The New Nation - Internet Edition

Food reserves to protect the poor

Joachim von Braun and Maximo Torero

The current food crisis has several causes-rising demand for food and feed, biofuels, high oil prices, climate change, stagnant agricultural productivity growth-but there is increasing evidence that the crisis is being made worse by the malfunctioning of world grain markets. Given the thinness of major markets for cereals, the restrictions on grain exports imposed by dozens of countries have resulted in additional price increases. A number of countries have adopted retail price controls, creating perverse incentives for producers. Speculative bubbles have built up, and the gap between cash and futures prices has risen, stimulating overregulation in some countries and causing some commodity exchanges in Africa and Asia to halt grain futures trading. Some food aid donors have defaulted on food aid contracts. The World Food Programme (WFP) has had difficulty getting quick access to grain for its humanitarian operations. Developing countries are urgently rebuilding their national stocks and re-examining the "merits" of self-sufficiency policies for food security despite high costs.

These reactions began as consequences, not causes, of the price crisis, but they exacerbate the crisis and increase the risks posed by high prices. By creating a feedback loop with high food prices, they further increase price levels and volatility, with adverse consequences for the poor and for long-term incentives for agricultural production. Because they impede the free flow of food to where it is most needed and undermine the flow of price signals to farmers, these market failures impose enormous efficiency losses on the global food system, hitting the poorest countries and people hardest.

Why Is This Happening?: Changes in supply and demand fundamentals cannot fully explain the recent drastic increase in food prices. Rising expectations, speculation, and hoarding have also contributed to the increasing level and volatility of food prices. The flow of speculative capital from financial investors into agricultural commodity markets has increased drastically, as shown by the rise in the number of traded futures contracts in recent years (Figure 1). Excessive speculation in the commodity futures market can, in principle, push up not only futures prices but also spot prices above levels justified by supply and demand. Despite the fact that still more research is needed to clearly identify the causal links between speculation and cash prices, it is apparent that some activity in the futures market reflects a genuine concern about future supply and demand and a desire by consumers to hedge against risks.

To analyze whether recent price increases reflect higher levels of speculation or hedging activity, we examined weekly reports by the U.S. Commodity Futures Trading Commission (CFTC) on trading activities in futures markets by commercial and noncommercial traders. Commercial traders enter futures markets mainly for hedging purposes, whereas noncommercial traders speculate mainly in search of financial profits. We found that for maize, wheat, soybeans, and rice, the total number of positions in futures contracts by noncommercial traders as a fraction of the total positions (commercial plus noncommercial) has significantly increased in the past six months, implying the possibility of a price bubble above what is justified by fundamentals.

Appropriate global institutional arrangements for preventing these market failures are missing. A global solution that addresses the need for reliable emergency food supplies and prevents excessive speculation in food markets may be costly, but given the losses created by the crisis, it will still have large positive net returns.

A New Global Institutional Arrangement: A traditional approach to coping with the market failures revealed by the food-price crisis would involve building up a physical, public, globally managed grain reserve. These reserves could be released to cope with excessive price increases. This option has the disadvantages, however, of high storage costs and slow transactions.

Alternatively, commodity exchanges could be reformed. The incentives for speculation in food commodities could be reduced by (1) limiting the volume of speculation relative to hedging through regulation; (2) making delivery on contracts or portions of contracts compulsory; and/or (3) imposing additional capital deposit requirements on futures transactions. These reforms could be implemented case by case or through an international alliance of commodity exchanges.

Difficulties could arise, however, in walking a line between ineffective regulators and overzealous ones. Market regulation also raises political economy concerns, such as lack of institutional capacity to implement and enforce regulations and the possibility that regulatory measures could benefit relatively small groups.

Instead, we propose a new global institutional arrangement that would consist of two prongs: (1) a minimum physical grain reserve for humanitarian assistance, and (2) a virtual reserve and intervention mechanism to calm markets under speculative situations, backed up by a financial fund.

Prong 1: An independent emergency reserve. A modest emergency reserve of around 300,000 metric tons of basic grains1-about 5 percent of the current food aid flows of 6.7 million wheat-equivalent metric tons-would be supplied by the main grain-producing countries and funded by a group of countries participating in the scheme (that is, the Group of Eight Plus Five [G8+5] countries [Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, the United States, Brazil, China, India, Mexico, and South Africa] and maybe others). This decentralized reserve would be located at strategic points near or in major developing-country regions, using existing national storage facilities. The reserve, to be used exclusively for emergency responses and humanitarian assistance, would be managed by the WFP. The WFP would have access to these grains at pre-crisis market prices, to reduce the need for short-term ad hoc fundraising. To cover the cost of restoring the reserve to its initial level, (i.e. the difference between the post-crisis price and the pre-crisis price times the quantity of reserves used by WFP), an emergency fund should be created and its level maintained by the participating countries.

