Journal of Hunger & Environmental Nutrition

ISSN: 1932-0248 (Print) 1932-0256 (Online) Journal homepage: http://www.tandfonline.com/loi/when20

Food Insecurity as Market Failure: A Contribution

from Economics

Cecilia Rocha PhD

To cite this article: Cecilia Rocha PhD (2007) Food Insecurity as Market Failure: A Contribution
from Economics, Journal of Hunger & Environmental Nutrition, 1:4, 5-22, DOI: 10.1300/
J477v01n04_02

To link to this article: http://dx.doi.org/10.1300/J477v01n04_02

Published online: 11 Oct 2008.

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 PERSPECTIVE

Food Insecurity as Market Failure:

A Contribution from Economics
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Cecilia Rocha, PhD

ABSTRACT. The complexity of food security requires an interdisci-

plinary approach in its study. For policy development and analysis, an
essential element of this interdisciplinary approach is economics. At the
center of the rationale provided by economics for government interven-
tion is the idea of market failure. The paper argues that the economic
theory of market failure, and in particular the concepts of externalities
and public goods, can be effectively used for analyzing and criticizing
the present food system. It also argues that through a better understand-
ing of these economic concepts, governments can devise market-based
policies for improving food security. doi:10.1300/J477v01n04_02 [Article
copies available for a fee from The Haworth Document Delivery Service: 1-800-
HAWORTH. E-mail address: <docdelivery@haworthpress.com> Website:
<http://www.HaworthPress.com> © 2007 by The Haworth Press, Inc. All
rights reserved.]

KEYWORDS. Economics of food security, externalities, food policy,

food security, market failure, public goods

Cecilia Rocha, PhD, is Associate Professor, School of Nutrition and Centre for
Studies in Food Security, Ryerson University, 350 Victoria Street, Toronto, Ontario,
M5B 2K3, Canada (E-mail: crocha@ryerson.ca).
Journal of Hunger & Environmental Nutrition, Vol. 1(4) 2007
Available online at http://jhen.haworthpress.com
© 2007 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J477v01n04_02 5
 6 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

INTRODUCTION

The complexity of food security requires a multi-disciplinary approach

in its study. Still, many who claim the need for a multi-disciplinary ap-
proach to the study of food security easily dismiss the contribution that eco-
nomics can make. As pointed out by Holden,1 economics is often seen
as a “reductionist discipline that frequently justifies the marginalization
of legitimate social concerns” (p. 173).
In this paper I argue that economics can greatly contribute to the anal-
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ysis of the nature of food insecurity and, consequentially, to the develop-

ment of policies towards its mitigation. Economics can be particularly
important when providing the rationale for government intervention in
market societies. It can help us answer questions such as when should
governments intervene, and what is the best intervention. Rather than a
justification for marginalizing social concerns, economics can be part of
a useful approach to social policy.
The insights provided through the economics view of food insecurity
can also help in the design of programs by civil society groups which
want to “harness market forces to pursue social and environmental ob-
jectives”2 (p. 129). Ecological labeling, fair trade, forest stewardship
certification, farmer seed enterprises, and many other initiatives rely on
markets to promote social, collective benefits. Economics can help un-
derstand how these markets function, enhancing the possibility for the
success of those initiatives.
At the center of the rationale provided by economics for government
intervention is the idea of market failure, defined as “a circumstance in
which the pursuit of private interest does not lead to an efficient use of so-
ciety’s resources or a fair distribution of society’s goods”3 (p. 41). It is
argued in this paper that the presence of “externalities” and “public
goods” in the production and distribution of food is the source of mar-
ket failures leading to food insecurity. It thus follows that, without
government intervention, unregulated (“free”) markets and profit-
seeking behavior will often lead to food insecurity. The presence of
market failures reveals the reality that, while markets are good mech-
anisms for organizing economic activities, they cannot work well for
social welfare without government intervention. In the case of food
security, identifying the types and sources of market failures in the
food system can help us develop appropriate policies to deal with
them.
 Perspective 7

