I was listening to a podcast called”Hedging Against Hunger” by Center of Global Development. We also had a short discussion on this in my development economics class today. It seems that the food aid from the US is not reaching to the needed population effectively.
The US contributes a big chunk for the World Food Program (WFP in short) under United Nations, but it is estimated that 200 million dollars were lost in transaction costs from years 2008 to 2010. It’s useful to investigate the breakdown of this. First of all, WFP US buys domestic food for aid. While this is welcomed by domestic farmers, it calls for a bureaucracy to supervise the procurement process and thus increase the costs. Another source of transaction costs comes from the requirement of the US that food must be shipped by US vessels. This was initially out of national defense concerns, but seems to be obsolete for the current situation.
The inefficiencies above can downplay the effect of the food aid. It takes a long time to get to the place where the food is needed. Moreover, if the food comes in the harvest season, it will exacerbate competition in the local market and depress the price of the food. The local food producers in the recipient countries are the ones to suffer.
Another inefficiency of WFP is that it always buys food on-the-spot without any forwarding or risk-hedging measures. This is partly because they raise funding whenever needed. This “reactive approach”, mentioned by Connie Veillette in the podcast, generates a thin and unstable income stream and greatly reduces the possibility of risk-minimizing through various financial instruments. It makes sense to publicize charity when there is a natural disaster and an obvious need for food. It makes people feel good when they are saving others’ lives after the problem of shortage is already visible. This can be clearly seen in the US WFP’s brochure on its website (http://issuu.com/erinkoepke/docs/wfpusa_2010annual_web?mode=window&backgroundColor=%23222222). The second reason is that donors provide food but not cash. In contrast, in Canada the WFP provide financial support lasting multiple years. This gives the organization greater freedom and better hedging. Lastly, the international organization itself is governed by different political voices and this may lead to gap between the theoretical best practice and the real-life reaction to a problem.