Prong 2: A virtual global food commodity exchange. A virtual reserve and intervention mechanism would be based on a coordinated commitment by the group of participating countries. Each of the countries would commit to supplying funds if needed for intervention in grain markets. Determining the size of this fund will require further analysis as commodity futures markets allow for high levels of leverage. For example, a fund of US$12 to 20 billion might cover 30 to 50 percent of normal grain trade volume and be sufficient to send a strong signal if an intervention is needed. These resources would be promissory, or virtual, not actual budget expenditures.

Then, if needed, intervention in the futures markets would be guided by a high-level technical commission. This commission, which could be appointed by the group of participating countries on a permanent basis, would depend on a "global intelligence unit" to trigger the alarm that prices are significantly above their estimated dynamic price band (that is, lower and upper price limits) based on market fundamentals, and that intervention is needed. The intervention would consist of executing a number of silent short sells over a specific period of time (that is, selling a firm promise-or a futures contract-to deliver grain at a later date at the specified price) in futures markets around the world at a price lower than the current spot price. The global intelligence unit would recommend the price or series of prices to be offered in the short sells, which should move smoothly toward the upper limit of the estimated price band. This increase in the supply of future sells (short) should lower spot prices and minimize speculative attacks. In other words, the virtual fund will come into play only if there is a need to realize the future sells, in which case the fund will be used to obtain the necessary grains to comply and calm the markets. Usually, this action would not be necessary and the whole operation would stay virtual.

We recommend intervening through futures markets (rather than spot markets) because under current tight market conditions, accumulating a global stock of grain large enough to calm markets is simply infeasible. The needed incremental supply is missing, and holding large grain reserves around the world would be inefficient. Moreover, to the extent food price rises were caused by a speculative attack, the market would respond immediately to an intervention in the futures market, and the cost would be minimal, given that the selling positions at lower prices would be closed immediately.

The global intelligence unit, to be permanently funded by the participating countries, would have three main roles: (1) advising when the emergency stocks should be accessible to the WFP; (2) designing and implementing a dynamic price band system; and (3) triggering sales in the futures market by the high-level technical commission until a speculative attack is eliminated.

Mechanism to Monitor Compliance: One potential risk of cross-country coordinated institutional design is the probability that a member country will fail to comply with the agreed-upon commitments. To ensure that all participants in this new system comply with the agreed-upon rules, existing World Trade Organization (WTO) dispute resolution mechanisms could be used. If the WTO's formal process for raising disputes for consultation fails to produce a satisfactory result, the matter moves to a hearing by a panel and possibly an appeal to the Appellate Body.

Toward an Effective World Food System: The G8+5, at their meeting in July 2008, should consider these and other options for calming global food markets. The World Bank should also initiate discussions on these issues with other global institutions and consider playing a lead role. Any solution must balance external regulation with internal corporate governance in a way that marries market development and welfare objectives. Some argue that achieving this balance is too difficult, but in fact the world cannot afford not to do so. Markets are needed to offer choices, but policymakers must play a role in assuring that the global food system meets the needs of the poor and vulnerable.

(Joachim von Braun is director general of IFPRI, Maximo Torero is director of IFPRI's Markets, Trade, and Institutions Division.)

Confessions of a British Spy - VIII

I stayed in Baghdad for a time. Then, receiving the message ordering me to return to London, I left. In London, I talked with the secretary and some officials of the Ministry. I told them of my activities and observations during my long mission. They rejoiced greatly at the information I gave about Iraq and said that they were pleased. On the other hand, Safiyya, the girl friend of Muhammad of Najd, sent a report agreeing with mine. I found out also that throughout my mission I had been followed by men from the Ministry. These men also sent reports concurrent with the reports I had sent and with the account I had given to the secretary.

The secretary made an appointment for me to meet the Minister. When I visited the Minister, he met me in a manner that he had not shown towards me upon my arrival from Istanbul. I knew that I occupied an exceptional place in his heart now.

The minister was very pleased to know that I had obtained Muhammad of Najd. "He is a weapon our Ministry has been looking for. Give him all sorts of promises. It would be worth while if you spent all your time indoctrinating him," he said.

