Malawi restricts trade in corn (Optional)

Video 55 of 245 from the course: Development Economics
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user's picture

Why not allow these cheap imports? Malawian farmers could then specialize in some other crop.

user's picture

The only reason to follow this policys is precisely the politics Josh mentiones above. If you get a huge inflow of corn as donation or below producing costs, the local population will buy the cheaper corn and consequently destroy the local market. Local corn farmers will reduce or finish their corn production as they are not able to sell it anymore and the whole country might become dependant on imports. Thats by the way the same reason why the US and EU have such high subsidised agricultural policies - food security troght surplus production for times of crisis.

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If Americans or Europeans want to send heavily subsidized (or free for that matter) corn to Malawi, why would that be bad a bad thing for Malawis? Or do you also complain when aid agencies send food to developing nations?

I think subsidizing corn growers is bad policy for the US or the EU: it favors domestic corn growers but harms the general tax payer in those countries, and overall distorts the market for trade, but the person who gets to buy the subsidised food can't be happier that the price is cheaper thanks to the generous donations of the US or EU governments.

Alex, it is perfectly reasonable to complain when aid agencies send food to developing nations, as long as we are talking here about cyclical shipments. Food aid in times of great despair is necessary, but if you make a habit out of it, destruction of local market will occur.

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@Echo Luke
While certain types of financial speculation have been harmful in recent years, this should not be taken as a general statement about the value of speculation. For some empirical evidence about speculative price smoothing, see this VOX article: http://www.voxeu.org/article/speculation-oil-markets-what-have-we-learned

Or this stylized example comparing oil (which has a futures market) with onions (which don't): http://mjperry.blogspot.com/2011/05/what-can-onions-teach-us-about-oil.html

Or this very good piece: http://www.econbrowser.com/archives/2012/04/a_ban_on_oil_sp.html

This evidence comports with economic theory. Move away from commodities and consider a simplified model of the US stock market. Typically, one would want to buy at a low price and sell at a high one; that is simply to say, investor behavior is countercyclical and tends to smooth stock prices over time (think what would happen if a stock priced increased and investor behavior was to buy instead of sell, the price would increase without bound. True, what qualifies as a "high price" is very context dependent, but stocks rarely increase above some "fundamental value" for long periods). Speculators' behavior is no different than that of the typical investor, it's simply that the order of transactions is reversed: they sell high and buy low. Replace "stocks" with "rice" and you can get the idea, which is what Tyler was discussing with his chart during the beginning of the video.

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user's picture

The speculators are responding to price signals and will release it back into the market when price signals indicate they should. The state will be taking and releasing on political whims, which are often arbitrary.

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If you read about it further (e.g. here: https://ueaeprints.uea.ac.uk/10599/1/Thesis_manda_e_2010.pdf), it's clear that the state marketing board (ADMARC) was not making arms length free market purchases, but rather engaged in a variety of distortionary practices, such as setting prices and acting as a monopsonist.

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Speculators rarely, if ever, will ultimately take possession of the physical commodity...

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