Tyler Cowen on Wal-Mart and World Hunger

Arabic Knowledge@Wharton interviews Tyler Cowen about food and economics.  Here’s a particularly interesting bit about why Wal-Mart’s presence in places like Africa might actually make it easier for the poor people to buy food there:

Cowen: If you look at wheat and rice, there have been price spikes over the last five years and they’ve made food a lot harder for poor people to afford. The so-called “Green Revolution” has somewhat slowed down. This is an unreported story. Crop yields are stagnant. It isn’t a problem we can solve overnight but it’s really one of the biggest problems in the world. It hardly gets any publicity. But for poor people in India, the Middle East and parts of Africa, it really matters.

Some of the problems are we don’t have enough trade. It could be either legal barriers or just costly to transport or trade things. If there could be a shortage of rice in one place, it actually not that easy to ship a lot of rice in there because of bad roads and so on.

Arabic Knowledge@Wharton: So if countries worked on improving the transportation infrastructure, that would lower food prices in some parts of the world?

Cowen: Exactly, that would do a lot to feed people. Again, it sounds much more mundane but it’s more important than what people in the food world usually talk about.

Arabic Knowledge@Wharton: So when companies like Wal-Mart bring their logistics ability to Africa, it actually could be a good thing for the poor people of Africa?

Cowen: It’s exactly what we need more of. Yes.

Stay tuned: Cowen will be answering your questions this week.


mannyv

Historically, famine has been more due to poor logistics than a lack of food. That has probably been exacerbated by pricing problems caused by free NGO food. How would you like to be a farmer (or a store) competing against free grain?

Would Wal-Mart be willing to build out a farm-to-market infrastructure? McDonalds did in Russia, but McDonalds sells a whole lot less stuff than Wal-Mart does.

Poorer countries may be more served by encouraging middlemen/distributors. If there's money to be made, they'll find a way to get the product from A to B. Building infrastructure would help, but what might be better is posting prices for goods in an accessible place in each region so various middleman can arbitrage between the regions. It'll give the government an idea of where to build roads - high price differentials are probably a sign of poor infrastructure between areas. A road to a high priced area may drive transport costs down enough to even out the prices.

In general, costs are higher in places that are hard to get to. Note that distributors in high-price remote areas will actively resist transport infrastructure that will reduce their monopoly.

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nobody.really

"Building infrastructure would help, but what might be better is posting prices for goods in an accessible place in each region so various middleman can arbitrage between the regions. It’ll give the government an idea of where to build roads – high price differentials are probably a sign of poor infrastructure between areas. A road to a high priced area may drive transport costs down enough to even out the prices.

In general, costs are higher in places that are hard to get to. Note that distributors in high-price remote areas will actively resist transport infrastructure that will reduce their monopoly."

Are you in the electricity business, mannyv? If not, you might consider it. Cuz you've just described what is supposed to happen (and is expected to be actively resisted) in the US wholesale electricity market.

Specifically, the US Federal Energy Regulatory Commission (FERC) has facilitated the creation of "independent [transmission] system operators" (ISOs) to coordinate the use of electric generators and the transmission grid that connects them within a given (typically multi-state) region of North America. (Canada has joined in on this, too.)

The ISOs calculate and publish locational marginal prices -- that is, numbers that reflect how the marginal price of electricity varies throughout the grid. If the price between two points gets very large, this sends a signal to build a transmission line between those two points.

Of course, the very entities that would be in the best position to build the line -- the local electric utilities -- are also the entities that tend to profit from the high prices that result when you DON'T build the line. In theory, rival entities could build the line, but there are practical difficulties. "Barriers to entry" remain.

If Africa finds a solution to this problem, please tell FERC! And if FERC finds a solution, I'll try to pass it along....

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James

Strangely enough, exactly this sort of thing was being done 20-some years ago, when I was working on transmission powerflow & stability software. Seem to work fairly well then: the hard part of building transmission lines was getting approval from the various public utility commissions involved.

Eric M. Jones

...and I'll bet you believe in Trickle-Down economics?

Joe Dokes

If better logistics were the single reason that Wal-Mart is able to offer lower prices than its competitors then they should be commended and emulated; because, better logistics creates cheaper products by increasing worker productivity and efficiency. Unfortunately, Walmart's competitive advantage is a result of better logistics AND the routine and systemic violation of labor laws,combined with wages and benefits so low that a large percentage of its workers qualify for food stamps and public supported health care.

That being said, for much of modern history extreme famine is the result of government policy. One simply has to look at the mass starvation in North Korea today, Ethiopia in the 80s, China in the 50s and the Soviet Union in the 30s to see that government policy causes most if not all modern wide spread famine.

The above examples are those from the left; but, I'd argue that current government policy that greatly rewards speculative investment that is largely a form of gambling is causing large swings in pricing of a number of commodities. These large swings in pricing is creating artificial mini famines in a number of countries. Simply look at the wild swings in the price of oil and other commodities to realize that purely speculative investors are simply searching for ever higher returns. Since the amount of capital available for gambling is so great that investors are willing to jump into and out of markets at ever increasing rates. The net result of this is large fluctuations in commodity prices. These large swings create market uncertainty that hurts consumers at every level. Particularly those in developing nations earning less than a dollar a day.

While some would argue that these speculators are necessary for market liquidity, a saner argument would recognize that we have chose to tax capital gains so low, that it has encouraged reckless investment, the results of which have been greater uncertainty in a number of important markets. For example, the up-swing in oil prices last year help to smother a nascent recovery. Without the swing in oil prices from 75 dollars a barrel to over a hundred and then back down to 80 the slow recovery would have been more likely to pick up steam. Instead, it appears that America is going to continue with its anemic 2% growth, while Europe slips back into recession.

Better logistics may help indeed help keep prices low. But functioning markets with appropriate government oversight are essential to the best use of resources.

Regards,

Joe Dokes

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Erik Dallas

The governments that fail and thus cause famines are also the governments that fail to build infrastructure such as roads. Hard to say whether the failing government’s corruption, ineptness, lack of centralization, lack of rules of law, lack of development, lack of economic opportunity and growth, or lack of roads contributed most to the famine, but it is sure one big lack of the failing government that made sure there was a famine.

paul o.

While I see your points on the negative side of Walmart, their greatest strengths are their large scale purchasing power that allows them to get cheaper wholesale costs. That combined with a slick inventory and distribution system.

Mike Fladlien

Better infrastructure would help developing countries in Africa. But before better highways and airports can be made, there has to be well defined and protected property rights as well as a government who won't tolerate corruption.

RPM

"Here’s a particularly interesting bit about why Wal-Mart’s presence in places like Africa might actually make it easier for the poor people to buy food there"

Why does that introduction make the conclusion sound like a surprise? Especially on this site, it should be pretty obvious that having an efficiently run store and distribution system makes it easier to buy things. Africans aren't exempt from the laws of economics.