When I said, "I have been anxious about Muhammad of Najd. He may have changed his mind," he replied, "Don't worry. He has not given up the ideas he had when you left him. The spies of our Ministry met him in Isfahan and reported to our Ministry that he had not changed." I said to myself, "How could Muhammad of Najd reveal his secrets to a stranger?" I did not dare to ask this question to the Minister. However, when I met Muhammad of Najd later, I found out that in Isfahan a man named Abd-ul-karim had met him and ferreted out his secrets by saying, "I am Shaikh Muhammad's [meaning me] brother. He told me all that he knew about you."

Muhammad of Najd said to me, "Safiyya went with me to Isfahan and we cohabited with mut'a nikah for two more months. Abd-ul-karim accompanied me to Shiraz and found me a woman named Asiya, who was prettier and more attractive than Safiyya. Making mut'a nikah with that woman, I spent the most delightful moments of my life with her."

I found out later that Abd-ul-karim was a Christian agent living in the Jelfa district of Isfahan and working for the Ministry. And Asiya, a Jewess living in Shiraz, was another agent for the Ministry. All four of us coordinated to train Muhammad of Najd in such a way that in future he would do what was excepted from him in the best way.

When I related the events in the presence of the Minister, the secretary, and two other members of the Ministry whom I did not know, the Minister said to me, "You have deserved to receive the greatest award of the Ministry. For you are the best one among the most significant agents of the ministry. The secretary will tell you some State secrets, which will help you in your mission."

Then they gave me a ten-day leave during which I could see my family. So I went home right away and spent some of my sweetest moments with my son, who resembled me very much. My son spoke a few words, and walked so elegantly that I felt as if he were a piece from my own body. I spent this ten-day leave so cheerfully, so happily. I felt as if I were going to fly from joy. It was such a great pleasure to be back home, to be with my family. During this ten-day leave I visited my old paternal aunt, who loved me very much. It was wise of me to visit my paternal aunt. For she passed away after my departure for my third mission. I felt so sad about her decease.

This ten-day leave elapsed as fast as an hour. Whereas cheerful days such as these go by as quickly as an hour, days of grief seem to take centuries. I remembered the days when I had suffered that illness in Najaf. Those days of affliction had seemed like years to me.

When I went to the Ministry to receive new orders, I met the secretary with this cheerful face and tall stature. He shook my hand so warmly that his affection was perceptible.

He said to me, "With the command of our minister and the committee in charge of Colonies, I shall tell you two State secrets. Later you will benefit very much from these two secrets. No one except a couple of confidential people know these two secrets." Holding my hand, he took me to a room in the Ministry. I met with something very attractive in this room. Ten men were sitting around a round table. The first man was in the guise of the Ottoman Emperor. He spoke Turkish and English. The second one was dressed in the attire of the Shaikh-ul-islam (Chief of Islamic Matters) in Istanbul. The third one was dressed in an attirement identical with that of the Shah of Iran. The fourth one was in the attire of the vizier in the Iranian palace. The fifth one was dressed like the great scholar leading the Shi'ites in Najaf. The last three of these people spoke Persian and English. Each of these five people had a clerk sitting beside him to write down whatever they would say. These clerks were imparting to the five men the information collected by spies about their archetypes in Istanbul, Iran, and Najaf.

The secretary said, "These five people represent the five people there. In order to know what their archetypes think, we have educated and trained these people exactly like their archetypes. We intimate the information we have obtained about their originals in Istanbul, Teheran and Najaf to these men. And these men, in their turn, imagine themselves to be their originals in those places. Then we ask them and they answer us. We have determined that the answers given by these people are seventy-percent agreeable with the answers that their originals would give.

"If you like, you may ask questions for assessment. You have already met the scholar of Najaf." I replied in the affirmative, for I had met the great Shi'ite scholar in Najaf and asked him about some matters. Now I approached his copy and said, "Dear teacher, would it be permissible for us to wage war against the government because it is Sunni and fanatical?" He reflected for a while, and said, "No, it is not permissible for us to wage war against the government because it is Sunni. For all Muslims are brothers. We could declare war on them (Sunnite Muslims) only if they perpetrated cruelty and persecution on the Ummat (Muslims). And even in this case we would observe the principles of Amr-i-bi-l-maruf (28) and Nahy-i-ani- l-munkar (29). We would stop interfering with them as soon as they stopped their persecution."

I said, "Dear teacher, may I have your opinion concerning the matter that Jews and Christians are foul?" "Yes, they are foul," he said. "It is necessary to keep away from them." When I asked the reason why, he replied, "It is done so in retaliation for an insult. For they look on us as disbelievers and deny our Prophet Muhammad 'alaihis-salam'. We therefore retaliate for this." I said to him, "Dear teacher, isn't cleanliness an issue of iman? Despite this fact, the avenues and streets around the Sahn-i-Sharif [the area surrounding hadrat 'Ali's mausoleum] are not clean. Even the madrasas, which are the places of knowledge, cannot be said to be clean." He replied, "Yes, it is true; cleanliness is from iman. Yet it cannot be helped because the Shiites are negligent over cleanliness."

