CHRIS BARRETT: Now let's look at donor driven food aid. Here, in particular, I want to explode a few myths as to who benefits and why.
As we've already discussed, modern food aid began in North America with multiple objectives. First, it was aiming to dispose of surpluses generated by generous farm price and income support programs. When the government provided a floor price, it was a buyer of last resort, guaranteeing that farmers in the prairies could sell their produce at an acceptable minimum price.
The government wound up buying lots of grain. It then needed to do something with this grain. It's expensive to hold grain. And it's cheaper to give it away, especially if you can give it away to people who otherwise wouldn't be buying it when you're not dumping the grain into your own market.
So food aid had as a primary objective in its earliest years, surplus disposal. It was conceived of as a surplus disposal tool. Hence, the name of that FAO subcommittee, the Subcommittee on Surplus Disposal, the CSSD.
Second, food aid had another objective that most people are unaware of. It was aimed at helping to sustain the United States Maritime capacity for national security reasons. At the same time as Public Law 480 was enacted in 1954, the United States government signed into law the Cargo Preference Act, which established that all US government shipments of food aid and of other programs would be prioritized to US flagged vessels. In other words, we were going to channel food aid through US flagged carriers as a way of ensuring a revenue stream for US shipping interests that would keep them in business in the event that we needed those ships in time of war. That was the second objective.
The third objective behind American food aid and food aid from other countries as well in the early years was to build export markets, to try to convince recipients that American products were products they would want to buy as their incomes grew and they became viable commercial customers. This was a hypothesis that food aid could serve trade promotion or market development objectives for the donor country.
The fourth hypothesis behind food aid as it began was that it could be used as a tool for foreign policy. This was especially an issue as the US/Soviet competition heated up increasingly over the 1950s and into the early 1960s. Food aid was seen as a tool by which we could help to secure our friendships with developing countries that might otherwise fall under the sway of the Soviet Union and its allies. And it was a tool by which we could discipline those who might otherwise stray a bit.
The fifth objective behind food aid was the one that we usually think of, that is to help poor and hungry people around the world. But it's important to keep in mind that the original legislation in 1954 that created Public Law 480 makes relatively little mention of concerns around poverty and hunger. The primary objectives here were surplus disposal, market development for exporters, national security, and cargo preference.
The problem here then is that food aid is serving at least five objectives. And there's a basic law in economics called the Tinbergen principle, named after the Dutch economist Tinbergen, who won the very first Nobel Prize in economics. The Tinbergen principle holds that you need one policy instrument for each policy objective. And yet food aid as a policy instrument is serving multiple objectives. In serving many masters, the question becomes which ones does it serve least well?
Over the last half century, a lot of things have changed. In particular, domestic farm support programs have changed. We no longer run the same price support and income support programs we used to. And so the government doesn't hold big surpluses of grains the way it used to. So the surplus disposal objective is to a certain extent gone by the wayside.
Secondly, US Maritime fleet has shrunk dramatically. It's declined by almost half just in the last decade. And it's now are relatively small fleet.
Third, American agricultural competitiveness has declined over time. Fourth, the Cold War has ended. Fifth, we've learned a great deal more about poverty and hunger and what works and what doesn't in trying to reduce poverty and hunger around the world.
So while we had these five original objectives that food aid was trying to serve, these objectives, and in particular the context, has changed a lot over half a century. And yet food aid has adapted only slowly and partially in ways I'll described.
In particular, food aid remains a donor driven resource, especially when it comes from the United States, which remains the biggest player in the world food aid system. US food aid is largely driven by domestic farm and foreign policy concerns today. If you look, it remains very strongly correlated with wheat stocks in the United States and with wheat prices.
As stocks go up and prices come down, food aid flows increase as the government tries to help private businesses, private agribusinesses to dispose of the surpluses that they are holding. The government doesn't hold the surpluses, now the private sector does. But again, the surplus disposal objective remains key.
Second wheat continues to dominate. Wheat continues to be something on the order of 60% to 70% of aggregate flows, although it's not the best resource in all situations. For example, in the recent tsunami in South and Southeast Asia, wheat is not the consumption commodity of choice. These are rice based economies. So in a food aid system dominated by wheat, how do you attend to the dietary preferences of a recipient population that consumes very little in the way of wheat based products?
We have the continuation of the Cargo Preference Act. Today, 75% of all US food aid flows have to go on US flagged carriers. That creates a very tight bottleneck. And as I'll show you, drives up the prices paid for freight services to the point that almost half of the American food aid budget now goes to pay for freight, not for food.
So who does benefit from the American food aid programs today? There are really three key beneficiaries. First, there is a small number of food vendors, businesses that sell into the American food aid system responding to the government's invitation for bids.
There's limited competition in this domain. Because it's a very bureaucratic process it takes a relatively large business to be able to monitor the government's procurement policies through the federal register, to respond to these, et cetera. Regulatory limits, timing problems, related bagging and shipping restrictions create a certain amount of market power in this area.
And as a result, our analysis shows that the government pays on average something like 10% more than the prevailing open market price for the same commodities purchased at the same time in the same places. So the government winds up paying more than a business would on the open market because of all the various restrictions that exist in the procurement of food into the food aid system.
This also gives an advantage to a small number of relatively large businesses. For instance, Cargill and Archer Daniels Midland, two very large global agribusiness concerns, together shipped almost 2 million metric tons of food aid in 2003. More than a third of all of the United States food aid came from just two firms. This is a very large volume.
