volatile markets

Grain Tomorrow the first ever summit of G-20 Agriculture Ministers will take place in Paris. The French government is to be commended for the initiative. Concerned by the evident disarray in government responses to the food price crisis of 2007-08, the French government moved quickly and deliberately to consider how best to respond. One of their investments, one that might be overlooked in the drama of a G-20 summit, has been in research to understand what kinds of tools governments have used to respond to price spikes and volatility, and how effective those tools have been, particularly in developing countries, and particularly with an eye on reducing poverty and vulnerability to hunger. The results of that investment is informing the debate at many levels, and is a welcome addition to a literature that is otherwise rather too orthodox.

One of the main contributors to this research is Franck Galtier, who works with part of the French agricultural research institution CIRAD. Galtier makes the point that countries are each quite different and need their own distinct mix of policies to respond to the specificities of their situation. Galtier has built a typology of responses to price volatility with four categories: measures to prevent (or mitigate) volatility and measures to cope with it, crossed with measures that are designed to leave the private sector in charge versus measures that require the state to intervene. One of his important conclusions is that, by far, the largest share of international policy advice (and money) for the last twenty years has focused on policies and programs that use public funds either to build infrastructure and open borders, or to manage risk and facilitate participation in commodities markets. Public interventions to mitigate volatility—to keep prices stable—have been widely neglected. Yet common sense and long experience suggest they might be the best use of money.

A number of governments (notably the U.S., Canada, U.K. and Australia) remain firmly committed to this lopsided policy agenda. We can expect the neglect of important public policy tools to regulate markets to be evident in the summit outcomes, even though a number of G-20 countries intervene heavily in their domestic agricultural markets, and to great effect, successfully limiting the incidence of hunger in their countries (for instance in China and Indonesia). The report prepared for this meeting at the G-20’s behest by ten international institutions (and discussed on this blog by Jennifer Clapp last week) also betrays an allergy to public regulation of markets.

It is ironic that many of the countries so averse to public policies that interfere in markets have biofuel policies that illustrate the worst kinds of market distortion. The U.S. even dares describe its biofuel sector as an “infant industry”! Demand from the biofuel industry, propped by billions of dollars worth of public subsidy and minimum use mandates, has exacerbated price spikes and increased the vulnerability of populations whose food supply is in some measure dependent on imports from international markets. Another example of market distortion is the role of excess speculation in financial markets. In 2009, the G-20 Heads of State set themselves the task of improving the governance of commodity futures markets, acknowledging their role in causing price volatility: “We have agreed to improve the regulation, functioning and transparency of financial and commodity markets to address excessive commodity price volatility.” Yet on this question, too, the U.S., Canada and others continue to block action (see here for a commentary on U.S. efforts to block reform).