Streetwise Professor

August 7, 2010

Whatabout Tricky Dick?

Filed under: Economics,History,Politics,Russia — The Professor @ 4:41 pm

My recent post on the Russian wheat embargo, which I considered rather benign, drew the ire of a reader who emailed me to say that I’d written “another BULL SH*T Russia post” (caps in original–but not the asterisk).

Thanks so much for writing!  I’m really looking forward to your Christmas card!

Rereading the post, I found nothing exceptional.  The title was the most inflammatory thing about it.  But I think the gist of the post is correct, including the title.  And I have a very strong historical basis for my claim that embargoes such as this one are highly damaging to a nation’s commercial reputation, with long term economic consequences.

So, wait for it . . . SWP is about to say “whatabout!”  As in “whatabout Nixon’s 1973 soybean embargo?”  An absolute charlie foxtrot, like most of Nixon’s economic policies (e.g., wage and price controls).  God spare us another such “conservative.”

In 1973, demand for soybeans spiked due to an El Nino of unusual severity that devastated the Peruvian anchovy catch and central African peanut production.  (Can’t blame global warming or CO2 for that!  Indeed, that was a time when Global Cooling was becoming the angst du jour.)  These were major sources of protein for animal feed.  The only real substitute was soybean meal, so the loss of anchovy and peanut production drove up demand for soybeans, and the price with it.  Meal prices doubled, and soybean prices increased 81 percent.  The US livestock industry was hurt by the higher prices, and so Tricky Dick imposed an embargo on US exports of soybeans and soybean meal.

US prices dropped substantially, but prices elsewhere, notably Japan and Europe, skyrocketed.  Japan in particular was deeply disturbed, and lost confidence in the reliability of the US as an exporter.  Japan imported 92 percent of the soybeans it consumed from the US, and was seriously injured by the loss of this source of protein, and the resulting rise in food prices.

It actively sought alternative sources, and identified Brazil as the most attractive source.  The Europeans similarly considered Brazil a desirable substitute for the US.  There was a considerable increase in investment Brazilian soybean production and infrastructure.  Although there is some dispute as to the exact contribution of the US embargo to Brazil’s becoming a  leading soybean exporter, it is widely agreed that the embargo materially contributed to Brazil’s rise to leadership in this commodity.

More generally, the embargo damaged US-Japan relations.  Agriculture Secretary Earl Butz admitted that the embargo was a serious policy error (while at the same time defending Nixon over Watergate).

As a general rule, I oppose embargoes.  The 1980 embargo was a bad idea.  So was Ford’s 1975 mini-embargo.

So this isn’t a Russia thing or a Putin thing.  It is an economics thing.  Restricting trade is a bad idea.  And one of the effects of an embargo is that it harms the commercial reputation of the country imposing the embargo.  Indeed, imposing embargoes at exactly the time when importing nations are most in need of the commodity is particularly damaging; fair weather suppliers, like fair weather friends, are not friends at all.  Once you get that rap, people will find ways to reduce their reliance on you, which will have long term consequences.

And given Russia’s track record on trade and embargoes, it has precious little reputational capital to draw upon in such circumstances.  It has even less now.  It wants to build up its ag export business in a big way.  It just made that a whole lot harder.  More Putinist short-termism that will impose long term damage on the Russian economy.

What’s more, the conjectures in the post about Kazakhstan and Belarus were more than fair, and were indeed echoed by a highly respected independent source.

So, Walter: not BULL SH*T at all.

Here are the effects of an embargo.  It helps domestic consumers, but hurts domestic producers.  The domestic consumers’ gains are typically short lived, but the impact on domestic producers can be long lasting due to the reputational damage.  It is especially harmful to foreign consumers, like the Japanese in 1973, and like Egyptians, Africans, etc., today who are major importers of wheat and who will be greatly harmed by the higher prices resulting from the embargo; so if you’d like to hurt very poor Egyptians and Africans to help relatively well-off Russians, this is a policy for you!  Foreign suppliers are helped–North Dakota and Kansas and Texas should send Putin a Candygram.

But when you net the losses against the gains, the former are bigger.  Embargoes create deadweight losses.  They make the world poorer.  That’s why I don’t like them, whether imposed by Jimmy Carter, Richard Nixon . . . or Vladimir Putin.  (Although, it is interesting, don’t you think, that this something these three have in common, besides being execrable national leaders?)

