Food inflation: lessons from India

The current rise in food prices is very, very dangerous. Not because food will be more expensive, but because chances are the government will intervene to prevent this.

The unions in South Africa have already called for a food price freeze. This merely serves to show that they didn’t bother paying attention in Economics 101. Nor bothered to witness the results of price controls in our neighbouring no-crisis zone, Zimbabwe. If you cap prices, you cause shortages. Simple. Fact. Nothing can change that except complete nationalisation of the entire supply chain, and even then, the difference will be made up from tax, so lower real incomes will keep the real price of food the same.

The danger is that there are enough communists, socialists, interventionists and developmental-statists in government that they might just listen to the unions. If only to pander to the population and avoid the counter-productive impact of strikes and riots.

A recent commentary by the grandiloquently named Swaminathan S. Anklesaria Aiyar, picked up by the Wall Street Journal Asia, makes a good example of India. His conclusion is similar to mine in a recent post on my own blog, Fixing the food price crisis:

India’s current food price problem isn’t a market failure. Rather, it’s a government failure to allow markets to work. The only sustainable solution is to pull back the subsidies and protections. But sustainability is the last thing on the minds of politicians competing to win the next election with ever-higher subsidies.

It’s a simple truism that in a free market, the solution to high prices is high prices. High prices drive prices down by stimulating production and discouraging unnecessary consumption. It is also true, however, that artificial costs and inefficiencies introduced into the supply chain by government intervention merely serve to perpetuate the supply-demand imbalance.

Our government should indeed take drastic action, by removing any and all regulations, subsidies, tariffs and other red tape from the agricultural sector. It should take drastic action to ensure that any pending land transfers are expedited (or cancelled) as quickly as possible, to prevent otherwise productive commercial farm land lying fallow. It should take drastic action to guarantee farmers — including new farmers on restitution or redistribution lands — gain full title to their property, so they can raise working capital by using their land and equipment as collateral. It should take drastic action to complete its long-overdue audit of state-owned land, and make suitable land available to emerging farmers and communities. And it would do well to take to heart the lessons Aiyar cites from India’s agricultural policy and its history of government intervention.

Everyone asks what government can do. Instead of acting innocent and blaming corporate collusion, this is what the government can do. This is positive action. This is taking the moral high ground. And it had better do these things quickly, or people might start thinking the unions actually have the right idea. I can think of no more dangerous result of food price inflation than that.