The answers given by this man in the Ministry were precisely concurrent with the answers I had received from the Shiite scholar in Najaf. Such accurate identity between this man and the scholar in Najaf amazed me utterly. In addition, this man spoke Persian.

The secretary said, "If you had met the archetypes of the other four personages, you would talk to their imitations now and see how identical they are with their originals." When I said, "I know how the Shaikh-ul-Islam thinks. For Ahmad Effendi, my hodja in Istanbul, gave a detailed description of the Shaikh-ul-islam to me," the secretary said, "Then you can go ahead and talk with his model."

I went near the Shaikh-ul-islam's model and said to him, "Is it fard to obey the Khalifa?" "Yes, it is wajib," he replied. "It is wajib, as it is fard to obey Allah and the Prophet." When I asked what evidence he had to prove this, he answered, "Didn't you hear about Janab-i-Allah's ayat, 'Obey Allah, His Prophet, and the Ulul amr from among you (30)'?"

I said, "Does this mean that Allah commands us to obey the Khalifa Yazid, who permitted his army to plunder Medina and who killed our Prophet's grandson Husain, and Walid who drank alcoholic spirits?" His answer was this: "My son! Yazid was the Amir-ul-Muminin with Allah's permission. He did not command the killing of Husain. Do not believe in the Shi'ite lies! Read the books well! He made a mistake. Then he made tawba for this (he repented and begged for Allah's forgiveness and mercy). He was right about his ordering Medina-i-munawwara plundered. For the inhabitants of Medina had become quite unbridled and disobedient. As for Walid; yes, he was a sinner. It is wajib not to imitate the Khalifa, but to obey his commandments compatible with the Shariat." I had asked these same questions to my hodja Ahmad Effendi and received identical answers with slight differences.

Then I asked the secretary, "What are the ultimate reasons for preparing these models?" He said, "With this method we are assessing the mental capacities of the (Ottoman) Sultan and the Muslim scholars, be they Shi'i or Sunni. We are searching for the measures that will help us cope with them.

For instance, if you know what direction the enemy forces will come from, you will make preparations accordingly, post your forces at suitable positions, and thus rout the enemy. On the other hand, if you aren't sure about the direction of the enemy assault you will spread your forces here and there in a haphazard way and suffer a defeat. t By the same token, if you know the evidences Muslims will furnish to prove that their faith, their Madhhab is right, it will be possible for you to prepare the counter-evidences to rebut their evidences and shock their belief with those counter- evidences."

Then he gave me a book of one thousand pages containing the results of the observations and projects carried out by the aforenamed five representative men in areas such as military, finance, education, and religion. He said, "Please read this book and return it to us." I took the book home with me. I read through it with utmost attention during my three-week holiday.

The book was of a wonderful sort. For the important answers and the delicate observations it contained sounded genuine. I think that the answers given by the representative five men were more than seventy percent agreeable with the answers that their archetypes would have given. Indeed, the secretary had said that the answers were seventy percent correct.

Having read the book, I now had more confidence in my State and I knew for certain that the plans for demolishing the Ottoman Empire in time shorter than a century had already been prepared. The secretary also said, "In other similar rooms we have identical tables intended for countries we have been colonizing as well as for those we are planning to colonize."

When I asked the secretary where they found such diligent and talented men, he replied, "Our agents all over the world are providing us intelligence continuously. As you see, these representatives are experts in their work. Naturally, if you were furnished with all the information possessed by a particular person, you would be able to think like him and to make the decisions he would make. For you would be his substitute now." The secretary went on, "So this was the first secret I was ordered by the Ministry to give you.

"I shall tell you the second secret a month later, when you return the book of one thousand pages."

I read the book part by part from the beginning to the end, focusing all my attention on it. It increased my information about the Muhammadans. Now I knew how they thought, what their weaknesses were, what made them powerful, and how to transform their powerful qualities into vulnerable spots.

(Source: Waqf Ikhlas, Istanbul)

Financing universities: An international perspective

Dr John Richards

Whether at the primary, secondary, or tertiary level, education is a kind of investment. As with investment in physical plant and equipment, investment in "human capital" increases labour force productivity and hence renders a country more prosperous. In an industrial knowledge-based economy, it is necessary that the overwhelming majority achieve secondary school education, that a clear majority go on to some form of post-secondary training, and that a sizeable minority achieve a university degree.