The US runs a program called the Emerson Trust that provides a storage mechanism for grains that can be released in emergencies. The Emerson Trust, however, pays businesses to be holding transactional stocks of grain. So these businesses make money off of just holding grain in their silos.
They therefore also have an interest to try to get the government not to release the grain since they're only paid when it's in their silos. So a storage program intended as a trust to be sure that there are resources available in time of emergency faces a great deal of political pressure against its use. It's a very peculiar design.
So in essence, the big beneficiaries within the agricultural sector are not small farmers, but they're big agribusinesses. And the best way of understanding this is to think of the scale of the resource. Food aid procurements by the United States government entail only something like a billion dollars a year, if not less.
And yet in the United States economy, we have a food economy that approaches a trillion dollars. So a billion dollars of procurement in the context of a trillion dollar food economy is just a drop in the ocean. We really don't have the capacity to move the prices that farmers get for their resources through food aid procurements. So it's little wonder that food aid doesn't directly benefit farmers anymore.
It used to be part of a system that helps farmers, because the government would buy up grain that farmers had by guaranteeing farmers prices. It no longer does that. It no longer is directly benefiting farmers. Today the only ag sector beneficiaries really are a few large agribusinesses.
The other group that benefits are the shippers. As I've mentioned, the Cargo Preference Act restricts American government shipments to US flagged vessels. 3/4 of all volumes at a minimum have to go on US flagged vessels.
At the same time, these same shipping industry concerns collect subsidies from the US government under the Maritime Subsidy Program. These subsidies have the same intent. The intent is to ensure the financial viability of ships that the Department of Defense can call on in time of war.
Now first of all, there are two different programs in existence at the same time. And shipping firms can draw both a subsidy and the premium they get under Cargo Preference at the same time. That's legal, not under all circumstances, but under most circumstances. When they're shipping bagged commodities, when they're shipping small lots of commodities. So there's a certain amount of double dipping that takes place.
This obviously is something that helps shipping concerns to be profitable. This is profitable and the Cargo Preference restrictions in particular are profitable because there are very few shippers that can participate. In 2002, there were only 13 registered shipping lines qualified to carry Cargo Preference Act shipments of food aid. That's not much competition.
And computations by the GAO, the US Government Accounting Office, and by my team show that in the decade 1991 to 2000, Cargo Preference Act restrictions drove up the cost of freight for food aid shipments by anywhere from 69% to 78%. In other words, you're paying 3/4 more to ship food around the world in humanitarian emergencies than you would if you hired out on a private basis on the open market. This is a very big premium they enjoy.
The third group of beneficiaries outside of a small number of agribusinesses that sell into the system and the shippers who earn a handsome profit from restricted competition in the transport of food around the world, the third set of beneficiaries are the NGOs, the non-governmental organizations that distribute food aid in various places in the world.
NGOs do extremely valuable work in combating poverty and food insecurity around the world. And they're the first responders who are most effective at addressing emergencies as they develop around the world. But food aid has become a very important resource for many of them. And so they can become very reluctant to change the rules of the game when they've learned how to play the game very well.
We find, for instance, that on average the major US NGOs get something on the order of $1 out of every eight from monetized food aid. Monetized food aid is the food aid that they take and sell in markets to get cash. It's only a small portion, something on the order of 40% or 50% of all of their food aid.
Monetization has increased very rapidly over the years. Back in the early 1990s, the Congress changed the rules a little bit, saying that at a minimum, NGOs had to monetize 10% of the food aid that they got in non-emergency situations. The intent was to make sure that the NGOs could cash out the food to get enough money to cover costs of internal transport, storage, handling, all the transactions costs associated with getting food from a port to intended recipients.
Over time, however, NGOs realized that this monetization opportunity could be used to generate cash that they needed for other operations when they couldn't necessarily get the Congress to appropriate cash for them. So NGOs would received food aid because there was more political support for sending food. They would then dump the food in local markets, take the cash proceeds from that monetization, and use it on projects, very worthwhile projects much more often than not. But they would use food as a very funny way then to turn taxpayer dollars into cash on the other end by converting taxpayer dollars into food purchased at a premium in US markets, shipped on very expensive terms around the world, and then sold typically at a discount in a developing country market.
As you can imagine, this is a very inefficient way of turning $1 into $0.50. So NGOs have become very dependent upon food aid as a resource in emergencies. Food aid is a source of cash through monetization, and also NGOs have been very concerned that food aid is a relatively low fixed cost enterprise. Meaning it doesn't take a lot of administrative expenses to manage a very large food aid program.
And as private donors have become very concerned about what share of the dollar that they give to an NGO is going to back office administrative expenses, they've become very concerned that the food aid dollars that they're receiving continue to keep these administrative cost ratios down. So food aid also serves this indirect objective of NGOs that it helps them to keep their administrative cost ratios down, making them more appealing to individual donors. So the perception is it helps them also to get leveraged resources from individuals who only want to give to efficient agencies.
The package then of three different beneficiary groups, NGOs, shippers, and agribusiness concerns, means that we have an environment in which the people who really benefit or the organizations that really benefit from food aid today are a bit different than those that most people think benefit from food aid.
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The US, Canada, and other developed countries have a decades-long tradition of sending food abroad to less-fortunate people. We think of this primarily as a humanitarian practice. But it originated with and has evolved to serve other economic, political and strategic aims as well. Professor Barrett examines how food aid has evolved, to what extent it fulfills its humanitarian and economic development and other, donor-oriented objectives today, and what challenges it now faces.
This video is part 3 of 6 in the International Food Aid After 50 Years series.