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  1. […] This post was mentioned on Twitter by Craig pirrong, Craig pirrong. Craig pirrong said: Updated my SWP blog post: ( ) […]

    Pingback by Tweets that mention Streetwise Professor -- — August 7, 2010 @ 4:34 pm

  2. I wouldn’t say that russian consumers -those sensitive to food inflation- are well off- but you need to travel outside Moscow to notice that. Otherwise i agree with SWP and down with putinoids.

    Comment by a.russian — August 7, 2010 @ 5:11 pm

  3. @a.russian–please understand that the statement was a relative one. I know Russians are not well off compared to western Europeans or Americans. I know that is especially true outside the metropolises. But most Russians are better off than the Africans or Egyptians who would otherwise consume Russian wheat.

    The ProfessorComment by The Professor — August 7, 2010 @ 5:25 pm

  4. I would add that Russia might not only have enough to export now, but for two years (if the ground is baked too hard for the winter crop to be sown).

    In this case, export bans and more agricultural subsidies (including a project to shift the areas of cultivation further north) make a lot of sense. No point being a reliable provider if you can only produce enough to feed yourself.

    Comment by Sublime Oblivion — August 7, 2010 @ 9:11 pm

  5. @ Professor- I would love to see stats comparing say 20% of the poorest Egyptians and the same 20% russians. Having visited Egypt half a dozen times I know how horrible some of them look- but I travelled a lot in Russia and I can say the same about some of russians. Egyptians at least live in a friendly climate- I think the russians similarly poor have no other choice but to die.

    Comment by a.russian — August 8, 2010 @ 5:31 am

  6. […] #here is a related post at The Streetwise Professor on unintended consequences of government policy.  SWP illustrates how President Nixon screwed up the soybean market. […]

    Pingback by Fannie and Freddie « Points and Figures — August 8, 2010 @ 10:10 am

  7. @a.russian. Some quick numbers. Looking at the lowest 10 percent (for which I was able to get figures rather quickly). Per capita income in Russia is $18.4k (purchasing power parity), $9.4K (constant dollar method). Per capita income Egypt is $5.7k PPP, and $2.1k CD. 1.7 percent of total income is earned by the bottom 10 percent in Russia, 4.4 percent in Egypt. (IE, income inequality is substantially greater in Russia.) This means that per capita income of the bottom 10 percent in Russia is (.017/.10)*18.4=3.1 (PPP) and (.017/.10)*9.4=1.6 (CD) in Russia, and (.044/.1)*5.7=2.5 (PPP) and (.044/.1)*2.1=.9 in Egypt.

    So, the difference in the income available to the poorest between Russia and Egypt is substantially smaller than the difference in per capita incomes overall–another indication of the difference in inequality across the countries. Nonetheless, Egypt’s poorest poor are still poorer than Russia’s poorest poor.

    Of course, it is difficult to make allowances for other differences, eg the climate amenities you mention, differences in public health, disease, etc.

    All said, the effects of price rises on either would likely be devastating. But the important thing to remember that this is not a justification for an export embargo. It would be better to offset the effects of any food price rise in Russia on the poor via direct payments targeted at them, rather than to try to mitigate the effects of the drought through a policy that reduces prices for all, including those who spend relatively small shares of their income on food. But, it is likely that the poor are essentially politically powerless, and that the embargo is a political benefit primarily directed at middle and upper income individuals who have a (relatively) greater political influence.

    The ProfessorComment by The Professor — August 8, 2010 @ 10:25 am

  8. @a.russian. There’s also an urban-rural element to this. The embargo hits farmers particularly hard, as it prevents them from getting a higher price that would recoup some of the income losses they suffer as the result of the loss of output arising from the drought.

    @S/O. You write as if there is some quantity of grain, below which exports are impossible. There is a supply of grain, that has multiple uses among multiple potential consumers. They bid against one another to purchase this grain. If some of the winning bidders for grain produced in country X reside in country Y, then “exports” occur. If Russians outbid Egyptians et al for all of it, none will be exported: if Egyptians, etc., outbid Russians for some of it, some will be exported. What’s the difference between that, and having people in Omsk outbid people in Moscow?

    Who is this “yourself” you mention can’t be fed? You know what? I can’t feed myself. You can’t feed yourself. In fact, outside of hunting and gathering tribes, and a few hardy souls elsewhere, NOBODY can feed themselves–not even farmers. We all feed ourselves by trading with people who have food, who provide it to us in exchange for something we produce that they value.

    Having an export embargo prevents adults from engaging in mutually beneficial transactions. A and B are precluded from dealing with one another to benefit C. The benefit to C is smaller than the benefit would have been to A and B.

    Your comments about embargoes and subsidies may be grounded in something, but economics ain’t it.

