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Rice Crisis and the Shortage that Wasn’t: Looking at the World in Someone’s Else Shoes

January 4, 2012

By Fiorenzo Conte

In 2007-2008 rice prices tripled  over six months (yes you are reading correctly: tripled!). Many analysts asked why this took place and why at that specific time. According to IRRI (International Rice Research Institute) the fundamental cause of the price spike is that demand outstripped supply as demonstrated by the steady price increase over the previous 7 years. If the prices had not increased more suddenly before it was because the world was drawing on rice stockpiles whose level in 2007 was the lowest since 1988.

This analysis however fails to explain why the rice crisis happened at that specific time. In fact if one looks at the rice market fundamentals, they were sound: rice production kept pace with the demand and the stocks were constant the three years preceding the crisis (see here the graph). So who pulled the trigger and set off a chain reaction which culminated in the rice global crisis?

NPR Planet Money has a fascinating account of how the price spike was ignited by a series of decisions which made a lot of sense from the perspective of every individual actor who took them. Each of this “rational” choice was dictated by the goal of achieving food security in each country in face of a growing fear that the world was running out of rice. More precisely the fear that there might have been a shortage because the shortage never materialized in reality. Rational choices compounded by fear determined the very irrational outcome of a price spike.

The first culprit was the government of India which made “food for all” its flagship. This implied that the government needed 60 million tons of rice and wheat. Afraid of not being able to get as much wheat as he needed the government thought to substitute rice for wheat. To do so it banned the export of rice out of the country. Why did it make sense to the Indian government to do so? Rice in India as in the rest of Asia is part and parcel of life and as such constitutes a topic of national security for governments. Banning exports served to secure food security for Indians.

The next thing was that rice prices soared by 20% overnight. Governments all over Asia rushed to buy as much rice as they could and hoard it in the expectation of a future scarcity of rice signaled by the price jump. If you are a rice exporting country you can hoard rice by banning or restricting exports. This is what Egypt, Vietnam and Thailand made one after the other. If you are a rice importing country you do not have much choice. What government officials in the Philippines did was to tell their people to eat less rice so that the government could have bought less rice (and this was probably the least reasonable of the reactions). In response to this Filipinos rushed to buy as much rice as they could because they understandably interpreted the message from the government as “we are running out of rice”.  All of these choices made perfect sense from the point of view of those who took them because they served to ensure that everybody could have rice on the table. What made sense for millions of people in Asia- i.e. going and hoarding rice – did not make sense to people sitting in other part of the worlds, where rice is not the centerpiece of life and can be substituted by another staple. The perspective from which you view the world determines what makes sense for you.

The same principle holds with regard to the lessons to be learned from the rice fiasco. In a best case scenario (what an economist strives for) governments would not tamper with rice markets so that rice could go where is most demanded. From a government perspective however this does not make sense because it is just not feasible. If the lives of your citizens revolve around rice you cannot let the market decide where the rice goes. The governments which did restrict exports did not experience price spikes in their own countries. The political reality which determines what is rational is in other words that governments are responsible for guaranteeing the food security of their own people. If you put yourself in the shoes of the Vietnamese policy makers it made a lot of sense to ban exports because they insulated their citizens from the prices spikes, even if they cause other people in other countries to suffer from it. So next time you think about the world try to look at it in someone’s else shoes.

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