Coordination Failure, Self-Fulfilling Prophecies, and Rising Food Prices

Fiorenzo Conte, in a post on the London School of Economics’ Development Studies Institute’s student blog, makes a crucially underappreciated point when it comes to food prices:

The price spike was ignited by a series of decisions which made a lot of sense from the perspective of every individual actors who took them. Each of this “rational” choice was dictated by the goal of achieving the 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. (…) To do so it banned the export of rice out of the country. (…)

The next thing was that rice prices soared by 20% overnight. Governments all over Asia rushed to buy as much rice they could and hoard it in the expectation of a future scarcity of rice signaled by the price jump. (…) 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.”

In a recent American Journal of Agricultural Economics article (ungated version here), Will Martin and Kym Anderson estimate that almost half of the increase in rice prices between 2006 and 2008 was due to country-level policies such as the ones described above.

This is a classic case of coordination failure (and, in the case of the Philippines, of a self-fulfilling prophecy). Unfortunately, global policy makers have very little say as to what goes on within countries. Even if they did, international organizations react way too slowly to be effective during food crises — this is especially true of the United Nations (the “colossus with feet of clay” analogy is particularly apt here), a little less so of the World Bank and the IMF.