How to turn a Stiglitzian into a paleo-Friedmanite: rice cartels by mattsteinglass
August 8, 2008, 1:44 pm
Filed under: Economics, Vietnam

I’m no economist and the things I’m about to say may be totally wrong. But:

Rice, rice, rice. In March, the world’s rice supply seemed to have dropped dangerously low. The World Food Program and The Economist talked about a “silent tsunami” of high rice and wheat prices causing starvation in food-importing third world countries. Worried about food security, Vietnam, the world’s number two rice exporter after Thailand, decreed a halt to new export contracts. By May prices had skyrocketed 80 percent to over $1000 per ton (benchmark Thai B-grade on the Chicago Board of Trade).

Fast forward three months, to yesterday. After a bumper spring harvest, with a bumper summer-fall harvest on the way, Vietnam has millions of tons of rice surpluses. The world price has fallen to $600 per ton. Vietnamese rice farmers suddenly can’t sell their crops at a profit; the rice is piling up in their houses, and Vietnamese Prime Minister Nguyen Tan Dung yesterday had to order the national rice export cartel, run by state-owned company VinaFood, to immediately purchase another half a million tons, at artificially inflated prices to guarantee farmers a 40% profit, and go find somebody to export it to. In a year when Vietnam should be raking in the bucks from high commodity prices, it’s instead being forced to subsidize its farmers — and this when the country is running a huge trade deficit and is desperate for sources of export income.

Who is to blame for this colossal *&()#:+%$!!-up?

I would tentatively advance the notion that having a state-owned monopoly buy up your country’s entire export rice crop every year, and make centralized command decisions about how much to sell at what price and when, is a really stupid idea. If Vietnam wants to ensure food security, it should have state-owned companies buy up a strategic reserve and empower them to pay for stockpiles at production cost in cases of emergency. Maybe it could let state-owned companies buy some fraction of the crop intended for export. But if Vietnamese farmers had been able to sell, say, half their crop to private exporters in May, back when the Philippines was screaming for more rice and the price was 80% higher than it is today, maybe the government wouldn’t have to be massively subsidizing its rice farmers today.

(Just to make things even worse: you’d think that rice export companies would be going around right now to buy up the surplus crop and store it in the expectation of higher prices later, right? But they can’t, because they normally take out loans to buy crops for export, and interest rates in Vietnam right now are at about 20% because inflation is running at 27% year on year. The fact that interest rates are lower than inflation is in itself a reflection of excessive government control: the government limits interest to 1.5 times the prime rate, and it’s holding the prime rate at 14%. In any case, food exporters can’t afford to buy and stockpile rice for more than a couple of months because the interest rates would bankrupt them. So the government’s order to them to buy more rice entails an order to state-owned banks to provide them with favorable terms of credit. That means an expansion in the credit supply, which will blow a small hole in the government’s policy of tightening credit to fight inflation. So not only has complete government control over rice exports robbed the country of hundreds of millions of dollars of precious export revenue, snatched away potential profits from farmers and forced the government to subsidize them, it’s also going to help sabotage the government’s desperately needed efforts to bring inflation down. This has not been a good several months for the post-Friedmanite, post-market-Messianism crowd.)


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