16 July 2007

It's all about rice

The Law of Demand is one of the most basic rules in economics: when the price of something goes up, demand goes down. Professor Nolan Miller, my tutor in microeconomics at the Kennedy School, has just found the first exception to this rule: rice in China. The paper is at http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP07-030.

It turns out that some people in Hunan, Southern China, spend so much of their limited income on rice that if you raise the price, they consume MORE rice. This is because raising the price of rice, in effect, reduces their income. The only way to avoid the gnawing pain of an empty stomach is to spend less on pork and vegetables, and fill up on rice instead.

Economists call this 'Giffen behaviour', after a Victorian economist called Robert Giffen who asserted that poor people in Britain ate more bread when the price of bread went up. Nobody has ever verified that example, or found any other, until now. Professors Miller and Jensen comment on the irony that economists have spent the best part of a century convincing themselves that Giffen behaviour was a theoretical curiosum, only to find it in the staple crop of the world's most populous nation.

Interestingly, the result only holds for rice, among very poor urban households in southern China. Rural households grow their own rice, so a higher price is good for them. In northern China, a similar relationship holds for wheat, but it is weaker for two reasons. One, wheat can be consumed in different forms: as flour, or processed into buns and noodles. Two, rice is relatively cheaper in northern China than wheat is in the south, so a substitute is more readily available.

My own experience in China makes me think that this phenomenon won't last forever: transport costs are falling all the time, the poor in China are getting richer and regional differences in taste are less pronounced than they used to be. I was able to eat noodles in the south for only 1 or 2 yuan more than they cost in the north.

Sadly, I don't have the data to investigate this relationship for Liberia. Liberia is several decades behind China in development: while even the most isolated Chinese village has a regular bus service, many counties in Liberia are virtually inaccessible at this time of year. Rice production is only half of what it was in 1990, when the war began. Some farmers have switched to growing cassava, others are so hungry that they eat the rice seed the UN donates them instead of planting it. But it is in the city that rice is - pardon the mixed metaphor - a political hot potato.

In 1979, increases in the price of rice (mostly imported from the USA) led to riots in Monrovia. The government tried to put them down, using the army. But a 28-year-old sergeant, Samuel Doe, decided to put the government down instead. His coup ushered in 3 decades of bad government and eventually civil war. Small wonder that the new government has put growing more rice at the top of its agenda. But let the Chinese have the last word:

"If you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people."