Rice in Ecuador: price control or export ban?

A few weeks ago, The Economist reported on the ever-rising price of agricultural commodities, including rice. What's good news for farmers is bad news for urban consumers and since cash crop farmers need to eat, they get hurt by higher food prices as well.

I've been spending some time in beautiful Ecuador visiting friends and picked up a copy of the local paper. Rising food prices are a major topic here as well, but the government's response is a little unusual: they simply banned rice exports.

Now, I could understand that if there were a real risk of people going hungry: Ireland famously continued exporting potatoes to England during the 'Potato Famine' of 1847. But since most of the poorest people in Ecuador are farmers, stopping them from selling their rice at the best price they can get seems like a bad idea.

On the other hand, banning rice exports will not lead to rice shortages in the short term, whereas price controls would, because any sensible farmer would just sell them abroad. So maybe it's the lesser of two evils?

Maybe, but beware the unintended consequences: Colombia, which used to import rice from Ecuador, has now imposed a ban on imports of other agricultural commodities! The same newspaper showed a farmer throwing lovely ripe mangos in a ditch, because Ecuador now has a mango glut. Simultaneous food shortages and other kinds of food going to waste? That's precisely what happens if you stop farmers from trading.

A refugee from New York in Liberia

Would you ever send your son to a warzone to escape a housing project? One Liberian mother did. This fascinating piece comes from the New York Times.

Testing the Growth Diagnostics approach

Bolivia is the poorest country in South America - its income per capita is not much above Ghana. A revolution, radical land reform, decades of foreign aid and structural adjustment have not changed this basic fact. The only dynamic parts of the economy are the natural gas and soy beans produced in the eastern plains, far from where most Bolivians live.


Bolivia is therefore a prime candidate for a Growth Diagnostic as proposed by Ricardo Hausmann, Dani Rodrik and Andres Velasco. Growth Diagnostics are appealing to policymakers for two reasons. One, they are empirically grounded, without sacrificing theoretical rigour. Two, they combine hard data with case studies - which makes life more interesting for the grad students as well!

I joined David Elmaleh, Naomi Krieger and Molly Kinder to read dozens of reports, run regressions and crank out charts. We soon became dissatisfied with the standard explanations for Bolivia's poor growth. If low foreign investment was the problem, why didn't Bolivia boom in the 1990s? If the people of the highlands were poor because they were excluded from power, why didn't the Bolivian revolution of 1952 or the election of President Evo Morales change that? If the IMF and World Bank were the problem, why didn't the massive debt cancellation of 2002-03 help?

The key to Growth Diagnostics is that you can't do everything at once. The key is to identify the binding constraint to growth - the market or government failure that is the most important cause of the many problems you observe. Our very tentative conclusion, based on the best data we could find, was that Bolivia is stuck in an informality trap. Small businesses can't get credit to grow or increase their productivity, because they are in the informal sector. But when they try to join the formal sector, they find the taxes, regulations and red tape they have to endure put them at a competitive disadvantage.

Meanwhile, gas and agricultural exports are booming, but those sectors don't employ many people and the profits are captured by multinationals and large landowners. The government of President Morales is trying to tax them to fund welfare and pensions, but the (relatively) productive eastern provinces have responded by declaring autonomy and threatening to dissolve the state.

In this tense environment, what could the Bolivian government do to promote growth and poverty reduction? Nothing, say the eastern provinces - we know what to do, let us get on with it! We humbly suggest another approach: by tackling bank monopolies, cutting red tape and reducing the legal burden on small businesses, the government will be helping its core constituency, the indigenous people of the highlands, to break out of poverty. Neighbouring countries like Chile, Peru and Brazil have realized that being pro-poor doesn't mean you have to be anti-business.

We hope that the government and provinces will be able to resolve the constitutional crisis and give growth a chance. The prospects are good: after all, everyone from Argentina to Venezuela wants to help Bolivia. Why not get the World Bank to build roads and Hugo Chavez supply free heating oil to the (freezing) altiplano?

Institutions matter. Especially in football

My favourite economic cliche is any paper entitled "xxx matters". Governance, institutions, latitude, size - you name it, it's statistically significant in someone's regression.

Last weekend I watched Harvard thrash Yale in New Haven. I was surprised at our victory, but even more surprised at the good humour and complete absence of violence in the crowd before, during or after the game. If you have ever been to, or near to, a football (soccer) match in Europe, you will know what I mean. Any politician who laments the culture of violence in modern society should try putting on a Harvard shirt and walking through New Haven an hour after defeating the local team. We didn't get so much as a whistle from the locals.