THE RIGHT TO FOOD, FOOD SOVEREIGNTY,

AND FOOD SECURITY

Although the right to food has been recognized as a basic human right
since the adoption of the Universal Declaration of Human Rights in
1948, its implications and the means by which it can be achieved are
still matters of much debate throughout the world.4 International bodies
such as the United Nations Food and Agriculture Organization (FAO)
recognize that the primary obligation to realize the right to food rests
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with national governments. For this reason, food sovereignty, defined

simply as “the peoples’ right to define their own policies and strategies
for sustainable production, distribution and consumption of food that
guarantee the right to food for the entire population,”5 is essential for the
right to food in democratic societies.
Food sovereignty, however, although a necessary condition, is not
sufficient for the right to food to be realized. The right to food is not, as
yet, enforceable by international law. Neither is it enforceable by do-
mestic legislation in most countries. Hence, beyond food sovereignty, a
necessary condition for the right to food is political will–governments
and people (civil society) committed to the right to food as a human
right and a right of citizenship. It is this commitment that will lead to
policies and programs promoting food security.
Difficulties in enacting legislation and designing policies to guaran-
tee the right to food are related to what can be identified as the political
economy of the problem–the ideological and power struggles in the de-
sign and implementation of policies that can advance the right to food
for all. While the right to food can be used as a guiding principle, can it
“result in appropriate action?”6 Does it have the potential “to achieve a
positive transformation of power relations”7 necessary for the realiza-
tion of food security within a country or worldwide?
The right to food is more than the right to be free from hunger. The
“Rome Declaration on World Food Security” asserts the commitment
from governments around the world to “the right of everyone to have
access to safe and nutritious food, consistent with the right to adequate
food and the fundamental right of everyone to be free from hunger.”8
From this declaration, a definition of food security has emerged which
emphasizes four components of the concept, all of which must be pres-
ent for complete food security:9

• Availability–food in sufficient amounts to meet people’s needs;

• Accessibility–assured physical and economic access to food;
 8 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

• Adequacy–food that is nutritious and safe, needed to maintain

healthy lifestyles, and produced in environmentally sustainable
ways;
• Acceptability–food that is culturally acceptable, produced and
obtained in ways that do not compromise people’s dignity, self-
respect and human rights.

When the Food and Agriculture Organization refers to countries as

food insecure, it is often referring to the availability component of food
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security. Due to extensive crop failures or wars, for example, these coun-
tries are in danger of not having enough food (in quantity) available to
feed their populations. Famines may be the result.
The vast majority of people that are food insecure around the world,
however, do have enough food available in their regions or countries, but
they cannot access that food. Food is sold in markets, and a great number
of people do not have the economic means to access enough of it. We
find large groups of people suffering food insecurity in food-abundant
countries, including some of the richest countries in the world.10 Accord-
ing to FAO’s “The State of Food Insecurity in the World 2004,” of the
852 million people around the world not getting enough to eat in 2000-
2002, 9 million lived in industrialized countries.11
Of course, most people suffering from food insecurity and its worst
manifestation, hunger, live in developing countries. Economic accessi-
bility to food is intimately related to income security. Lack of participa-
tion in markets as consumers of food due to poverty is the most prevalent
cause of food insecurity. It is also one of the most important factors in
health insecurity, as it leads to malnutrition and related illnesses.
Malnutrition, however, can result from conditions other than the lack
of food. Food insecurity due to the inadequacy of the food available for
consumption threatens another large portion of populations worldwide.12
This refers to the quality of food and the quality of diets. It addresses the
question of food safety and the nutritional content of foods, as well as the
appropriate nutritional balance of what we eat. The importance of this
factor in food security has been recently highlighted by studies which
indicate that for the first time in human history the number of over-
weight people rivals the number of underweight people.13 In western
countries many are talking of an “obesity crisis.”2,14 In 1991, 15% of
Americans were obese; by 1999, that proportion had grown to 27%.15
In Canada, the number of obese children has almost tripled to 13%
between 1981 and 2001.16 But this “dietary transition” is also affect-
ing developing countries, exacerbating public health problems with the
 Perspective 9

