National rice markets
The price of rice is a key variable for farmers, consumers, and governments in most of Asia, and in many other parts of the world. Although the world market price of rice has declined over time, domestic prices are more relevant for farmers and consumers.
There is wide variability in the domestic price of rice among different countries, with some countries — Japan, Korea, Turkmenistan, and Brunei — having extraordinarily high domestic prices that are at least seven times the median price of $239 per ton. Higher GDP per capita and higher proportions of imports in domestic consumption are both associated with higher domestic prices.
To protect national rice markets from volatility in the international market, governments sometimes intervene, raising domestic rice prices above world prices when world prices are low and vice versa when world prices are high. The level of state involvement in Asia reflects the importance of rice to human nutrition and food security. While the private sector plays a leading role in most countries, agencies such as BULOG in Indonesia, the NFA in the Philippines, VINAFOOD in Vietnam and the Food Corporation of India are all heavily involved in purchasing of paddy from farmers or rice from mills and in distributing rice to poorer people. BULOG and NFA monopolise rice imports into their countries while VINAFOOD controls all exports from Vietnam.
The rice price dilemma: welfare effects of domestic price policies
In order to understand the importance of higher rice prices for welfare, poverty, and food security, it is first important to distinguish between net rice producers and net rice consumers. A net rice producer is someone for whom total sales of rice to the market exceed total purchases of rice from the market, whereas, for a net rice consumer, the reverse is true. Net rice consumers will generally be hurt by higher rice prices, while net rice producers will benefit.
It is also true that whether a given household is a net rice producer or consumer depends on market prices. Higher prices will discourage consumption, encourage more production, and possibly convert some households from net consumers to net producers. Lower prices could do the opposite. Higher rice prices will substantially hurt poor net rice consumers because rice is typically a larger share of expenditures for the poor. In such circumstances, rice price increases can have important effects on effective purchasing power, even if they do not directly affect nominal income per se. Farmers who are net food producers are likely to benefit from higher prices, which, other things being equal, will tend to increase their incomes. Since many farmers are poor, higher prices could help to alleviate poverty and improve food security.
Another potentially important effect of rice prices occurs in labor markets. Higher rice prices, by stimulating the demand for unskilled labor in rural areas, can result in a long-run increase in rural wages, thereby benefiting wage labor households in addition to self-employed farmers. The net effect of higher food prices on welfare and poverty at the country level will thus depend on socioeconomic structures and the national net trade position (as well as labor market outcomes). Positive impacts of higher prices are much more likely in exporting nations, since a greater percentage of households are probably net producers. But, among rice importers, the impacts on welfare and poverty of higher prices are more uniformly negative. In addition to the short-term adverse effects of high rice prices on poverty, high rice prices also raise concerns about long-term economic growth in countries where rice is the staple food. Although there is no solid evidence in this regard, high rice prices (in countries that choose to adopt such a policy) might end up reducing their international economic competitiveness by raising the price of the wage good, thus making wage rates less competitive and discouraging investment in labor-intensive employment that promotes long-term economic growth. High rice prices may also impede diversification into labor- intensive higher-value crops.
Price policy options for the future
In general, it seems hard to justify sustained departures of average domestic prices from world market prices on either efficiency or equity grounds. Sustained deviations from the world price can lead to large misallocations of scarce resources that increase with the square of the deviation from the world price, meaning that losses increase exponentially as the deviation gets larger. In terms of dynamic efficiency, attempts to consistently enforce a domestic price higher than the world price may lock farmers into rice and out of more dynamic high-value crops, and they may lose the ability to learn and adjust dynamically to changing market conditions, a skill that will be of increasing importance for farmer- entrepreneurs in the future. Consistent price differentials also encourage corruption.
The world rice crisis of 2008 will undoubtedly encourage many governments to strive for self-sufficiency using higher rice prices. But, given the welfare costs to the poor of high prices, investments in agricultural research and infrastructure so as to improve agricultural productivity and markets would seem to be a far superior way to achieve self- sufficiency. One policy option would be to offset high producer support prices with consumer subsidies targeted to the poor, but this faces at least two major problems. First, it is very difficult administratively to target the poor. Second, raising producer prices above market levels and lowering consumer prices below market levels incurs large fiscal costs (especially in poor countries) that crowd out spending on public goods, thus impairing the long-run growth of the economy. The case for stabilizing prices around the long-term trend of world prices seems stronger, although it is still very controversial among economists and there is no widespread agreement on this issue.
The central question is how to absorb the instability in world supply and demand that leads to changing world market prices. Trade-based domestic price stabilization policies, if successful, shield domestic producers and consumers from that instability, but at the cost of affecting world market prices and making them more unstable. Trade-based stabilization policies can lead to corruption as well, especially when the government plays a major role in conducting trade. Holding large stocks can provide a buffer, but the carrying costs of stocks can be very large, even without taking into account the quality deterioration of grain in storage. Safety net programs are a possible solution, but they place large administrative demands on governments, can have problems achieving wide coverage, and may need to be redesigned to serve transitory instead of chronic needs. Politically, it is hard to imagine that a poor country could tolerate the wide swings in income distribution that would result if domestic prices followed world prices on a month-to-month basis. As a result, there is no realistic chance that governments will simply abandon stable food price policies any time soon. Given this reality, it makes sense to explore ways to make price stabilization more cost-effective. This is especially important because the benefits of stabilization decline as economies grow and the importance of rice to the economy declines.
Changes in demography and the rice economy
As economies develop, the rural sector undergoes major changes. The younger members of rural communities, particularly men, leave in search of jobs in urban areas or overseas and send remittances back to their rural homes. These rural economies are becoming older and more feminized, and this trend is likely to continue. In some countries, especially in Africa, HIV/AIDS is also exacting a toll on the rural labor force. As a consequence, labor availability is declining and wages are increasing in many rice-growing areas. Farm employment is less attractive, and labor is harder to find at peak periods for key operations, such as transplanting, weeding, and harvesting. With rising wages and labor shortages, mechanization is becoming more common for both land preparation and harvesting, especially in irrigated areas. Also, farmers are shifting from hand weeding to the use of herbicides, and from transplanting to direct seeding. By the late 1990s, an estimated one-fifth of the rice area in Asia was direct seeded, and this proportion is expected to rise.