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Leaving rice alone

  • Published at 09:45 pm May 25th, 2019
Leaving rice alone
The point is to benefit consumers Mahmud Hossain Opu/Dhaka Tribune

Don’t mess with the markets through politics

The Finance Minister Mustafa Kamal has announced that rice imports will be restricted, exports allowed and subsidized to aid Bangladeshi farmers. 

What actually needs to happen is that the finance minister needs to stop interfering in the rice market. Of course, with millions of rice farmers in the country, all of whom have the vote, this isn’t something a politician is going to do, however sensible it actually is.

The background argument here is that sometimes Bangladesh doesn’t produce enough rice to feed everyone -- the price rises and that’s bad for consumers. At other times, the monsoon season goes well, no cyclones destroying crops, and thus the harvest is good.

Prices, then, are great for consumers, but the farmers are complaining bitterly about not making money. The temptation is for politicians -- and all would like the votes of both the consumers and the farmers -- to step in and to try and organize this market, and the prices in it. Sadly, this doesn’t really work.

This is because of an old problem that Friedrich Hayek pointed out in his Nobel lecture. Government, anyone at the centre, just doesn’t know enough, cannot gain enough information, to be able to plan matters in detail. Thus we shouldn’t be using such decisions from the centre to change matters because such decisions will always be made upon inadequate data.

Concerning rice, there is this way to approach this question. We want -- as is always the intent in matters economic -- to improve the lives of consumers as best we can. 

As Adam Smith pointed out, the purpose of production is always and only consumption. It is who gets to eat the rice at what price which is our concern, not who grows it nor where. 

So, if Bangladeshi farmers can provide it better, or cheaper, than foreigners, then good luck to them. If they can’t, then use the land for something else. Given the Bangladeshi geography and climate, foreign supply is only ever going to be at the margin and that’s fine.

But what do we actually have as a system? A minister decides whether excess production may be exported or not. Or that prices are “too high” and so imports may be allowed. Why do we have this license system? Why do we need a ministerial decision?

Think on it -- a quick look around the internet tells us that there are at least 14 strains of rice used for just the Aush and Boro plantings (Sulfala, Biblab, Asha only three of them) and they’ll all obviously have slightly different characteristics. 

We would trust a minister to have the information about which of these should be planted in which quantity on what plots of land now, would we? We know, absolutely, that he just cannot rule the world to that level of detail.

So what makes us think he knows what the price should be? And yes, such different kinds of rice might well have different relative prices.

Well, of course, the minister isn’t even claiming that he knows much about all of these individually. What he is saying, though, is that he can see the prices in the market and thus, must do something. 

Allow those exports, limit those imports -- which is the truly silly thing about the system. If we didn’t have the rules on licenses for import and export then the prices would be all we did need. 

We’d not need the intervention of the minister at all, would we? If rice was plentiful and cheap in Bangladesh, then it would be bought for export. If it were expensive and more was desired, then imports would be shipped in. Because this is the way the markets work, prices change people’s behaviour.

The current system of ministerial decisions looks at the same prices the market sees and then takes weeks or months to make a decision. When left alone, those markets would react to those same prices today. 

All we’ve done by having the political decision is to make the system slower and less effective. Which isn’t, when we come to think of it, really how we want to run a country.

All of which gives us a useful and basic rule for our socioeconomic system. It isn’t true that free markets and prices solve every problem. There will always be things we want to do over and above -- those purely impersonal forces. 

But the trick is to allow the market result to play out and then see what problems are left which then need to be addressed, instead of intervening in the markets themselves and thereby making things worse. 

Thus giving us our basic rule: Don’t mess with markets. Clean up after them perhaps, tax and redistribute the spoils at least a little bit, certainly, but don’t mess with them through politics and regulation.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.