The FAO’s “State of Food Insecurity in the World”: A Study in Regulatory Capture?

Last week, the Food and Agriculture Organization (FAO) of the United Nations released its much-ballyhooed State of Food Insecurity in the World 2011 (SOFI). If you don’t have time to read all 55 pages of the SOFI, you can find the executive summary here, but be forewarned that the link opens a .pdf document.

In honor of World Food Day 2011, and given my interest in food policy as it relates to developing countries, I wanted to spend some time discussing the SOFI’s conclusions.

First, although the title of the report conspicuously ends with “2011,” the document really focuses on the impacts of the food crisis of 2008 rather than on the food crisis of 2010-2011, with a good amount of speculation as to what the future holds for food policy. So I’m afraid the “2011” in the title reflects the year of publication more than it denotes the object of the report.

The FAO cannot be faulted for this, however, as we are still reeling from the food crisis that began at the end of 2010 and the beginning of 2011, and which is still possibly unfolding. As for the current famine in the Horn of Africa, it gets only one short mention, and the FAO appears to shy away from using the “F” word — famine, that is — when discussing it.

Second, and much more important, is the FAO’s insistence that food price volatility is the major problem. Here is one of the main conclusions of the report, cited in the executive summary:

Price volatility makes both smallholder farmers and poor consumers increasingly vulnerable to poverty. Because food represents a large share of farmer income and the budget of poor consumers, large price changes have large effects on real incomes. Thus, even short episodes of high prices for consumers or low prices for farmers can cause productive assets — land and livestock, for example — to be sold at low prices, leading to potential poverty traps. In addition, smallholder farmers are less likely to invest in measures to raise productivity when price changes are unpredictable.

For almost a year now, my coauthors and I have been spreading the news that price volatility does not affect consumers negatively in the short run. This is something we actually have solid empirical evidence for, too. At the micro level, Chris Barrett, David Just, and I show that the poorest households in Ethiopia — who are almost all net consumers of food — are either unaffected by food price volatility or slightly benefit from it, and that it is the richest households in our data — who are almost all net producers of food — who suffer from net volatility.

At the macro level, I show that increases in the world price of food — both food in general and cereals, which are the major component of the diet of the world’s poor, in particular — appear to cause increases in the number of food riots, but that increases in food price volatility are associated with decreases in the number of food riots instead. These macro results cover both consumers and producers of food, so what I am estimating is the overall impact of rising food prices and food price volatility.

(A technical aside: food price volatility can have a long-term impact on the food price level. Food price volatility forces producers to produce less food than they otherwise would, which restricts the supply of food in the future. Holding demand constant, this means that food prices will increase in the future. But no study has so far quantified the future welfare impacts of food price volatility today, and my estimates tend to show that consumers do not include this in their expectations.)

By the way, that consumers could benefit from food price volatility while producers definitely suffer from it should not be surprising. Economists have known this to be true in theory since the theoretical pioneering work of Sandmo (1971) and Turnovsky et al. (1980).

Yet when Chris Barrett and I called attention to that fact last summer in Foreign Affairs, we were practically told we were idiots by people whose job it is to think about food policy.

An Easy Mistake to Make?

It is possible that the FAO scribes have a hard time thinking about the level of food prices (i.e., the mean price level) separately from food price volatility (i.e., the variance of the price level). After all, only regression analysis can hold one constant while studying the effects of the other and vice versa, and it is difficult to think about variance independently from the mean, since to calculate the former, we need to take the latter in consideration.

Moreover, it is not necessarily obvious that one can think about — and study the impacts of — the two concepts separately, and many are those who confuse “price volatility” with “rising food prices” when volatility really encompasses unexpected departures — both upward and downward — from a given price level.

Is this the case with the FAO? Quoting once again from the executive summary of the SOFI:

This edition of The State of Food Insecurity in the World focuses on food price volatility and high food prices.

I guess not.

Regulatory Capture

Ever since I started thinking about food prices at the end of 2010, I have lived by my colleague Don Taylor’s injunction (a restatement of Occam’s Razor, really) never to assume that a conspiracy took place where it is likely that a simple mistake has been made.

So all this time, I have had to remind myself that it was likely that the FAO and other food policy institutions simply did not know about the differential impacts of rising food prices and food price volatility.

I am not sure I can live by Taylor’s injunction much longer, as it is becoming increasingly obvious that, in all those reports, the FAO is really talking to its donor countries — the US, Canada, the European Union, Japan, etc.

Indeed, it is in those countries that policy makers care the most about reducing food price volatility, because it is in those countries that agribusiness represents powerful interests, that agricultural producers have formed influential lobbies, and that institutions have fallen prey to regulatory capture, aided and abetted by wealthy consumers who barely detect it when their budget share of food increases due to that regulatory capture.

In other words, it looks as though the FAO is playing right into the hands of producer organizations via national governments by obsessing over food price volatility. But if you care about the world’s poor, you should primarily care about consumers, and so you should focus on lowering food prices rather than stabilizing them.

What is more surprising is that The Guardian, which as far as I’m concerned is the newspaper of record for all things development policy, appears all too happy to repeat the bromide that food price volatility is a “major obstacle to [the] millennium development goal of halving global malnutrition.”

I am sure the typically left-of-center readership of The Guardian would be just thrilled to know that the newspaper is an unwitting stooge of the farm lobby. Maybe it’s time for everyone to stop being so Pollyannaish about the UN agencies?

2 comments

  1. M Norton

    Marc,

    Interesting post. It inspired me to go out and do more reading on the subject, and you know what? Wikipedia actually has a pretty great article on the 2007-8 food price rise. The word “volatility” seems like a code word for something, but I haven’t quite put my finger on what yet. Certainly it seems easier to talk about than high food prices themselves.

    I was reminded of this article from the Atlantic asking if Wall Street was helping drive world hunger. (Posted before the protests – it’s really unpopular to be a bank these days.)

    http://www.theatlantic.com/business/archive/2011/09/is-wall-street-driving-world-hunger/245090/

    It made me wonder – does increased volatility have the side effect of increasing financial speculation? And thus prices?

  2. Marc F. Bellemare

    Mike,

    It’s good to hear from you, and I thank you for your comment. I think you’re right that the term “volatility” is code for something. For most people, it stands for “rapid, unexpected increases,” but the strict definition of volatility encompasses both rapid, unexpected increases as well as rapid, unexpected decreases. This is something that is difficult to get across to most people. It gets even more difficult when you have to explain that it’s possible to study the impact of volatility independently from that of an increase in the mean, or vice versa.

    As for speculation, I remember seeing that article. You pose an interesting question, which every social scientist should always ask when presented with observational data: What if the causality runs the other way? In most cases, it likely does.