appearance of a double burden of under-nutrition and chronic diseases

related to overweight and obesity.17 Countries such as South Africa, Egypt,
Brazil, and Mexico are now showing obesity rates close to those of richer
countries, and the percentage of people that become obese each year in
developing countries such as China, India and Indonesia has also been
increasing.15,18
The adequacy of the food system is also reflected in its environmen-
tal impact. Soil erosion, contamination of ground and surface water, de-
forestation and loss of biodiversity are just a few of the environmental
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impacts of modern food production. In fact, the environmental degrada-

tion created by modern agriculture is threatening its capacity to continue
feeding the world. Indeed, “the environmentally degrading activity that
has the strongest effect on agriculture is probably agriculture itself ”19
(p. 436).
The last piece of the food security puzzle is that adequate food should
be produced and accessed in ways that do not compromise people’s dig-
nity and self-respect. Shared food fulfills this condition when people
feel reciprocity in the sharing. When food, however, is donated rather
than shared, the reciprocity is broken. Food aid, through international
donations, food banks, and charitable drives, while necessary for the
survival of so many people, is one of the clearest indicators of food inse-
curity. In market economies, accepted, dignified ways of accessing food
is often through markets. But when markets fail, the dignity and human
rights of many people are put in jeopardy.
The acceptability of our food systems also depends on food being
produced in ways that respect human rights. Too many food commodities
in both local and international markets have been produced by workers
laboring under very poor conditions, in some cases bordering on slav-
ery. Agricultural workers tend to work long hours, with little protection
against exposure to hazardous conditions.20 They are among the poorest
people in the world, suffering the worst manifestations of food insecu-
rity. These are unacceptable conditions, and interventions to eliminate
them are urgently needed.

FOOD INSECURITY AS MARKET FAILURE

Market failure is a traditional argument used for the necessity of pub-

lic policies and government interventions in the areas of health, edu-
cation, public safety and national defense. Food security should also
be included in this list. Market failure happens when free markets are
 10 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

“socially inefficient” (when the social benefits of market outcomes are

less than the cost paid by society as a whole for that outcome, or when
the full benefits for the use of social resources are not realized). In the
case of market failure, the “market clearing forces do not maximize so-
cial net benefits”19 (p. 14). Two of the most important causes of market
failure are the presence of negative externalities and of public goods.

Negative Externalities in the Food System

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A clear case of market failure emerges in situations where the costs

society pays for a given activity are greater than the social benefits that
activity brings. This is often what happens when an economic activity
creates pollution or environmental degradation; for example, the use of
environmental resources (water, land, or air) to dispose of wastes gener-
ated in the process of producing, transporting, or consuming a given
commodity frequently imposes costs to society that are not compen-
sated by the benefits that commodity creates. These pollution costs are
called externalities because neither the producer nor the consumer of
this commodity had to account for them–they are external to the market
transaction. Externalities are social costs that are not reflected in the pri-
vate costs and prices of market goods.21
The emergence of “factory farms” in animal food production (such
as huge feeding lots for cattle and gigantic hog and chicken farms) has
created much controversy and debate in North America.22-24 Producers
in such operations blame the push for lower and lower food prices in
world food markets (and the need for higher and higher profits for cor-
porate shareholders) for the trend. They claim (with some reason) that
consumers’ demand for cheap food makes it impossible for smaller
scale, family farms to compete effectively. Economies of scale (being
big) tend to lower the cost of production, and hence, the price of food
to consumers.
This is a clear case in which business efficiency is not the same as so-
cial efficiency. North American consumers get cheap food, but at what
social costs? Factory farms create many and very significant negative
market externalities through their operations. Pollution of ground water
(increasing the cost of purifying water for communities nearby), and the
foul smell (reducing the value of neighboring properties) are just a few
of the examples of the negative externalities factory farms can create.
Thus, while consumers pay a lower price for the meat produced by fac-
tory farms, society at large is incurring a much higher cost for food pro-
duced in this way–a cost that is not captured by the market price. While
 Perspective 11

