Barter beware: by leaving markets, food importers make things worse

“Before all else, a government must safeguard the basic needs of its citizens. Yet, from north Africa to China, and from Russia to south Asia, governments have started entering into a secretive web of barter deals as a substitute for global commodity, because the financing for the international food trade is drying up or becoming too expensive. This is a dangerous tend that rich and poor countries must work to reverse.

It is understandable that food-importing countries use any available means to secure supplies. Being cut off from trade puts too much pressure on domestic food markets. In Sub-Saharan Africa local food prices have increased even as global commodities prices have fallen. The World Food Program has too few resources. But beyond the very short run, solutions based on barter will only make things worse.

The great advantage of a well-functioning market is that it is open to all on the same terms. Barter systems, in contrast, are deeply arbitrary and government-to-government deals always vulnerable to caprice and political calculation. The world does not need a great game whose winners hold the most vulnerable – those most in need of food imports – at their mercy.

Government barter also opens the floodgates to domestic corruption and abuse. When goods are not exchanged at market prices – or worse, when the terms of deals are not even made public – officials can too easily make bad deals or favor their own interests rather than those of their citizens. Market trading would ensure transparency.

The problem today is that the markets are not functioning well. Commodities markets are volatile in the best of times, and were already stressed during last year’s unprecedented price rises. But now trade financing has become much harder to obtain: banks are frequently charging more for letters of credit that typical trading margins can cover. This is blocking trade flows.

Countries make a mistake if they try to escape these market imperfections by leaving markets altogether. As more trade shifts to barter deals, commodities markets become even thinner, less liquid and more volatile for those who still trade commercially. And the gross inefficiency of barter will increase the cost and reduce the availability of food further – precisely what food-importing nations must avoid.

As part of its efforts to defrost global credit markets, the world must urgently try to restore trade flows and make trade credit affordable again. Well-functioning international trade is the best guarantee of food security”.

Source: Financial Times Monday February 2 2009.