especially in Africa, which depend on Indian supplies.
It is difficult to deny that the prospect of general elections in 2024 – in which the incumbent Modi administration is a strong but not insurmountable favorite – weighed in favor of measures that will tame domestic inflation at the expense of economic turmoil in other parts of Asia. By awarding bilateral exemptions to the export ban, New Delhi can generate diplomatic goodwill with certain trade partners, as was the case with Senegal and Gambia, who were granted permission to import Indian broken rice around the earlier bans.
India is not only the source of recent problems on the global grain market; it is also the host of the G20 this year. Given the circumstances of last year’s summit, the Chair, Indonesia, accomplished an impressive feat of economic diplomacy by getting leaders to concur on a consensus statement that included food security. During its presidency, Indonesia lifted palm oil export restrictions imposed earlier in the year. It remains to be seen whether the summit in New Delhi will be able to produce a consensus on how to pacify global agricultural markets.
Preventing Food Crises: Managing Perception to Avoid Shortages
Avoiding self-fulfilling prophecies is frequently the most important aspect of food crisis management. When individuals and governments anticipate shortages, they stockpile, producing the market scarcity they are attempting to insure against. A set of decisions that seems perfectly rational on an individual or even national level can result in a social welfare outcome that is far from optimal — a classic prisoner’s dilemma outcome. As with the toilet paper crisis in some countries during the early days of the COVID-19 pandemic, the key is to stop this issue in the bud by managing perception and assuring consumers that supply is sufficient to meet demand at a reasonable price. According to Franklin Roosevelt, the only thing to agonize about is panic itself.
On international food markets, it is frequently necessary for a single government to communicate market confidence in order to deter importers from stockpiling. In 2008, this role was played by Japan, which announced it would send the Philippines a portion of its so-called ‘WTO’ rice inventories (imported in accordance with minimum market access provisions but stored in warehouses to safeguard local production). The measure by Japan calmed rice markets and averted a more severe crisis.
Peter Timmer explains in this week’s main article that three Asian nations will play crucial roles. Indonesia, which is entering a prolonged drought season due to El Nino, is obligated to purchase 1 million tonnes of rice from India, but it remains uncertain whether this order will be fulfilled at least in part. The response of Indonesia to any scarcity in its import program will have a significant effect on the global price. If India pledged to fulfill the commitment in full, it would significantly soothe the markets.
The Philippines and Vietnam are also worthy of close attention; the former due to its status as the second-largest rice importer in the world after China, and the latter due to the fact that its relatively good harvests this year will fill some of the void left by India (with its farmers enjoying much higher profits due to higher prices). Things could deteriorate if the Philippines require more rice than anticipated or if Vietnam becomes concerned about its own food security and imposes trade restrictions.
Despite the significant challenges that India’s protectionist action has created, the situation does not appear nearly as unstable as it did in 2008. As Timmer concludes, “the critical question is whether the price increase will be gradual, giving consumers time to adjust without panicking, or whether it will be sudden.” The lack of hysteria since India’s announcement in July gives optimism that the increase in rice prices will be gradual and manageable.
In many nations, the accelerated post-COVID inflation is beginning to subside. It would be a shame to forsake the hard-won benefits of monetary policy tightening with a bout of destructive food inflation. A coordinated response must prioritize maintaining open rice markets and preventing frantic accumulation.
Source: East Asia Forum