WILL CHEESEBURGER CRAVINGS DRIVE THE NEXT WAVE OF COLONIZATION?

Senior Associate Dean Bhaskar Chakravorti interviews Professor Steven Block, Professor of International Economics

 
 Professor Steven Block in Haiti's Central Plateau
Bhaskar ChakravortiSteve, I am fascinated by something I call the “Finger Lickin index” of globalization: what our growing appetites for fried chicken may tell us about the future of economic development. KFC (formerly Kentucky Fried Chicken) has over 3,000 restaurants in over 700 cities in China.  It opens one new restaurant a day there. In 2010, Yum! Brands, the parent of KFC made 54% of its profits in China. KFC, of course, is not alone. McDonald’s plans to operate over 1,000 restaurants in China by 2013.  In fact, this is a story that is being played out all over the developing world, with China being the most extreme example: as the mature markets remain sluggish and as the middle class in the developing world has more disposable income, there is an increasing demand for food and for meat in particular; the multi-national food companies are rushing in to satisfy the growing appetites.  More food and more meat means more land that needs to be secured to grow more food.  This race for land leads countries and companies to secure food supplies in places such as Africa, Latin America and even parts of Asia, where agricultural land may be acquired or leased more easily.  So, Steve, do you think that cheeseburger cravings will define the next era of colonization?

Steven Block:  Interesting question. To answer that question, are a lot of pieces to consider.  One is an underlying question about the demand for food and what happens in countries as their income grows. But there’s a deeper question there about what we mean by colonization, because the form that these land acquisitions are taking are clearly different than classical colonization.

If we talk about food as a driver of this colonization, a couple of things are going on.  One is that income growth, particularly in China and to some extent in India, leads to changes in the demand for the quality of food, not just the quantity of food. They demand higher quality calories, and meat in particular has a very high income elasticity of demand. This in and of itself has all kinds of implications for hunger and grain markets, because as the demand for meat grows it creates a secondary demand for grain to be used for feed as opposed to food. That affects the price of those grains, and poor people may be competing with animals to be consumed by richer people for the basic grains.

I have some numbers from the International Food Policy Research Institute.  If you look at the world’s share of cereal production that went for feed grains in 1995, it was 21%; it’s projected to be 37% by 2020, and this reflects the increased demand for meat, primarily in China.  Obviously, the consumption patterns are pretty different in India.  It’s been growing more recently, but India is not going to demand meat in the same way that China is. They predict that the demand for meat in China will increase by 41% by 2020 relative to 1995.  There’s this huge demand for meat.  

When we talk about meat – your cheeseburgers – the issue is not directly where the meat is going to come from, but how they’re going to feed those livestock.  In other words, is this going to increase the global demand for grain? We know that it will.

Looking down the road, the question is where could that grain be produced most cost effectively? China is a huge country and it still has a lot the land, but it’s not just China that’s involved in these huge land acquisitions – or land grabs, as some people call them.  All the terms are loaded.  These are very controversial developments.  They’ve been going on for at least ten years at a significant scale, but it was the global food crisis of 2007 and 2008 that accelerated this trend when the price of basic grains, rice in particular, doubled or tripled over the course of about 18 months. This sent a shockwave through the global food economy.

Not just for China, but other countries that experienced rapid population growth have accelerated this drive to acquire large tracks of land in other places for the purpose of growing food and sending it back home. But it’s not just land that’s driving this, and it’s not just China that’s involved in buying large tracks of land in other countries.  For example, water-scarce countries in the Gulf are also engaging in this in a large way.  In part because they have the money to do it and in part because what they’re really getting is water from these other places. In most of these instances the cause for concern lies from the target countries’ perspective in what happens to poor farmers. 

Now, do we call this colonialism or not?  It’s not the classical colonialism where England would go to India and say, as a matter of state intervention, “this is mine now.” These are often private companies backed or sanctioned by their governments. A lot of it is happening in the private sector.

BCIt sound an awful lot like the East India Company. 