from a market perspective factory farms seem efficient (as they can pro-
duce food at a lower cost to producers and lower price to consumers),
from a social perspective, unregulated operation of factory farms is often
inefficient.
There is a need for policy to intervene in reducing the social costs that
such food production system generates, either by regulating such opera-
tions, or by imposing high pollution taxes, or both. Governments can
closely regulate feeding lots by setting maximum limits on the number
of animals per farm, or by setting rules on what type of waste treatment
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must be used to prevent pollution. The effect of regulations and taxes is

to create “compliance costs” to producers, increasing their private cost
of operation. Until emission taxes or standards are set, producers are able
to use the waste-disposal services of the environment virtually without
cost. Without taxes or regulation there is little economic incentive for
producers to think about the environmental consequences of their ac-
tions and to economize on the use of environmental resources.
The externalities created in the process of food production are neither a
recent phenomenon nor are they exclusive to North America. The strict
market efficiency gains brought about by conventional agricultural tech-
niques since the 1960s (and the “green revolution”), while evidenced
and often praised by the significant increase in food production, have
masked important social losses in the form of environmental degrada-
tion throughout the world. Ironically (and tragically) those same techniques
that had once allowed for greater food production are now threatening the
capability of many countries and regions to continue producing food
given the deterioration of their environmental resources. Table 1 sum-
marizes some of the most common environmental problems associated
with modern food systems, the sources of the externalities generated,
and their social impacts.
While the environmental problems created by modern food systems
can be found throughout the world, their consequences are more severely
felt by people in developing countries. Take the case of soil erosion, where
small farmers in developing countries could avoid soil erosion by adopt-
ing more appropriate agricultural techniques (crop rotation, less inten-
sive plowing, etc.). There are many reasons, however, preventing this
from happening. First, farmers may not be aware of this information.
They may not know that the technique they are using will lead to soil ero-
sion, and/or they may not be aware of other appropriate techniques to use.
This is an example of imperfect information, another source of market
failure preventing producers (farmers, in this case) to make the best de-
cision for their situation.
 12 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

TABLE 1. Common Environmental Externalities in Modern Food Systems

Environmental Problem Source Social Costs

Water pollution Chemical pesticides and Water-borne illnesses;
and water scarcity herbicdes; organic waste higher costs for drinking
runoffs; irrigation water; declining fisheries;
disputes over water access
Soil degradation Monocultures; intensive Soil becomes less productive
and erosion plowing and cropping; for further food production;
intensive irrigation leading crop productivity declines;
to greater soil salinity declining ground water
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quality; greater susceptibility

to drought
Deforestation Expansion of agricultural Localized flooding; soil
activities; use of chemical erosion; loss of biodiversity;
pesticides and herbicides loss of local foods and local
food habits; loss of “carbon
sinks” to combat air pollution
and climate change
Depletion of fish stocks Over-fishing by modern Declining fisheries; disputes
fishing vessels over fishing stocks; economic
and social decline of coastal
communities; loss of local
food habits
Climate change Increased emissions Higher risks and
of methane, carbon dioxide uncertainties for coastal
(agricultural machinery communities; changes
and transportation), in soil fertility;
and nitrous oxides localized flooding; greater
(by chemical vulnerability to severe
and organic fertilizers) weather changes

Most often, however, farmers are aware and do have the information
they need to prevent soil erosion. It is the conditions under which many
of them live that limit their choices in techniques of production. If pro-
tecting soil fertility comes at a cost of lower food productivity today,
many farmers will continue using the techniques that they know will
lead to soil erosion. This is because, when so many of them live in pov-
erty, their very survival and the survival of their families depend on the
agricultural products they produce today. They cannot afford risking
lower production at present for the sake of continuing food production
in the future. The cost of preservation today for poor farmers is too high.
This perverse situation is exacerbated when land rights are inexistent or
uncertain.25 Poor farmers will have even less of an incentive to invest in
soil preserving techniques if the land they work on are not theirs or if it
can be taken from them at any moment.
 Perspective 13