So why are otherwise peaceful people like the Brits or Italians so eager to start a fight when it comes to football, while it's a family day out in New England? It can't be a greater police presence: they have them in Europe to. It can't be lack of alcohol: that was freely available at the pre-match tailgate. It can't be weapons: the US in general, and New Haven in particular, has lots of them. Maybe the huge geographic mobility of US society holds back the local pride and partisanship you find elsewhere. But when the Red Sox won the World Series a few weeks ago, I detected a fair bit of local pride at their victory parade.

I think there is a cultural norm at work here: football is a game for the family, so crowd violence is unacceptable. How this norm evolved is anyone's guess, but once it's there it's very hard to change. British police trying to deal with hooliganism in the 1980s had the same problem in reverse: the culture of violence had become an institution, an informally accepted way of doing things.

Social norms underpin economic behaviour wherever you look. Consider fare evasion on the subway. In London or New York, you have to pass through a fare barrier to get to the platform. In Paris, the barriers are as large and heavy as doors, to stop people from vaulting them. In law-abiding Vienna, there are ticket-stamping machines but no barriers. The city transport authority decided it would be cheaper to employ roving inspectors levying on-the-spot fines than build fare barriers in every station. Why do buses travel faster in Berlin than in Boston? Because passengers can use any of the doors to get on the bus, not just one - the driver takes it on trust that they have a ticket.

On a more serious level, business and government is a lot cheaper in high-trust societies. Imagine how much it would cost to send all your business mail by DHL or FedEx because the postal service is insecure. Try keeping a stash of $5 top-up cards in the petty cash box and giving them to your staff one at a time to make phone calls, because you can't get a telephone credit account. Or if you're a retailer, how about counting the inventory in your store at the end of every day to make sure nobody is stealing it?

Institutions matter, in sport as in everything else - we're just a little late to realize it.

Will your exports make you rich?

Rich countries make rich-country things. Poor countries make poor-country things. According to the theorem of comparative advantage, you should specialize in whatever you have relatively low costs - but we also know that over time, countries grow rich by changing and upgrading what they produce.

But why have some developing countries grown into diversified, mature economies whereas much of Africa is still stuck growing or mining a few basic commodities?

This answer comes from Cesar Hidalgo, Bailey Klinger, Laszlo Barabasi and Ricardo Hausmann, who just got it published in Science (or see here for the full version):This diagram shows the 'product space'. Imagine international trade as a forest, with individual products making up the trees. Firms are like monkeys swinging through the trees. The closer the trees are together, the easier it is for firms to move from one tree to another. Thus firms and countries specializing in products in ‘denser’ areas of the forest can diversify more easily. Countries tend to move into the centre over the time - but the denser the part of the forest where they start, the quicker they will get there.

Where does Liberia fit within this product space? It turns out that most of Liberia’s exports are within the sparsest part of the forest: rubber, cocoa, iron ore and palm oil all have extremely poor links to other products. See where tropical agriculture is in the diagram above . . . and compare it with garments, say, or vehicles and machinery.

The implication of this is that export diversification will not be easy in Liberia, because the economy has specialized in products that are very remote from other products. It takes 7 years for a rubber or cocoa tree to become economically useful. Rubber or cocoa plantations are therefore a huge ‘sunk cost’ and difficult to change. On the other hand, neighbouring countries like Ghana and Nigeria show the perils of trying to develop industries in which you don't have a comparative advantage. Maybe fruit, vegetables and low-tech food processing (canning, juicing) are a way forward.

If you go to the authors' website, you can download the map and the data for your country. A blinding insight or another example of economists restating the obvious in a more complicated way?

Back on the farm: the World Bank's view on agriculture

Last week the World Bank published its 2008 'World Development Report'. This weighty report, whose colour graphics alone must cost a small country's GDP to produce, sums up 50 years of experience in supporting (and not supporting) agriculture with a simple message:

"Agriculture is good for growth and even better for poverty reduction - but it is only effective with the right public policies and in many cases aid."

This may not seem particularly surprising, but it's welcome nonetheless. Since the report was commissioned under former President Wolfensohn, it will be interesting to see if Robert Zoellick (during whose time as US Trade Representative the US increased its huge, trade-distorting subsidies to cotton growers) follows up the rhetoric with loan dollars.

The report is at the World Bank's site but for a quick summary, see this from the New York Times.

A brief postscript: the costs of the slave trade

By coincidence Professor Dani Rodrik has been thinking about the slave trade as well, needless to say in a more rigorous, dispassionate way than I have . . . see this post on how the countries that exported the most slaves are now the poorest in Africa, even though they were probably richer before.

On a personal note, I'm back in the USA, trying to remember the taste of fried fish with cassava greens and the warm, welcome rain of Liberia, so unlike the cold, hostile showers of Massachusetts . . . I have to confess that I have been looking at travel planning websites to see if I can afford a trip to Monrovia in December to do some more work on agriculture. The answer is probably 'no' but if anyone knows of any great fare deals between the US or London and Liberia around then, please let me know!