Food Prices, Future Crisis

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn has said that if prices of food keep rising, it will possibly cause starvation for a countless number of people.

BBC News quotes the IMF boss:

"Thousands, hundreds of thousands of people will be starving. Children will be suffering from malnutrition, with consequences for all their lives."

The same story posits some causes:

Food prices have risen sharply in recent months, driven by increased demand, poor weather in some countries and an increase in the use of land to grow crops for transport fuels.

Almost 8 years into the twenty-first century, and a long way from the industrial revolution, one would think that this should not be happening.

It's puzzling to think about these crises when countries in the European Union and the United States are overproducing food thanks to sustained subsidies. Thinking about David Ricardo's comparative advantage, industrialized countries should have moved on a long time ago from producing staples (economists, think of the Heckscher-Ohlin model). The American or European worker could spend his time on a much more profitable endeavor, and leave the farming to those less specialized, labor intensive countries. Although this is true, it misses the point, since the problem today is a lack of food, and not whether the poor farmers in poor countries can compete with subsidized farmers in wealthy countries, so lets leave this discussion for a further post.

One of the causes seems to be the allocation of crops towards the creation of alternative fuels that would have otherwise been allocated towards food production. I know we are running out of oil, but is a trade-off between fuel or food considerable? The US has good oil reserves, and the world's oil is not due to expire for a while (although not a very long while). Maybe the answer lies on looking for a new source of energy, one that does not jeopardize the world's food supply. Or maybe it lies on a joint world initiative to empower poor African countries in the growing of crops that can be used for bio-fuel production. This would create a new supply of crops to meet the new demand for bio-fuel producing crops, and not a reallocation of current crops, which reduces food supply. Unfortunately, taking up this option is not likely to happen any time soon.

Markets and the price mechanism are amazing allocation instruments. However, when the outcome of one such market jeopardizes the human lives, creative solutions must be thought of. Lets start thinking then...