Food and Oil markets: Market Signals Don’t Give The Right Incentives?

Recently we read from a prominent economist who argued that the reason markets don’t work in saving resources is that “market signals don’t give the right incentives”.

Nonetheless our self righteous expert didn’t say why the market signals have been behaving this way, but cited food and oil as an example.

To quote segments of this timely and incisive article from the liberal New York Times (Keith Bradsher and Andrew Martin)-accounts for the aberrations in food market dynamics (all highlights mine)…

Agriculture Trade Left Behind
Courtesy of NYT

``When it comes to rice, India, Vietnam, China and 11 other countries have limited or banned exports. Fifteen countries, including Pakistan and Bolivia, have capped or halted wheat exports. More than a dozen have limited corn exports. Kazakhstan has restricted exports of sunflower seeds.

``The restrictions are making it harder for impoverished importing countries to afford the food they need. The export limits are forcing some of the most vulnerable people, those who rely on relief agencies, to go hungry.

``“It’s obvious that these export restrictions fuel the fire of price increases,” said Pascal Lamy, the director general of the World Trade Organization.

``And by increasing perceptions of shortages, the restrictions have led to hoarding around the world, by farmers, traders and consumers.

``“People are in a panic, so they are buying more and more — at least, those who have money are buying,” said Conching Vasquez, a 56-year-old rice vendor who sat one recent morning among piles of rice at her large stall in Los Baños, in the Philippines, the world’s largest rice importer. Her customers buy 8,000 pounds of rice a day, up from 5,500 pounds a year ago.

``The new restrictions are just an acute symptom of a chronic condition. Since 1980, even as trade in services and in manufactured goods has tripled, adjusting for inflation, trade in food has barely increased. Instead, for decades, food has been a convoluted tangle of restrictive rules, in the form of tariffs, quotas and subsidies.

``Now, with Australia’s farm sector crippled by drought and Argentina suffering a series of strikes and other disruptions, the world is increasingly dependent on a handful of countries like Thailand, Brazil, Canada and the United States that are still exporting large quantities of food.

So EXPORT RESTRICTIONS imposed by national governments is one major factor…

World Tariffs Courtesy of New York Times

``Powerful lobbies in affluent countries across the northern hemisphere, from Japan to Western Europe to the United States, have long protected farmers in ways factory workers in Detroit could only dream of.

``The Japanese protect their rice industry by making it nearly impossible for imported rice to compete. The European Union severely limits beef and poultry imports, and Poland goes further, barring soybean imports as well.

``Negotiators have been working for years to free trade in farm goods, but today’s crisis actually makes that more difficult for them. Food protests in places like Haiti and Indonesia that rely heavily on imported food have convinced many nations that it is more important than ever that they grow, and keep, the food their citizens need…

So IMPORT RESTRICTIONS again by national governments likewise contribute as another major obstacle….

``In some of the nations concerned about shortages now, past policies have discouraged farming. From Indonesia to West Africa to the Caribbean and Central America, poor countries have frequently cut farm assistance programs and lowered tariffs to balance budgets and avoid charging high prices to urban consumers. But they have found that their farmers cannot compete with imports from rich countries — imports that are heavily subsidized.

``As a result, steps that could have taken place decades ago, resulting in more food for the world today, were abandoned. These included changes like irrigation schemes and new crop varieties.

``“The subsidies given by developed countries to their farmers have led to lack of investment in agriculture in developing countries” in Africa and elsewhere, Mr. Nath said.

``To make matters worse, the World Bank and the International Monetary Fund frequently pressured poor countries in the 1980s and 1990s to lower tariffs and to cut farm support programs, mostly to reduce budget deficits.

``Indeed, the World Bank concluded in 2006 that not enough attention had been paid to the negative effects of its policy prescriptions on farmers in developing countries.

``The current export restrictions, which mainly help urban consumers in poor countries, are the latest blow to farmers in the developing world.

``Arfa Tantaway Mohamed, who grows rice on three-quarters of an acre outside the bustling town of Aga in northern Egypt, is frustrated at Egypt’s export ban, which is suppressing rice prices."

Third and Fourth factors include, VACILLATING POLICY PRESCRIPTIONS and SUBSIDIES…again by national governments.