Agricultural extension programs that inform and educate farmers, ru-

ral credit for adopting soil preservation techniques, and secure land rights
are some of the policies that would help small farmers make the right de-
cisions concerning the environmental impacts of their practices and the
continuing productivity of their lands for future food production.
Another important form of negative externality found in food produc-
tion is that related to ocean fisheries. Fish in the ocean are an exam-
ple of common-property resources. Indeed, most environmental resources
can be characterized as common-property resources–resources that are
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commonly held by a community. No individual private ownership applies

to them. The environmental problem created by common-property re-
sources (or “common resources” or “the commons”) is the tendency for
them to be overexploited to the point of exhaustion or extinction, if there
is free and open access to them. The social ecologist Garrett Hardin
first drew attention to this idea in his famous article “The Tragedy of
the Commons.”26
Fish in the oceans are renewable resources in that their stocks can be
replenished as long as the rate at which they are harvested is lower than
the rate at which they can reproduce themselves. The problem with free,
open-access common resources is that they tend to be harvested at a
faster rate than they can naturally replenish themselves. Without con-
trols, each fishing vessel has an incentive to take as much fish from the
ocean as it can (and as fast as it can). Individually, no fisher has an in-
centive to conserve the present stock by not taking as much from the
ocean because his/her sacrifice (or investment) will not pay off if others
(“free-riders”) are not doing the same. Without control of some sort all
individual fishers will attempt to catch as much as possible, leading thus
to a depletion of that once renewable resource and hence the tragedy of
the commons.
While Garrett Hardin and others have argued for private property as a
solution to the tragedy of the commons (private owners of fish stocks
would have a legal right to bar access to their resources, and they would
have an incentive to preserve them for future uses), private property is
not the only (or the most practical, or fair, or effective) way of dealing
with this externality problem. Evidence from Africa suggests that pri-
vatization schemes to control overgrazing of tribal rangelands, for ex-
ample, have not been successful in increasing productivity, and have in
fact worsen inequalities.27 In general,

grazing and fishing grounds in most traditional societies have often

been commonly held and managed quite sustainably for centuries.
 14 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

This was achieved by means of informal social restraints and tra-

ditions which prevented overexploitation. However, when such
restraints break down as a result of modernization or population
pressures, the free-access problem emerges, and a tragedy in the
commons is likely to result.28 (p. 34)

In North America, recent problems with salmon, cod, and snow crab
fishing illustrate situations in which common-property resources in
food production are involved. Throughout the world, natural fisheries,
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common grazing pastures, and forest resources are also examples of

open-access resources prone to the tragedy of the commons. They re-
quire policy interventions from governments that can be derived from
an understanding of the economic nature of such situations as market
failures.
Setting quotas might be a way to address the problem of open-access
resources (such as in fisheries), although the technical and political
complexities in each particular case must be carefully considered.29 In
many cases, setting appropriate quota levels requires governments to
collect and analyze high amounts of information, adding to the cost of
this policy. Combined with the cost of monitoring and enforcing regula-
tions, setting quotas may not always be the best policy to follow in such
cases. This is a particular concern for governments in poorer countries,
where monitoring and enforcement mechanisms are not securely in
place for lack of appropriate human, technical, and financial resources.
As an alternative, more cost-effective policy to preserve common-
property resources avoiding their overexploitation, governments through-
out the world are experimenting with “developing markets” for the
services these resources provide. For example, the Kyoto agreement of
1997 was the first attempt to create an international market for permits
for greenhouse gases.30 But there are many examples of innovative at-
tempts at national levels.
Some of the most interesting examples can be found in developing
markets for forest environmental services. These have taken various forms,
such as debt-for-nature swaps, trust funds, shade coffee and shade co-
coa programs, eco-tourism, and the processing and commercialization
of native forest products (e.g., creams, crafts, juices, jams, and cookies)
under concession fees. However, despite the potential benefits that such
markets may create, they themselves are prone to market failures, espe-
cially those detrimental to poor communities.
Landell-Mills and Porras31 suggest a number of steps governments
should take for promoting the development of pro-poor markets. Among
 Perspective 15

those, some of the most important, applicable to many of the situations

throughout developing countries, include:

• Formalizing and securing property rights held by the poor: Poor,

marginalized groups risk losing their control over environmental
resources when markets start to develop and property rights are not
secured. Furthermore, just as in the case of land-tenure conditions,
poor groups will not be willing to engage in activities that may put
in risk their control over the resources they have.
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• Strengthening cooperative institutions: Market participation is of-

ten costly. Many small landowners, fishers, and producers cannot
afford, by themselves, to participate in markets. Through coopera-
tives, however, these costs can be shared by many producers, making
market participation feasible. Governments can help by facilitating
the formation of cooperatives, and securing their institutional (le-
gal and economic) status.
• Investing in training and education: Effective market participa-
tion requires skills that are not immediately available among poor
groups. Marketing, negotiation, management, financial accounting,
contract formulation, and conflict resolution are some of the most
important skills poor groups must acquire to benefit from market
participation.
• Establishing market support information: As mentioned above,
imperfect information is another source of market failure. Govern-
ments can help by providing information on prices, potential buy-
ers and suppliers, legal contracts, and sources of funding.
• Improving access to finance: Facilitating credit will also increase
the possibility of poor groups to invest in participating in new mar-
kets. Micro-credit schemes and subsidies to financial institutions
willing to support poorer groups may be required.

The above list emphasizes the importance of governments as facilita-

tors rather than just regulators and/or providers of last resort. It suggests
policies for governments to use in improving market functioning, rather
than policies to substitute or eliminate markets. The proposition here is
that governments can and should use markets as tools to improve social
welfare. While it is true that “the free market cannot solve free market
problems,”32 it does not follow that market-based solutions cannot be
successful in addressing many of those problems. On the contrary, mar-
kets can be effective tools for social policies if they are properly under-
stood and manipulated by governments.
 16 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

Food Security as a Public Good

While the above examples illustrate problems in food security arising

from negative market externalities, inefficiency also emerges in situ-
ations where private markets do not provide enough of an activity or
good even when the benefits it brings grossly outweighs its social costs
(the case of positive externalities). In such cases there would be under-
allocation of social resources through free markets, indicating market
failure.
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“Public goods” is the term used to describe goods characterized by

two features: they are non-rival and non-exclusive. Being non-rival means
that, once available, they can be simultaneously enjoyed by many people.
As non-exclusive goods, once available, it is very difficult to prevent peo-
ple from using them, even those who have not paid for them. The oppo-
site of public goods are “private goods,” which are rival and exclusive.
Private goods cannot be enjoyed simultaneously by many people, and
individuals can be prevented from using them (if, for example, they
don’t pay for their purchase).
Free markets fail to provide an efficient quantity of public goods be-
cause these goods tend to create very high beneficial externalities (as
many people can enjoy them at the same time) that cannot be captured
by private markets. Free markets are not effective in producing public
goods because producers cannot prevent non-payers from enjoying
them. There is, in general, no profit motivation to lead private firms to
supply a socially efficient quantity of such goods. In many cases, mar-
kets for public goods will not even exist. Public goods generate high
benefits to society, but free markets, governed by private, individual
self-interest, will not provide them. Hence, the existence of a public good
“presumes a legitimation of governmental activity.”33
Food itself is not a public good. It is a private good and, as such, pri-
vate producers do have an incentive to produce it as they can prevent
non-payers from accessing it. Food security, however, is a public good.
All individuals living in a food-secure society benefit from that condi-
tion, even if they were not contributing (paying) for its provision. In
other words, food security can be simultaneously enjoyed by many peo-
ple (a public good), in contrast to private goods (e.g., food), “which are
marked by rivalness in consumption . . . (and for which) property right
enforcements prevent consumption if one does not pay”33 (p. 141).
The public-good nature of food security can be seen in its many pub-
lic-good components. Environmental quality and food safety are exam-
ples of clear public goods. And while nutritious foods and healthy diets
 Perspective 17

