Friday, September 30, 2005

Agricultural price stabilization is a faulty development strategy

Price stabilization involves stockpiling reserves during high-supply/low-price periods, for release during low-supply/high price periods. This is an activity that either the private or public sector can undertake. Consumers benefit from less volatile prices; traders benefit from being able to buy low and sell dear ("intertemporal price arbitrage" is the fancy term.) In many Asian countries, government-owned traders do price stabilization especially for agricultural staples. In the Philippine case we have the National Food Authority which trades in rice and corn.

From the NFA website, we see the following mission statement:
Stabilization of grains supply and prices, both at the farm-gate and consumer levels. Farm-gate prices shall be kept at levels that provide farmers a reasonable return on their investment. Retail prices shall be kept at reasonable levels for consumers.

The NFA is also given the monopoly right to import rice and corn, ostensibly to support its mission.

Public intervention is called for when an activity is characterized by public good features or externalities. What is the public good feature or externality associated with price stabilization? Answer: none. The private sector can do this very well all by its lonesome. There is in fact strong reason to suppose that public intervention (as done by the NFA) imposes costs in excess of benefits. Just look at the mission statement - it essentially says, "buy dear, sell low"! A private enterprise can never get away with this - not unless there's a Big Brother who can foot the bill using the general tax fund, as well as enforce restrictions on competitive trade. The excess social loss from NFA operations has been estimated to be in the order of 50 billion pesos yearly (Roumasset, 2000; unfortunately unavailable online.)

Abolish the NFA. Absolish the NFA now.


Roumasset, J., (2000). "Market Friendly Food Security: Alternatives for Restructuring NFA." Unpublished paper, Department of Economics, University of Hawaii,Honolulu.


Anonymous said...

I used to head one of its departments and I can give you "millions of reasons" why it will not be abolished.

Anonymous said...

As neatly illustrated in your "buy dear, sell low" statement, the mission statement really doesn't make sense. Another way of thinking about it is that the two statements: high prices to farmers, low prices to consumers, are contradictary.


Econblogger said...

first poster: I didn't even dare broach the subject of corruption. But now that you've brought it up, I guess abolition would be difficult, but not impossible. (I've watched too many movies where the good guys one, you see.)