SB:  Yes, but I don’t know how the East India Company acquired property in India. These deals that are being made are mostly legal land acquisitions where companies are going in to target countries that are desperate for foreign investment.  They’re desperate for foreign currency.  Their revenue sources are very limited and one of the things that they have to sell is their land, and so governments are often encouraging these deals.

BCWhat are the primary target countries?

SB:  That depends on the source of the investment.  Somewhere between 60-70% of the total land acquisitions have been in sub-Saharan Africa.  I have a chart that’s slightly dated, but the interesting pattern is that the Gulf states are tending to buy land in other Muslim countries.  A couple of years ago, Saudi Arabia was thought to have purchased 1.6 million hectares of land, most of that in Indonesia.  South Korea acquired 2.3 million hectares, about half of that in Madagascar.  A lot of land is being sold in the Sudan.  About half of China’s foreign land acquisitions have been in the Philippines.  The second largest was Laos, but China is also buying land in Tanzania, Uganda and Cameroon, and I think also Mozambique.

BCDoes this also include things like leases of land, which is what is happening in large parts of Brazil?

SB:  There are a range of contractual agreements, but by and large my understanding is that they’re legal contracts. One concern is that many of the leases are for quite long periods of time – perhaps 99 years.  How does one fairly price land for such a long period?  What are the implications of such contracts for the development of local land markets?  

Much of the controversy arises when you ask, “who are the losers?”.  The concern is that it’s the poor in these countries and, in particular the poorest of the poor, that are the losers.  There have been instances where the populations have been displaced.  It’s not like there’s nobody living on this land. The World Bank has done a review where they looked at fourteen case studies. In sub-Saharan Africa in particular there has been a lot of concern about the institutional conditions in these target countries.  Countries where land rights are not well defined, and property rights are not well enforced.  There’s a big risk to the poor populations that may be living on or near these lands that are being sold or leased to foreigners.  These are countries that are by and large food importing countries with substantial hunger problems.  Problems that became significantly worse in many cases in 2007-2008, and again in 2010 as the prices of food have increased rapidly. They’re very controversial arrangements.  There are high rates of unemployment in these countries.  You’ve got a country like Sudan, which is vulnerable to famine, they’ve leased or sold something close to 400,000 hectares of land to Saudi Arabia.  What happens to food production in those countries?  Ethiopia is another case that’s been very controversial. They have been selling large tracks of land next to very poor populations that are currently at risk for famine.  There are potential benefits, for example the transfer of improved agricultural technologies, increased rural employment, and enhanced tax revenues, and so on; but recent studies seem to suggest that these potential benefits have yet to be realized in most settings.

BC:  When you say selling land, is this publicly-owned land or is it land that is owned by farmers?  Is it land that’s owned by absentee land owners with sharecroppers who were working on it? Who are the incumbents on the land before the external parties came in?

SB:  It is hard to generalize because, as you said, there are a variety of ways to own land and it changes from country to country. It’s my understanding that in Ethiopia, the constitution says the state owns all the land. In other cases, and most pervasively in sub-Saharan Africa, the problem is that the property rights themselves are just poorly-defined. It’s often the case in sub-Saharan Africa that there is competition between traditional systems of land rights -- where the chief of the village might allocate the rights to cultivate to individual families -- and the modern system of land titling that’s coming from the central government. That’s a significant source of tension in a lot of African countries, and there are so many deals going on now that they probably take all different forms. 

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Is there a positive side to land acquisition?

BC:  In addition to land acquisition, there are a whole set of adjacent forms of investments and interest. For instance, to get grain from the land to the ports you need to have roads, so that translates into the building of infrastructure. In addition, even within the land, it’s possible that the incumbents who are operating on subscale plots of land are leading to de facto land reform in many of these countries. There are certainly negative aspects of these developments.  Is there a positive benefit that both the countries and the societies are getting because of infrastructure, development, and land reform?

SB:  In principle, there can be significant benefits from land reform, the value of which will vary from place to place.  In the specific case of land reform we have seen, it tends to be the wrong kind of reform if the goal is to benefit the poor. The poor, by and large, aren’t thought to have benefited so much in sub-Saharan African settings from this kind of arrangement.

