Let Them Eat Cash: The New Approach to Food Aid

A few years ago, I used to subscribe to Harper’s Magazine.  The lead article in one of the issues was titled “Let them eat cash: Can Bill Gates turn hunger into profit?”  It seemed interesting, but couldn’t really understand much of it at the time, since I didn’t know anything about food aid policy, or development in general.  Just the other day I met someone who is working with the World Food Program’s Purchase for Progress program out here in Ghana.  She asked me what I thought about the WFP and food aid in general.  So I gave her my typical screed about food aid providing a market for surplus corn and soyabean production in the United States while calling it aid.  And I talked about how flooding the market with low-cost (or no-cost) food may be necessary in the short-term, but is counterproductive in the long-run, since it undermines the competitiveness of the private sector in the areas where it is delivered and leaves the market in a state of atrophy.  The conversation reminded me to go back and re-read the article.  This time, I understand it much better.

The author, Frederick Kaufmann, attended a world summit on hunger and climate change (fitting both into the busy schedule).    He had the opportunity to speak with the head of the WFP, and she described to him the new strategy and theory behind Purchase for Progress (P4P):

Grain purchases from small farmers and traders would put cash into the hands of hundreds of thousands of people and encourage farmers to plant and harvest more and more food. In addition, the WFP would put these farmers in contact with other groups, who would in turn help them acquire better seeds, fertilizers, and pesticides, more advanced irrigation systems, larger warehouse facilities, and improved access to roads. Thus could a poverty-stricken peasant move from being a recipient of food aid one year, to creating a bit of surplus the next, to making a profitable business out of it a few years down the line—and supplying food for others.

In order to realize these plans, the World Food Program would guarantee a market where none might now exist. They would do so, in part, by “forward contracting,” whereby the WFP would promise to purchase a certain amount of a farmer’s output, at a certain price, either one, two, or three years down the line. Such guarantees would give small farmers the incentive to plant more crops, since they could count on an eventual market for their goods. A WFP contract might even help farmers get credit from the local bank, or perhaps a bit of crop insurance.

P4P was designed to mimic sophisticated global markets. Along with its purchase guarantees, P4P included plans to support countrywide commodity exchanges, which the WFP hoped would develop along the lines of the Chicago Board of Trade. (In Ethiopia and Uganda, exchanges have already opened.) In the new paradigm, the smallest farmer can benefit from the biggest market.

These warehouse receipt programs, which Ghana is in the process of trying to develop, provide an opportunity for farmers to store their products and use their crops as collateral for the bank.  The idea is sexy and sophisticated, but one thing I have realized, which Kaufmann I think understands well, is that the complexity and difficulty of trying to pull off an intervention like this is high, and, at the end of the day, even though the World Food Program is providing a market for local production, it is still giving the food away for free, which distorts competition in the local market, driving prices down and, in the long run, making the industry less competitive than before.

Whenever there is a buyer in the market that is subsidizing costs, it creates a distortion in the market.  This is true in any situation.  As a private sector business, how can you be competitive when inefficient companies have a competitive advantage over you because their operating costs are subsidized by the government or NGO?  Of course, in the United States, the government is considering the renewal of the Farm Bill in 2012, which will provide $30 billion in subsidies to big agriculture, including $5 billion in direct payments to farmers (most corporate farms).  So there are major distortions in the market everywhere.  And while the mission of the World Food Program is honorable, well-meaning, and probably necessary, I am not so sure that it is creating a long-term, sustainable solution to the problem.  And, apparently, neither does Frederick Kaufmann:

I clicked on my microphone and said I had a question for Mr. Gates: Despite all he was doing to end world hunger, might not programs like Purchase for Progress in the end perpetuate market conditions that actually promote world hunger?

An uncomfortable silence settled on the room, and for the first time that morning Bill Gates stopped smiling.

“You should track what the food output has been,” he said, and this time he remembered to turn on his microphone. “The amount of food being produced in the world today is much greater than millennia ago.” His face had grown florid as he gazed down from his perch beside the African presidents. “Incredible progress has been made,” he recited. “You get operating markets, they can feed the world very well. This money is being spent because it improves the human condition.” And now his smile returned. “If you look at historical figures and do not see a positive trend, you might not choose to be involved,” he said, “but I do see a positive trend.”

Gates shook his head and turned off his microphone, and Bettina Lüescher announced that the news conference had come to an end.

Hunger was over. It was time to discuss climate change.

Cynical, to be sure.  But I do feel that it is the right question to be asking.  It is a tricky one, since the mission of the World Food Program is undoubtedly positive, but the mechanism by which it operates is exacerbating the problem in the long-run and probably providing cover for the real causes of hunger and food shortages, which are global trade dynamics and agriculture subsidies in the countries that fund the World Food Program.  Unfortunately for the world, which is in the midst of yet another food crisis, the thinking that has created stagnation in the past is not going to feed the future (which also happens to be the name for Obama’s new food aid program).  There is a new special report in the Economist titled “The 9-Billion People Question,” which explains how the problem of hunger is about to become much, much more pertinent in the coming decades.  It is something I am still learning about, but these two articles are a good place to start.

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