can be rival and exclusive (private goods), their insufficiency can create
significant consequences for public health (a public good), through in-
creased social and economic costs of malnutrition and diet-related ill-
nesses such as diabetes and heart disease.17,34
Traditionally, the solution for the absence of efficient markets for
public goods has been to have these goods produced and delivered by
governments. As we have seen in the case of environmental protection,
however, many innovative policies such as the facilitation of new mar-
kets, are being attempted. This new approach allows for partnerships
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among governments, private sectors, non-governmental organizations, and

communities to devise ways in which public goods can be produced and
delivered. Free markets will not generate efficient quantities of public
goods. But that does not mean that public goods can only be produced and
delivered by governments.
Another important policy consequence of food security as a public
good is that unregulated markets may still not provide a socially effi-
cient quantity of it even if enough income were distributed to low-in-
come groups. Food security incorporates the notion of accessibility to
food (which could be increased by providing enough income to all), but
it goes beyond that to include food safety, quality, and diversity accord-
ing to social/cultural norms. It also encompasses the environmental sus-
tainability of food production and distribution systems, and the human
dignity in producing and accessing food. Access to food will improve
with more income allocated to the poor, but market failures do not dis-
appear simply by turning people into consumers. Income security can in-
crease food security, but it cannot eliminate all conditions leading to
food insecurity.

SUBSIDIES, MARKET POWER,

AND INTERNATIONAL TRADE

The logic of policy to mitigate or prevent food insecurity due to mar-

ket failures is predicated on the assumption of food sovereignty. Gov-
ernments must be able to act in promoting and guaranteeing food security
and the right to food. This necessity, however, often collides with estab-
lished rules for international trade. By definition, any government agree-
ing to partake in any international agreement is abdicating some of its
sovereignty. This, of course, is not necessarily negative, as long as the
gains from such agreements outweigh their costs.
 18 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

While the win-win scenario of international trade proposed in the

neo-liberal view is often predicted from an assumption that there will
be efficiency gains from trade among free markets, such gains may not
be realized in the presence of market failures. Thus, identifying the
sources of market failures in international trade and the appropriate pol-
icies to correct them may be key in designing a successful (truly effi-
cient) trade regime. Important market failures in international trade may
emerge from two sources: perverse subsidies and market power.
Subsidies are fiscal tools available to governments which can be used
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to reduce inefficiencies in free markets. Quite often, however, the use of

subsidies has aggravated food insecurity. While subsidies may be effec-
tively used to correct market failures, they are frequently used to create
government failure. “Perverse subsidies” is the term used to describe
the effect of subsidies in decreasing social efficiency by leading to higher
social costs. Those are subsidies that create negative externalities in-
stead of combating them.
Kent and Myers35 suggest that perverse subsidies amount to around
US$2 trillion per year worldwide. Some of the sectors in which most
perverse subsidies are concentrated are agriculture, fossil fuels, trans-
portation, water, fisheries, and forestry–all of which significantly im-
pact food systems worldwide. Subsidies to agri-business corporations
have created significant negative externalities, costing societies the de-
terioration of their natural environments, increasing health costs, and
disruption of rural communities.
At the international level, subsidies (and protectionist policies) have
been often justified in terms of reducing the vulnerability of countries
to the vagaries of global food systems. Many authors have argued, how-
ever, that more open international trade can in fact smooth out the fluctua-
tions and uncertainties inherited in local food production.36 Furthermore,
the use of subsidies in recent years has significantly moved from promoting
food self-sufficiency to promoting exports, especially in the European
Union and the United States, where agriculture is grossly subsidized.
This has had deteriorating consequences in many poor countries which
see their farmers undermined by the unfair competition of dumped com-
modities in their markets.
While there seems to be growing consensus on the need for the reduc-
tion of agricultural subsidies in the European Union and the United
States for a better food trade system to emerge, negotiations on interna-
tional agreements are boggled down by the market power and lobbying
pressures of special groups which dominate food systems in the global
market. Market concentration in the past 20 years has been significant
 Perspective 19