Aside from the macroeconomic benefits of foreign direct investment, there’s the potential to generate employment.  There’s the potential for technology transfer. The Chinese are really good at growing rice, and rice yields per hectare in China might be more than four times greater than the average rice yields in sub-Saharan Africa. In principle, the Chinese could be transferring into these places technology and possibly even varieties, although that’s more problematic. They may be building irrigation. They may be building roads. The question is, who is allowed to benefit within the recipient countries?

African agriculture is technology-deprived, and levels of productivity are quite low by international standards. To the extent that China or Japan or Korea comes in a rice production scheme on a large track of land, there are potential benefits. In practice, though, it’s not clear how much technology has been transferred.

Another question is whether the companies that are buying or leasing large land tracks are shipping in workers from their own countries, or if are they employing local populations to grow the food. There are a number of instances where the Chinese have brought their own labor to Africa to do the production. So while there are a lot of potential benefits, the question remains about the contractual or institutional changes that would be required to make sure the benefits are realized. 

Now, it turns out that private firms and even pension funds are very involved in buying land in these places, and this year there was a group of institutional investors that launched something called the “Principles for Responsible Investment in Farmland,” more commonly referred to as the Farmland Principles. The stated goals are to improve the sustainability, transparency, and accountability of investments in farmland.  The first principle is to promote environmental sustainability, because a major concern is that the techniques used for production will degrade the environment, and, in particular consume a lot of water that wouldn’t be available for others. The second principle is to respect labor and human rights.  The third is respecting existing land and resource rights.  The fourth is upholding high business and ethical standards, and the final principle is reporting on activities and progress towards implementing and promoting the principles.

BC:  If an investor -- a major shareholder – with an international standing is involved, is it conceivable that they can insist that certain basic standards be met to conform to these principles? Then perhaps there can be some levers to govern the behaviors of the private enterprises that are engaging in these practices.

SB:  Sure, as with any kind of socially responsible investment, that’s the enforcement mechanism. And this comes up against the need for these companies to still compete with one another and generate returns that are attractive. But just the fact that the Farmland Principles would state these things in this way implies specific concerns that haven’t been addressed in the first ten years of these types of land deals.

IS THERE ENOUGH LAND ON THE PLANET?

BC:  As the demand escalates for meat or other forms of food, particularly from the fast-growth and highly-popular emerging markets, is there enough land to sustain this? Even if one were to theoretically distribute the production of grain and other food sources across the earth’s surface, is there enough of that surface to sustain this?  Is there enough water beneath those surfaces to keep doing that over time?  Has there been an analysis of the different scenarios as you roll forward for the next ten, twenty, fifty years or beyond?

SB:  According to the World Bank, there’s quite a lot of under-used land suitable for rain-fed agriculture.  Most of it is thought to be in about 10 countries, half of them in Africa.  Water is a major issue.  Again, according to the World Bank, Africa has used a smaller share of its available water than many other regions. There are lots of analyses about how we will feed the planet’s population, how the composition of the demand for food will change, and so on. On those broader questions, there are a range of competing answers and scenarios. Climate change is also brought into the discussion as an important factor in shaping the potential to grow food in various places. When you add that element in particular, there’s a requirement to make many assumptions, and there’s a lot of speculation involved in generating these scenarios. 

On one end of that spectrum is Lester Brown, who has for a long time been sounding alarms about the ability to feed a growing population with limited arable land and water. Economists tend to be a little more sanguine about these issues, because it’s not just a matter of how much land and how much water is available. The other part of the story is technical change to support productivity growth on existing land and with existing water. Historically it’s been productivity growth that has been the savior in most places.

Increases in food production come either from expanding the area that is cultivated or from increasing yields of crops on the land that is already cultivated. Historically, a majority has been through area expansion, but over time that proportion has shifted towards technology-driven productivity growth in agriculture, particularly in the advanced economies and in Asia.

In the U.S. and in Europe, productivity is incredibly high and it’s very technology driven. But since the 1960’s, East and South Asia have seen quite dramatic productivity growth with the green revolution. That’s been important because these are very population-dense places, and land is scarce. Land is not so scarce in sub-Saharan Africa, although there are questions as to how much of it is arable and how much environmental damage is done by expanding the area that’s cultivated. Much of the land in Africa is highly fragile and there has been substantial soil erosion.