One of IMF’s proposed solution (ironically a multilateral “government of governments” organization) is…

``Trade polices. Global food markets need to be kept open, with restrictive policies, such as export taxes and bans, removed to maintain appropriate incentives for producers and consumers. Tariff reductions can help to reduce trade distortions and mitigate price increases.”

So none of the above looks like a malfunction caused by market forces, instead they come from distortive government policies.

As for oil we excerpted this article from Jim Mctague of Barrons online,

``Drilling in the Gulf has long been contentious. On one side are the tourism, real-estate and environmental industries. On the other are those dastardly oil men, the J.R. Ewings that everyone loves to hate. Five years after the 1973 Arab oil embargo, Congress amended the Outer Continental Shelf Lands Act to give states, local governments and environmental groups more leeway to challenge drilling in federal waters off their coasts, and they did just that with the enthusiasm of terriers chasing rats.

``James Watt, President Ronald Reagan's environmentally hostile, politically inept interior secretary, tried to reverse the restrictive trend in 1981. He proposed opening almost the entire Outer Continental Shelf to drilling. Coastal communities howled like injured coyotes. California's congressional delegation slipped a provision into an appropriations bill that year that placed a moratorium on drilling off that state's shores. Subsequently, Congress enacted separate moratoriums for Florida, New Jersey, California and North Carolina.

``Those bans didn't cover the Destin Dome, which went on the block in 1984. Chevron and partners Conoco and Murphy Exploration & Production drilled three exploratory wells there in 1987, 1989 and 1995 that found an estimated 2.6 trillion cubic feet of natural gas. But to actually produce gas, Chevron needed federal and state approval.

``Chevron submitted a development plan to the state and the Interior Department for review in 1996 -- an inauspicious time for offshore drillers. George Bush I in 1990 had placed a temporary moratorium on new drilling off South Florida, fulfilling a campaign promise to Sunshine State voters. Then, in 1995, the Clinton administration came out against new lease sales, and Florida's congressional crew, both Republicans and Democrats, successfully supported another moratorium on new drilling to replace one that had expired.

``Chevron proposed drilling 12 to 21 gas wells. Florida bureaucrats took their sweet time before nixing the application two years later. Chevron appealed to the Department of Commerce, which can overturn state decisions. Reluctant to upset anyone, Commerce simply stalled. Under the law, there is no deadline on appeals. Chevron sued the federal government in 2000, claiming it had been denied a timely and fair review of its plans. Clinton stepped down, and Bush II was sworn in. His Commerce Department twiddled its thumbs, too. Meanwhile, Bush met secretly with Florida's then-governor -- his brother Jeb -- a foe of offshore drilling. They agreed to have the federal government buy back the leases for $115 million and place a moratorium on drilling at the Dome until 2011. There are now 140 actual leased tracts there that can't be drilled, reports Lisa Flavin, a senior policy adviser at the American Petroleum Institute in Washington.

``When President Bush suddenly flip-flopped this month and said he favored drilling on the Outer Continental shelf, Democrats accused him of wanting to give more land to Big Oil. Thundered Rep. Ed Markey of Massachusetts: "Oil companies already own 68 million acres of drillable land and sea, which is the size of Georgia and Illinois combined, but they're not producing there." They should use it or lose it, he added. But those acres include the Destin Dome!

`` Chevron took its lease refund to help finance a $12 billion project in Angola to produce liquefied natural gas for shipment here. Ironically, a major gas pipeline between Texas and Tampa runs right by the Destin Dome.

Again, populist and vacillating policies, regressive ideologies and environmental restrictions have kept supplies out of the market.

Overall, the problem of the inadequate diffusion of the incentives of market price signals basically stems from the mismatch between the incentives of LESS price sensitive economic agents who heavily regulates the supply side (government) and the price sensitive economic agents who accounts for the demand side (consumers).

Investments can’t happen when governments restrict them. Trade can’t happen when governments prohibit them. Prices surge when demand and supply imbalances are further aggravated by government hoarding! Thus, price signals don’t reflect efficient resource allocation because governments obscure them.

So it isn’t the problem of markets but one of government intervention.