not only in food production, but also in food transportation and retail-
ing, and in agrochemicals where in 2001 seven companies accounted
for 90% of worldwide sales.37 The purchase of Seminis, the world leader
in the conventional (non-genetically modified) creation of vegetable seeds,
by Monsanto has given the latter transnational company much of the
control over global markets for seeds (both genetically modified and
conventional).38
While within countries policies to counteract the market failures
created by monopolistic powers can range from price regulation to anti-
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trust laws and state ownership, on the international stage measures to

counterbalance market concentration must be managed through inter-
national institutions (UN agencies, the World Trade Organization),
and negotiated into international agreements. Effective and fair inter-
national agreements, which would benefit the poorest countries and
groups of people in the world, require attention to much of the same fac-
tors as those for the creation of pro-poor markets for public goods (as
described above in this paper). For the effective participation of poor
countries and groups in international trade, negotiations on interna-
tional agreements must:
• Respect and secure property rights held by the poor (e.g., farmers’
rights, protection of traditional knowledge and genetic resources).
• Allow and support strengthening cooperation among poor nations
(e.g., G20 group in the negotiations of the World Trade Organiza-
tion) and among the poor within nations (e.g., producers’ coopera-
tives, labor unions).
• Stimulate and protect the public good (and non-profit) nature of
scientific research on issues which affect the livelihoods of poor
groups, and which are specific to developing countries’ needs.
• Have mechanisms to guarantee transparency and access of infor-
mation.
• Have mechanisms to guarantee that poor countries and poor groups
can effectively use the information they access.
In parallel to the creation of pro-poor markets for public goods, the
role of international agreements would be to facilitate the incorpo-
ration of poor countries and groups in the process of globalization in a
manner to benefit them. In the absence of a supra-national govern-
ment, this can only be accomplished through negotiations and partner-
ships among country governments, and through institutions of global
governance39 bringing together international institutions and donor
 20 JOURNAL OF HUNGER & ENVIRONMENTAL NUTRITION

agencies, non-governmental organizations, private sectors and differ-

ent communities around the world.

CONCLUDING REMARKS

This paper argues that effective policy for food security requires
an understanding of market failures found in today’s food systems. It
highlighted some common sources of market failures leading to food in-
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security: negative externalities (pollution and public health problems),

corporate market concentration (and market power), unregulated use of
commons resources (fisheries, forests, etc.), and the incapacity of un-
regulated markets to provide public goods such as food security in so-
cially efficient quantities.
Defining food insecurity as market failure does not, in any way, un-
dermine the notion of food as a human right. It simply points out that the
right to food cannot be realized in free markets. It is based on the prem-
ise that “improving food security will lead to progressive realization of
the right to food”40 (p. 648). The market failure argument also identifies
which policies may be more appropriate to address food insecurity. There
will be situations in which the only way of guaranteeing the right to food
is by bypassing markets and having direct state provision of food and nu-
trition programs. The challenge, however, is to determine the best ways
to achieve the goals of food security and the right to food. Many of those
may be through facilitating (or even creating) market mechanisms, forging
competition, and decentralizing service provisions. Understanding food
insecurity as market failure allows for the use of markets as effective
tools of policy. The recognition that modern food systems are ripe with
market failures should not, thus, lead to the conclusion that markets
should not be used (or that they should be abolished). The presence of
market failures only suggests that it is foolish to trust the invisible hand
of markets to govern our societies. Intelligent policy can use markets as
tools for improving social efficiency.

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Received: April, 2006

Revised: January, 2007
Accepted: February, 2007

doi:10.1300/J477v01n02_02