Rice is the New Cocaine

Cracking Down on Grain Smugglers

Well, I had a feeling this was going to happen. What’s that scientific term called again… you know, like it explains the reason why when someone farts the smell spreads across the room? I don’t think it’s osmosis… it’s something else, but I can’t remember.

Having low grain prices was used initially by the CCP to make sure urban costs of living stayed very low, which was supposedly going to speed up industrialization. While the CCP did have moderate growth rates post 1949 until the Reform and Opening period, a lot of the industrial growth was very inefficient and produced products that couldn’t be sold on the market. Only when the policy of grain extraction was softened and the peasants could sell their excess grain (and other produce) on the market did grain production increase.

In these days of modern rural China, agricultural taxes no longer exist and all produce can be sold on the market. However, remnants of the ‘good ol days’ still exist. First, a certain amount of land must be allocated to producing grains even if other types of produce, like ‘big white vegetable’ or pineapples are more profitable. Also, while the peasants can sell their grains on the market, they can only sell it on the domestic market. International grain trades are operated by the government and these days, they’re not exporting much.

The existence of two market prices for the same goods wouldn’t be a problem if China was still closed off. The root of the problem would still exist, but the cost of getting through all the barriers of trade would probably deter most smugglers. However, with a more porous border and much higher worldwide grain prices, there is a huge incentive to sell grains abroad. I think it would only be a matter of time, well actually, I’m pretty sure it’s already happening, that local government officials see how much profit can be made from this and start facilitating the smuggling of grains.

If this takes or is taking place, then it will the the officials who gain the profit from the higher grain prices while the peasants, forced to sell grains at a low price while paying more for other goods like pork and turnips will be hit even harder by inflation. And I assure you that inflation is dangerous. In fact, inflation kills more people per year than shark bites.

Now the government should do something about grain prices. I’m not one of those neo-liberal nutcases who espouse free trade more than white middle class hippies shout free Tibet. However, I don’t think closing off China from the international grains market is such a great idea. Subsidization of farming tools, fertilizers, the increased reclamation of land, work to reverse desertification, ensuring clean water supplies, and stopping the encroachment of hotels and golf courses on agricultural land… sure, it’ll take a long time, but this would ensure that China’s food supply would remain healthy for years to come. And as we all know, if you shift that supply line outwards, prices magically go down.

“Inflation is a problem that needs to be solved now, foo!” Ok, that’s true, but with the developed world buying corn to be used for gasoline and paying their farmers to destroy their own crops, there’s little hope for lower international grain prices. So I guess that’s why the PRC are trying to artificially keep prices low…

But the way I see it, there are two (ok, there’s a lot more, but two is such a pretty number) choices for China:

1. Allow the peasants to sell the grain at international prices. Food price will go up by a lot, but the income of the poorest people in China will increase, thus softening the blow of inflation on the most vulnerable sector. The urban residents will probably be hit hardest, but the middle class will survive even if they can’t buy a car or take a family vacation to Xian. The migrant workers will also be hurt very hard, but with rising profits in the countryside, there is an increased incentive to return home and relieve the population pressure on the urban areas.

2. Force the peasants to sell the grain at low domestic prices. Grain prices will stay relatively low, but there is a huge chance that grain will be exported through illegal means, thus enriching triad smugglers and corrupt officials while the peasants see none of those profits. Thus in this scenario, a small select part of the population will be enriched while a little over forty percent of the population will suffer. This also hurts China in the long term since, with little profit to be made from farming, more land will be converted to alternative use and further decreasing domestic grain production.

I personally prefer the first choice. Combine that with long run policies to increase grain production, the leveling off of China’s population, and the global market’s adjustment to higher prices, and China should have a fairly stable supply of starch for years to come.