University education has become more important in recent decades, and younger cohorts have invested more in education than their parents. In the age 25-34 cohort, the youngest whose members can be expected to have completed a university degree, approximately three- tenths have a university degree, double the share among those age 45 and older.

A second university goal is the generation of relevant new knowledge via research. In good universities, teaching and research are joint products: the best researchers are often the best teachers. This poses a dilemma: to what extent should faculty members teach or conduct research, and how to decide? In the UK, for example, the central government undertakes regular audits of university departments. Productive departments, measured by a high publication rate per faculty, are funded more generously; less productive departments receive less funding and their faculty members are required to spend more time per week in teaching.

A third legitimate goal is the "consumption value" for students of university learning. Even if the study of art, music, philosophy or literature does not enhance labour force productivity or generate new knowledge, students benefit from exposure to the ideas and works of great minds.

There exist several means to evaluate university performance. Some are relatively straightforward managerial accounting measures of inputs and outcomes of university activities. Others are assessments by committees or agencies established for the purpose of generating professional judgments. Yet others derive from unofficial but valuable surveys conducted by the media needless to add, none of these measures are perfect:

Graduation rates: If a high proportion of entering students drop out before graduation, that is an index of "wasted resources" and the university should probably be required to improve quality of teaching. This is not necessarily the connect interpretation. Some universities have a mandate to accept all students having a minimum threshold (such as a high school certificate), and cull the less academically oriented via "tough" courses with high failure rates. Alternatively, a university may realise a high graduation rate by resort to lax marking. In effect, it sells a low-value credential.

Faculty qualifications: We may measure the quality of a university by the quality of the faculty. What percentage is full time, as opposed to sessional part time, instructors? Presumably, full time faculty members devote more attention to the diverse hard-to-specify tasks of university education than do sessional instructors responsible solely for teaching a particular course. What percentage has doctoral degrees? Are the degrees from reputable universities? What is the publication record of university members?

Children with secondary education knowledge and skills will usually be more productive than those without, and can be expected to earn more over their working lives. Perhaps parents should pay for the benefit that investment in primary/secondary education provides to their children. But, in most countries, there is no charge for attendance at government primary or secondary schools. Why not? First is an efficiency argument: the incremental benefits of a well trained work force accrue not only to the children thus educated but to the whole economy. This spillover public benefit is sufficiently important to justify the subsidy to primary and secondary education. There is also an equity argument: wealthy families typically appreciate the value of education and are willing, if necessary, to pay for it, but providing primary and secondary education of reasonable quality to all is an important means to equalise the distribution of opportunity and income among citizens of a country.

Some extend to the tertiary level the efficiency and equity arguments pertaining to primary/secondary education. A free-tuition university strategy removes a barrier faced by poor but meritorious students who cannot obtain credit to pay fees, and would not otherwise attend. There are two important counter-arguments to this extension.

It is useful to divide this listing into, on the one hand, financial arrangements channeling resources to the universities supplying education and, on the other hand, financial arrangements providing resources to students who then are able to pay higher fees. I start with supply-side options:

State-owned universities, free tuition, with variable entrance requirements across classes of universities

State-owned universities, variable entrance and tuition regulations, with discretion over tuition fees accorded to elite universities .

This roughly describes the situation in several large US states (e.g., California) with multiple state-owned universities. The lower tier offers acceptable quality undergraduate degrees at modest tuition levels; the upper tier (e.g. Berkeley) offers excellent education at much higher fees.

Unfortunately, the reputation of public university degrees has suffered over the last quarter century. Both problems associated with a strategy of free tuition and subsidised living costs have been severe. Access to public universities is restricted to those with HSC or equivalent. Hence, public funds used to finance public universities largely benefit families with above-average incomes. The quality of instruction is too low to attract families with means to send their children to private universities (whether in Bangladesh or abroad). Instead, the strategy has attracted students willing to suffer the mediocre instruction in exchange for subsidised living arrangements. The youth wings of the political parties have effectively controlled access to dormitories and extended their control into faculty appointments.

Recommendation: The private universities should collectively establish a credible accreditation committee to evaluate private universities, at arms' length from both the government and individual private universities.

To provide reasonable assurance to students and their families of the quality of private universities, there must be a credible accreditation committee able to vet private universities and refuse accreditation to those below some benchmark. Deciding the benchmark and enforcing it will be controversial. To provide for its independence, appointments to the committee might be made by the senior judiciary, and a significant number of committee members could be foreign-based academics.

The government should provide modest funding to suitably accredited private universities via an enrolment-based formula.

The private universities face severe financing difficulties. On the one hand, they face competition from free-tuition public universities; on the other, they face difficulty in attracting students from the small number of families able to afford foreign study for their children.