Wednesday, April 23, 2008

Without comment: From Rahul Mahajan's blog

Disclaimer: As with my usual `without comment' series (this is only the 2nd), I neither endorse or oppose the views here. It is only for your edification. I will not respond to comments either.

The original is at Rahul Mahajan's blog Empire Notes.

April 21, 2008

Weekly Commentary -- Capitalism and the Global Food Crisis

In Haiti, the poor are eating mud pies, concoctions of mud, oil, and sugar, the only way some of them can now afford to deal with what they call “Clorox hunger,” a feeling of starvation so intense it makes you feel as if your innards are being eaten away by bleach. Across the world, from Haiti to Cameroon to Egypt to Bangladesh to Indonesia, rising grain prices have sparked food riots and social unrest.

In the past year, the price of wheat rose 150%, before retreating somewhat in the past few months so that it’s only up 80%; the price of corn rose 50%. Most remarkably, the price of rice has risen 141% since January.

Reportage and commentary has identified the factors going into this catastrophic price rise: a drought in Australia, the rising price of oil, growing demand for meat in India and China, and the sudden craze for biofuels.

For the most part, they have neglected to identify the underlying enabling factor – capitalism.

It is the genius of capitalism to take a good idea – use plants’ ability to fix solar power in order to create fuel that can replace the dwindling reserves of oil – and twist and torture it until it leads to crisis. Although, to be fair, some credit must also be given to the freakish inertia of the American political system and the massive stupidity it helps to produce in politicians and legislators.

First, capitalism requires that biofuel profit somebody, or it won’t be produced. Second, the combination of capitalism and the corrupt interest-driven politics of American agriculture dictate tha

t those profited be a politically important constituency. The combination of the disproportionate importance of the Iowa caucus and the stranglehold that agrobusiness has over domestic policy formation on agriculture has led to the United States coming up with the most insane possible approach to biofuels – price supports for corn, the growing of which in this country involves massive use of oil directly and of petrochemical fertilizers. With easy profits to hand, corporations maximize production instead of minimizing waste, so that we end up paying subsidies to corporations to use up more oil.

At this point, one quarter of corn production in the United States goes to biofuel. Consider now the effects on the rest of the world. The United States has labored, especially in the last few decades, to create a world market in everything. NAFTA, which had nothing whatsoever to do with deindustrialization in Ohio, has eviscerated Mexican corn production and made the country dependent on imports of previously cheap American corn. Now, however, the Mexican consumer has to compete for that corn with oil companies that are effectively government-subsidized; it’s no surprise who wins.

Haiti, similarly, used to produce its own rice, but the structural adjustment imposed on it in the mid-1990’s by the United States as a condition for allowing Aristide to return and for an end to the military reign of terror, made it a significant consumer of U.S. agrobusiness rice. Biofuel subsidies create incentives to produce corn instead of rice or wheat; this helps drive up the price of rice and wheat.

Finally, consider this: the market processes of setting a price where supply equals demand don’t have to be linear. If overall grain supply for food decreases by 10%, that doesn’t mean the price goes up by 10%. Depending on the shape of the demand curve, it could change by any amount. In a market made extremely tight by the various factors cited above, a small push from the change in biofuels policy created massive price rises, further helped along by speculation, just like tech stocks in the late 90’s or tulips in 17th-century Holland – just, this time, those speculators are literally feeding off of corpses.

Third World countries have finally responded, with price supports and bans on export of foodgrains. The World Food Program wants $500 million to deal with the immediate crisis. As of last week, though, its emergency appeal for $96 million for Haiti had netted only about $12 million. And do remember, when you see U.S. food aid reported, that 65% of that money is overhead and transportation costs, because of the corrupt, interest-driven requirement that food aid be produced in the United States; it’s a solution that’s part of the problem.

This crisis is undoubtedly a harbinger of worse to come if we don’t make systemic change; we may yet look back on the creation of a world market for food as among the most calamitous consequences of a century that saw more violence than any in world history.

Posted at 10:18 am.

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