What are the consequences of farming abroad?

*As with any writing that pertains to trade and agricultural issues, I would like to note explicitly that this post represents solely my own opinions.*

A couple weeks ago, there was a fascinating story about the South Korean corporation Daewoo leasing land in Madagascar for the purpose of farming. This is especially notable because it is the latest in a series of land deals, whereby rich countries with limited agricultural production capacity are acquiring land in the developing world for the purpose of growing food to ship back home. A number of Middle Eastern countries have made similar arrangements in Africa, particularly Sudan, and China has been actively pursuing land deals in Brazil.

The scope of this deal is particularly staggering: if it is finalized, Daewoo would acquire a 99-year lease on 1.3 million hectares (half the size of Belgium) for no money, but Madagascar would presumably benefit from increased employment and rural development. I suspect the potential gains are highly skewed toward Daewoo, though I don’t want to fault a sovereign government for negotiating a deal presumably in its best interests.

However, I’m interested in the larger implications of this ‘farming abroad’ trend. In my mind, it’s inherently a sensitive issue because it involves food, which we all consume. Necessarily, agricultural investment will be more controversial and visible than, say, a sovereign wealth fund acquiring a stake in a foreign bank. The countries that are seeking these deals need to be very careful to avoid looking like imperialists, and there certainly needs to be a careful balance between how much food is exported and how well the domestic market is served. I wouldn’t bet on these contracts being honored very long if there were food shortages in the host country. How does any government allow food to be exported if locals are starving without full-throated international condemnation and vicious domestic civil unrest? My point is, land lease contracts ought to be managed with the utmost care to balance public relations and, more importantly, ethical concerns. A contract that looks skewed toward the foreign party is in neither side’s interests, in my mind.

Second, the lesson which these countries appear to have gleaned from the food crisis earlier this year is that self-sufficiency is the best option. If we follow this thinking to its logical conclusion, we risk severe resource-driven competition and conflict, especially as the world population continues to expand. For humanity to secure its food future, we absolutely need free and non-distorted agricultural trade at the multilateral level. That countries are drawing the opposite conclusion and adopting what I would describe as “beggar-thy-neighbor” food policies is troubling, to say the least.

(Photo from Quack A Duck's photostream)

Multinational corporations and censorship

Via Frostfirezoo, here’s an interesting picture of image search results for Tiananmen on normal Google and Google China. The results, unsurprisingly, vary wildly depending on whether you search from China or not.

I find this sort of problem immensely interesting and a serious gray area. Google has taken a lot of heat for this in past. On the one hand, you have a company whose corporate motto is “Don’t be evil”, yet hiding the uncomfortable truths of history for one fifth of humanity is hardly model behavior. On the other hand, the government of China has always been able to leverage the size of its domestic market to impose strict constraints on how foreign companies operate within its borders. The Communist Party of China will control the flow of information, whether or not Google is there. Should Google deny itself (and its shareholders) the benefits of operating in an enormous market because of realities that it has no control over?

There are externalities as well. In sum, is the fact that Google operates (even if search results are skewed) a net benefit for the Chinese people? I’m sure that you could make a convincing case for it: I’d be lost without Gmail, Gcal, and Google Reader (and this blog probably wouldn’t exist.) Again, though, we’re talking about one of the world’s preeminent technology companies: is it really fair to let them off the hook so easily? Shouldn’t they have used the leverage that this position gives them more aggressively?

There are no right answers here, but I think this is a great example of how complicated and nuanced the great issues of international political economy are. Feel free to hash it out in the comments. For what it’s worth, I believe that China’s bargaining power was significantly larger than Google’s. I’m willing to take some unavoidable censorship now with the hope that things will evolve as China becomes richer and more integrated into the world economy.

The death of the death of distance

Recently, there's been some chatter in the news and blogosphere about the how the high price of oil is putting some serious dents in the 'death of distance' theory, a subset Tom Friedman's ubiquitous 'flat worldism' (or is it flatism? I can never remember: I gave up trying to finish the World is Flat on my third try.) The gist of it is: high shipping costs mitigate the advantages you would get from delocalizing production, and if oil prices don't fall, we will see a reversal of a key component of globalization in the future.

Anyways, this is rather old hat - I remember reading a lot of doomsaying about transportation costs earlier this summer when it looked like oil was on a runaway train to $200. But the issue clearly still has traction, as oil prices are unlikely to drop signficantly anytime soon. Research shows that shipping costs clearly play a big role in determining trade volumes. For starters, we have the standard gravity model, which predicts trade volumes based on two variables: GDP size of the two trading nations and the distance between them. Perhaps unsurprisingly, as distance increases, trade declines. And for anyone who truly wants to get into the nitty gritty, I direct you to this NBER paper, which uses the gravity model to show how rising shipping costs helped destroy the last great era of globalization (give or take 1870-1914.)

My first thought is that the price of oil will have to get substantially higher to really reverse global integration. You don't create delocalized production chains overnight - they're the result of significant research and preparation, and they usually take the form of foreign direct investment. FDI, which often represents tangible physical investment, is by nature fairly illiquid. Also, shipping is still a fairly low portion of overall production costs, and certainly much less than labor costs. It would take very high shipping costs for the (cost of shipping + cost of labor in developing country) to exceed (cost of labor in rich country).

Still, there have been complaints that price-sensitive industries are under pressure. Chinese textiles and basic manufactures reportedly produced the slimmest of profit margins. This is a concern, but only if it's an industry-wide problem. In this case, the price of these goods will go up; if not, it will weed out inefficient producers very, very fast.

In my opinion, these concerns are most important in the 10-15 year outlook. If oil prices continue to trend upwards as they have for the past decade, what effect will that have on delocalized production? It's really difficult to make any sort of accurate forecast that far into the future, but one thing seems clear to me. If shipping costs become prohibitive, the biggest losers wouldn't be first-world consumers, it'd be third-world countries that rely on their comparative advantage in labor for economic development.

Don't let this keep you up at night (unless you happen to manage supply chain logistics for a living), but it's certainly something to keep an eye on. Both from a development standpoint and a business standpoint.