    The ProfessorComment by The Professor — August 8, 2010 @ 12:01 pm

  9. Professor, thank you for your comments.
    I think it would be not a bad idea now for the government to cancel import duties for food as well if they really care about the population- but that would be too good to be true.

    Comment by a.russian — August 8, 2010 @ 12:40 pm

  10. @Professor #7 Those numbers conceal the huge gap in incomes between Russia’s rich and poor. Russia’s wealthiest made their money by stripping assets from the state during the privatization disaster. Russia’s poorest have not caught up, and they did, indeed, suffer widespread famine in 1998-99.

    Anyway, it doesn’t make sense to promise to deliver something you do not have. I think a democratic government would enact a ban if faced with similar conditions because they would be accountable to the people. Anytime the world has been faced with food shortages, the people with money end up buying too much. (The only people with money is China.)

    Comment by harry — August 9, 2010 @ 12:25 pm

  11. @Harry. The numbers I utilize in fact demonstrate clearly the vast gap between rich and poor. EG, the bottom 10 pct earning only 1.7 pct of nat’l income. The appallingly low income earned by the bottom 10 pct is plainly evident–$2k for crissakes. What’s clearer than that?

    The fact that other governments would follow bad policies is hardly any endorsement. N wrongs don’t make a right, even taking N to the limit.

    And as I noted in a reply to a.russian, if you are concerned about the impact of higher food prices on the poor, an embargo is a bad way to address that concern–far better to provide income support to those most acutely affected.

    Moreover, a.russian makes the very cogent point that if your real concern is alleviating the effects of the shock on the price of food is your main concern, reducing import barriers would be a great way of doing it. Is that happening? As if.

    The drought is a fundamental fact. You cannot change it. It means that food is more scarce, and a higher price will be paid one way or another. Bad policy makes the price higher than it need be. The particular policy of the embargo also exports the misery to others. Do you respond to pollution in your yard by dumping it on your neighbors?

    And nothing you or any other commentor has said undermines the point of my post: Russia will pay a price in the future for its short term policy response. It has ambitions of becoming a leading grain exporter. This action undermines that dream, as the example of the Nixon bean embargo shows.

    The ProfessorComment by The Professor — August 9, 2010 @ 12:35 pm

  12. @SWP,

    That kind of economics-grounded thinking leads (in extreme cases) to situations like the Irish Potato Famine – though in sum the country could have fed itself, just about, its big grain exporters had far more interest in exporting their products to the wealthier markets of Britain than providing them at prices the destitute, hunger-stricken Irish could afford.

    This is obviously an extreme case. However, so is your insistence that comparative advantage should be the end all in international trade. I disagree and think that the interests of Russia’s poor citizens should come before those of Egypt’s or Pakistan’s.

    It would be better to offset the effects of any food price rise in Russia on the poor via direct payments targeted at them, rather than to try to mitigate the effects of the drought through a policy that reduces prices for all, including those who spend relatively small shares of their income on food. But, it is likely that the poor are essentially politically powerless, and that the embargo is a political benefit primarily directed at middle and upper income individuals who have a (relatively) greater political influence.

    Not really, when Russia’s bottom 20% spend most of their incomes on food and clothing. Direct payments are better, in principle, but they are also more complex to implement fairly and efficiently, neither quality which the Russia bureaucracy administering it is famed for.

    Comment by Sublime Oblivion — August 10, 2010 @ 1:24 am

  13. S/O–In fact, trade restrictions (the Corn Laws) were a major contributor to the Potato Famine.

    Nice to hear you admit the lack of state capacity/ineptitude of the bureaucracy in Russia. I’ll keep it on file in case I need to remind you of it someday. That is the only intellectually defensible argument for the trade restriction.

    The ProfessorComment by The Professor — August 10, 2010 @ 8:50 am

  14. Even some Russians agree with SWP regarding the utter insanity of this grain embargo:

    Comment by La Russophobe — August 11, 2010 @ 3:49 am

  15. 1. When have I ever extolled the virtues of the Russian bureaucracy?
    2. Britain had no duty to feed the Irish (as argued by the contemporary The Economist). But the Irish could have theoretically fed themselves had the country not been run by the interests of big (british derived) landowners / grain exporters.

    Comment by Sublime Oblivion — August 12, 2010 @ 11:49 pm

  16. […] that China is the only untrustworthy one. The U.S. cut off soybean exports to Japan…so Japan went and helped Brazil build up its soybean […]

    Pingback by Why is it said that globalization results in a borderless world? | Economic theory — November 9, 2010 @ 9:12 am

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