Will US Rent-Seeking Stop? Food Crisis & Tied Aid

♠ Posted by Emmanuel in , at 5/06/2008 02:39:00 AM
This news is potentially groundbreaking. Although the US is the world's largest aid donor, it has long been criticized for observing the practice of "tied aid." For a long time, many other industrialized country aid donors followed policies similar to those that the US still maintains by giving aid that is tied to the interests of American agriculture. In effect, yes, aid is given, but the economic aspects of this aid are of secondary consideration to the support of domestic agricultural industries. This snippet from the Brookings Institution of the aid inefficiencies tied to prioritizing American food production and ship transportation is illustrative:
To its credit, the Bush administration has repeatedly proposed increasing flexibility to purchase food locally [in aid recipient countries], but such efforts have died in Congress because of strong pushback from domestic agribusiness and shipping constituencies. In comparison to a system that requires food aid to be purchased from American farmers and shipped on domestically-registered transoceanic vessels, however, it is roughly 25-50% cheaper to purchase food locally or regionally. Increased fuel prices have only made long shipping more expensive. For the same investment of taxpayers’ money, a faster and more flexible system can result in saving more lives while better supporting developing economies. The arguments against tied aid – that it is slow, costly and inefficient – have remained the same for years.
The following Wall Street Journal article is important in that the Bush administration has tabled a $770M food aid proposal before the US Congress to help combat the rising cost of food in developing countries. Once again, the issue of tied aid is likely to be a contentious one as the agricultural lobby--which has a strong influence on elected officials from farm states for obvious reasons--contends with the commonsensical proposition of untying aid. First, there are the efficiency gains noted above. Second, giving "technical assistance" by training those in impoverished countries to grow their own food is, of course, a better long-term solution than relying on US farm products year in and year out. Also, considering that food demand and prices are so high nowadays, it is debatable whether agribusiness really needs the implicit support of tied aid and the extensive subsidies that go with it. It is time for the US to kill off tied aid: the rest of the industrialized countries have largely done so already and not doing the same only turns world opinion against the US:

The Bush administration called for an emergency increase in U.S. aid to alleviate the global food-price spike, as the administration and its allies seek to use the crisis to push for major changes in the way the world community manages the fight against hunger.

President Bush proposed $770 million in aid as soaring prices are bringing what some say could be the worst hunger crisis in 30 years. The money, if approved by Congress, would come on top of $200 million that the Bush administration released two weeks ago for emergency international food aid, and would bring the total for U.S. efforts to combat global hunger to about $5 billion for 2008 and 2009.

With the developed world's attention focusing again on food aid to Africa and elsewhere, debate is likely to sharpen over how it should be delivered. The traditional U.S. approach effectively turns Washington into an intermediary for American-grown food to be shipped overseas at subsidized prices. That may alleviate immediate hunger, but it does little to deal with the fundamental issue: Africa's inability to feed itself.

The head of the United Nations's World Food Program, an American, has been pushing for her program's dollars to flow directly to Africa's farmers and help build the kind of market -- with multiyear contracts, future pricing and the like -- that Western farmers take for granted.

"As America increases its food assistance, it's really important that we transform the way that food aid is delivered," Mr. Bush said. In his State of the Union address in January, he called for the U.S. to purchase up to 25% of food assistance directly from farmers in the developing world. He said that building up local agriculture is the best way to break the cycle of famine.

The $770 million proposal came as part of a $70 billion emergency request that Mr. Bush sent to Congress for pursuing the Iraq and Afghanistan wars in fiscal 2009, which starts Oct. 1.

The White House sought to defend itself from charges that increased production of biofuels -- which Mr. Bush supports -- is contributing to the food-price spike. The White House said that increased production of corn-based biofuels such as ethanol accounts for only about 3% of the 43% increase in global food prices. Rapid growth in emerging economies, rising energy costs and bad weather in some crucial producing countries such as Australia, China and parts of Eastern Europe have also been factors, the administration said.

Mr. Bush's proposal immediately became tangled in U.S. farm-subsidy politics. Democratic House Speaker Nancy Pelosi (D., Calif.) pledged to work quickly on speeding aid overseas. But she also urged the president to pass the farm bill, of which he has been critical. The speaker noted that it contains "a major increase to the food-stamp program that will ensure that 38 million Americans -- especially children -- have improved access to basic nutrition."

Current U.S. food-aid programs have powerful support among American farmers and agribusinesses. They have long supported overseas aid as long as it was their own grain being shipped overseas, not cash. Rebecca Bratter, director of trade policy at U.S. Wheat Associates, the export development arm of the U.S. wheat industry, said, "We support more money for food aid, but we don't support the local and regional purchase option. It compromises the efficiency of the U.S. food aid program."

