The global food crisis of 2007/8 led to the in-depth questioning a food security strategy based on massive imports of cheap food, a strategy that was formerly promoted by international institutions such as the World Bank or the World Trade Organization (WTO), and implemented by many countries throughout the world. Bangladesh’s trade policy for rice testifies to such a turnaround, as demonstrated in a study by Paul A. Dorosh and Shahidur Rashid of the International Institute for Food Policy Research Institute (IFPRI), which we recommend reading (excerpt below)1
From the mid-1990s, Bangladesh largely based the food security of its population on cheap rice imports. During the crisis of 2007, grain prices rose sharply on the international market and subsequently on local markets placing countries in a critical situation in terms of food security. The example of Bangladesh is particularly revealing of the destructive effects of a food security strategy based cheap imports of food products. Not only did the 2007 crisis clearly highlight the dangers of a strong dependence vis-à-vis international agricultural markets in which price volatility is high, but this choice of policy also had another long-term adverse effect, more insidious but equally destructive. Because even though cheap food imports have given urban populations access to food, they have had disastrous consequences for farmers and rural households, who in almost all developing countries, make up the majority of the population. Low agricultural prices have greatly depleted the population, but they have has also hampered their ability to invest in their farms and develop their productive capacity. As the IFPRI study shows, the 2007/8 crisis is a forceful reminder of the need to invest in agriculture and to implement stabilizing mechanisms for agricultural prices. The recent episode of agricultural price volatility, including the price increases generated by the drought in the United States and in the region of the Black Sea, only confirm the urgency of such measures.
momagri Editorial Board
For more than a dozen years, from 1994 to 2007, private-sector rice imports made a major contribution to price stabilization and food security in Bangladesh by adding to domestic supplies. In the first half of this period, including the crucial eight months following the massive floods in August 1998, these imports were sourced from private markets in India. However, from 2003 to 2007, Bangladesh wholesale prices were consistently below the calculated import parity price of rice sourced from wholesale markets in India even though there were steady private-sector imports from India. Econometric evidence in this period provides an answer to this puzzle by establishing a strong statistical comovement (co-integration) between Bangladesh domestic wholesale prices and import parity prices of subsidized BPL rice from India’s public stocks. Rice imports at these subsidized prices during the 2003/04 to 2006/07 period resulted in a major benefit to Bangladesh consumers through lower market prices, generating an estimated 1.0 to 1.6 billion dollars in consumer surplus. The effect of lower prices for producers was a loss of income of a similar magnitude.
The flow of subsidized rice imports ended, however, when India’s domestic market supply situation changed. As international cereal prices rose in 2007, India cut off rice exports to Bangladesh to protect its own domestic market from possible price increases. Although India subsequently did allow rice exports (at prices much higher than BPL prices) that ultimately reached almost 1.7 million tons (July 2007 to June 2008), Bangladesh rice prices rose substantially. Because of this experience, Bangladesh policymakers and civil society no longer perceive India and the international market as reliable suppliers and thus call for increased stocks.
Model simulations of the Bangladesh rice market suggest that changes in net supply (production, imports, and net market injections by the government) and consumption demand (as determined by real per capita income and population growth) account for only 9 percent of the actual 45 percent increase in real rice prices actually observed (November 2007 to April 2008, compared to one year earlier). However, if in addition to these changes in net supply and demand, private stockholding increased by about 900,000 tons, equivalent to about two weeks of consumption, this would reduce available market supply and result in a simulated real price increase, essentially matching the historically observed increase (45 percent). The implications are that private stock changes could have been a major factor in explaining the price increases of 2007/08 and moreover that measures to add to domestic supplies and calm markets earlier may have prevented this extra stockholding and limited the real price increase to only about 10 percent.
This paper also shows that if the hypothesized increase in private stockholding had been avoided through timely intervention, a total of about 1 million tons of net market injections (that is, an extra 300,000 tons of rice in addition to the approximately 700,000 tons of net rice offtake that actually occurred in the period from November 2007 to April 2008) would have been sufficient to stabilize prices. These calculations suggest that ready availability of approximately 1 million tons of rice through drawdown of public stocks or imports would enable Bangladesh to handle similar disruptions in the future, provided that private imports could supply an amount similar to that in 2008 (1.25 million tons). Further sensitivity analysis is needed, though, regarding alternative assumptions of model parameters.
Looking forward, it is important to note that since 2008 Bangladesh domestic prices have generally been less than import parity sourced from either Thailand or wholesale markets in India but far greater than export parity to the world market. As a result, there have been relatively large domestic price fluctuations. In the absence of interventions in domestic markets, this price volatility will likely continue due to fluctuations in domestic rice harvests. In this environment, private trade at import parity prices still provides a price ceiling and can dramatically reduce the volume of stocks needed for price stability (although in some years an import parity price ceiling may be unacceptably high, as it was in 2008). A return to the stable and low prices of the 2002–06 period is not possible in the absence of subsidized exports by India, however, without massive (and costly) domestic rice market interventions by the Bangladesh government.
Finally, the mediumterm solution to maintaining real rice prices at moderate levels thus remains investments in agriculture. Bangladesh successfully reduced real prices of rice during the 1970s and 1980s through increases in supply, largely brought about by the efficient use of green revolution technology: irrigation (private tubewells), improved seeds, and fertilizer. Increased productivity of rice (and other crops) remains a key channel for increasing availability of food, reducing its price, raising rural incomes, and enhancing food security.
1 You can read the study in english on the IFPRI’s website: http://www.ifpri.org/sites/default/files/publications/ifpridp01209.pdf (Discussion Paper 01209, septembre 2012).