In a January 26 article, Lydia Polgreen, the West African bureau chief for the New York Times, wrote about the increase in domestic rice farming in Senegal brought on by the recent price rise for that staple. Entrepreneurial farmers in that country are planting more rice in response the the changed market conditions in the hope of earning more money.
One would think that this would be a good news story. Not according to Lydia Polgreen. Polgreen paints a portrait of impending doom and disaster, repeatedly pointing out the risks involved should the price of rice fall beneath the cost of production. Polgreen presents the story as a human interest piece but misses the bigger picture.
There are two issues that escape Polgreen’s grasp. The first is the triumph of capitalism, and the second is the market distorting effects of US and EU subsidies for agricultural production.
Polgreen spends the majority of the article discussing the potential, and as yet unrealized, downsides to the increased production of this cash crop instead of lauding the entreprenurial spirit of the farmers who are pursuing higher profits. Certainly there are risks involved, as there are in any new venture - regardless of geography. The fact that Senegal has an economic system in which farmers are free to pursue the most efficient and profit maximizing crops should be a cause for celebration. History demonstrates that liberal economic policies are the best method for inducing growth in a country.
Additionally, there are time tested mechanisms for reducing ones exposure to price fluctuations in the commodity markets. Polgreen does not even address the issue of whether or not the Sengalese farmers have the ability to hedge their crops. Hedging is a simple mechanism where one sells their yet unrealized crop now for delivery in the future, effectively locking in the current price and ‘hedging’ the risk. Of course, if the price goes up, this limits the upside, but more importantly, it also limits the downside. Oxfam, the British charity who is quoted in the article as helping the rice farmers achieve their goals, should be organizing this mechanism if they haven’t already done so. We don’t know as Polgreen doesn’t address this most basic issue.
The second point that Polgreen misses is the market distorting effects of US and EU subsidies for agricultural production. The developed world spends over $250 billion a year on subsidies for domestic agricultural production. This artificially lowers the cost of domestic production which in turn lowers the global price for those commodities. This in turn often makes farming unprofitable in the developing world.
If the developed Western world was serious about promoting economic growth in the developing world it would suspend those subsidies and let market forces rule. This would shift production away from high cost production centres such as Europe and the US and towards low cost places such as Africa. In turn the economies of the developing world would see export oriented growth – a prerequisite for economic development.
This concept, however, takes much more effort to comprehend and isn’t nearly as emotionally charged as lamenting the potential downsides of entreprenurial risk.