But with food prices soaring, U.S. farmers enjoy robust demand, and have less need for the government to buy some of their crop for use in overseas aid. And the U.S. increasingly has come under pressure from other developed countries to change the design of its food aid. Canada recently announced it would move toward more untied aid, and European countries made the switch in the 1990s.

"It is a moment of opportunity in many respects," said Lael Brainard, an expert on global development at the Brookings Institution. Despite the entrenched support for the current programs, she added, "Times have changed. It's worth testing the proposition."

Josette Sheeran, head of the World Food Program and a former U.S. State Department official, has been backing the idea of getting Africa to feed itself since taking office last year. In a recent swing through Africa, she called it an effort "to attack hunger at its root." Ms. Sheeran wants the U.N. agency to evolve into a market-led food development agency from its traditional role handing out food procured elsewhere. Her strategy is to harness the WFP's purchasing power -- it buys nearly $800 million worth of grains and cereals a year -- to create a market for local agriculture production on a continent with vast stretches of fertile land whose potential hasn't yet been tapped.

She is seeking to give African farmers an incentive to increase their harvests and take advantage of the recent surge in prices for corn, wheat, soybeans and other crops. In Africa, farmers are often reluctant to make investments to optimize their harvests because they're uncertain there will be a market for surplus production.

The WFP's "Purchase for Progress" plan has been picking up important allies. The World Bank, after two decades of neglecting African agriculture in favor of urban investments and social projects, is nearly doubling its lending to African agriculture next year to $800 million, and has made ending hunger a top priority.

Robert Zoellick, the World Bank's president and a former U.S. trade representative under Mr. Bush, told Ms. Sheeran at this year's World Economic Forum in Davos, Switzerland: "Hunger hasn't gotten anywhere near the attention it should." On Thursday, Mr. Zoellick praised his former boss's announcement, saying it "goes beyond critical short term needs and aims to deal with the causes of the crisis so millions will not suffer again."

The Bill and Melinda Gates Foundation is working with the WFP to structure multiyear forward contracts -- a common trading device in the West that is mostly unheard of in Africa north of South Africa. The contracts would give farmers a guaranteed price and a steady market. The WFP and the Gates Foundation hope this will showcase the potential for African agriculture and entice investments from private companies or governments like China and India looking for additional food sources.

"The only way to deal with the [food] crisis is to dramatically increase production. Having an assured market from the WFP is a great help," said Akin Adesina, vice president for policy and partnerships of the Alliance for a Green Revolution in Africa, a joint program of the Gates Foundation and the Rockefeller Foundation.

Boosting agriculture production in the developing world will require investment in everything from new research on seeds to irrigation systems to better roads for transporting crops.

Rajiv Shah, the director of agriculture development at the Gates Foundation, estimates it will take additional investments between $9 billion and $12 billion a year over the next 10 to 15 years to transform African agriculture and triple the income of 60 million smallholder farmers in sub-Saharan Africa.

For decades, U.S. policy has been to donate only food. Recent attempts to shift a percentage to cash have met with aggressive opposition from the U.S. agriculture industry. Three years ago, farmers and their allies in Congress effectively shelved an effort by the Bush administration to begin this switch.

European governments switched to giving all-cash donations in the mid-1990s, arguing that cash allows more flexibility in responding to crises and that the U.S. uses its food aid as a form of farm subsidy.

Corruption often bedevils aid, whether the donations are in cash or food. Regimes in nondemocratic countries may seize the aid for themselves or for elites, leaving the intended recipients empty-handed. South Korea has recently cited evidence that its food aid to North Korea was diverted to the North's military.

Today, for the first time in its 45-year history, the WFP receives more than half of its donations in cash rather than food, with the cash coming mainly from Europe, Canada and private donors. Of the WFP's total food procurement of $767 million last year (compared with about $300 million in 2002), 80% was spent buying food from 70 different developing countries. Uganda led the pack, selling 210,000 tons of grain to the WFP for nearly $55 million. Overall, the WFP bought about 902,000 metric tons of food for $253.3 million in Africa.

On a recent swing through Africa, Ms. Sheeran stopped at a chaotic and grimy street market in Addis Ababa, Ethiopia. Grains from around the country arrived there on the backs of donkeys and the open beds of exhaust-spewing trucks. Ms. Sheeran asked consumers and traders how they were coping.

"Supply is low, demand is high. We have gone from three meals a day to two. Then it will be one meal. Then we will die," said Yoseph Yilak, head of the local grain traders' association. "Why is the world taking corn for fuel? It will mean the death of many people."

"What's the solution?" Ms. Sheeran asked. "The best solution long-term is massive production of food," said Mr. Yilak, resplendent in a light blue leisure suit. "Don't just give us food. Help us to grow more."