Historically, the share of output growth explained by area expansion has been the greatest in Africa, but the projections are for that to change. Projections that I’ve seen suggest that there will be a really dramatic increase in the share of output growth coming from productivity in Africa. Whether these land deals that we’re talking about will be a vehicle for that productivity growth remains to be seen.  They have the potential to contribute, but there are other technological barriers to agricultural productivity growth in Africa that are unique to Africa. Just because a Chinese company buys half a million hectares of land in Mozambique, it’s not going to automatically solve that problem.

GETTING TO KNOW THE PLAYERS: CHINA, INDIA ... AND JAPAN?

BC:  Africa keeps coming back as one of the most significant destinations for these land deals. Is this setting up a competitive dynamic among the major, should we say, “colonizing” powers? Whether that is China, or India, or some of the oil- rich, water-poor countries?

SB:  To call them colonizing powers is presupposing a lot of what the debate looks like. But are these countries competing for land in Africa? Not to my knowledge, but my knowledge of that is limited. Africa’s a big place. China, in particular, has been very aggressively moving into Africa, not just for land but for mineral resources, building infrastructure, large infrastructure projects, and now increasing land and water rights.

The patterns have tended not to overlap so much. Countries will have historical relationships with one another, so the Gulf countries are going to other Muslim countries to buy land.  China is mostly doing it in Asia although increasingly so in Africa. Japan, interestingly enough, is apparently doing much of its land acquisition in North and South America. It has bought a little bit of land actually in China, but Japan has bought land in the United States, Mexico, Cuba and Brazil.

BC:  Could the United States or Canada get into this business of selling land to foreign countries? There’s plenty of land here. 

SB:  Of course, the United States has sold a huge quantity of assets to foreigners. Not in the form of farmland, but in real estate and other assets. As of a few years ago, Japan had purchased a couple of hundred thousand hectares of farmland in the United States. I don’t think it’s been widespread. One reason that Africa will be a more attractive target for this is because the cost of land is so much cheaper there. U.S. farmland is very valuable by comparison, so it’s kind of a luxury good in this market and will likely not be highly sought after by countries looking for cheap sources of land to grow food for their populations.

BIOFUELS OR FOOD: WHICH WINS?

BC:  The other big question here is the composition of the land use. There are many competing demands on this land.  There’s a demand for meat, which translates into grain being grown to feed cattle or livestock. There’s this demand for staples which are eventually consumed by human beings. There’s demand for corn and sugar and soy for biofuels. And then there’s demand for preservation of existing land that’s also a concern.  Do you see any hope of some kind of rational way to allocate these demands in a way that is sensible and sustainable? Or is this going to continue to be a sort of decentralized free for all?

SB:  I think by its nature it’s going to be decentralized, but these parties are responding to similar kinds of market incentives. A substantial share of the food grown in some of these land deals is for biofuels. Globally, the land area planted to biofuels doubled between 2004 and 2008.  The demand for biofuels is very sensitive to the price of oil, because biofuels are only profitable when the price of oil is relatively high. Unsubsidized ethanol production in the U.S. becomes profitable when oil costs around $80 to $100 per barrel.

There’s an interesting controversy with regard to the global food crisis of 2007 and 2008 when the commodities prices went up so dramatically. The controversy surrounds the question of what share of that price increase was due to the demand for biofuels. Nearly one-third of the U.S. corn production was going into biofuels and some industry analysts had suggested that upwards of sixty percent of the global commodities price increases were driven by the demand for biofuels. Some economists have looked at that and came up with numbers more like twenty-five to thirty-five percent, but that’s still a huge contribution to the increase in global food prices.

So policies in places like the United States -- where we subsidize ethanol production -- might be a factor.  Policies with respect to the price of oil will be a big factor in driving the demand for grain for biofuels.  International trade policies will be a factor here.  It turns out that the Brazilians are very good at producing ethanol from sugarcane, and the United States has large tariff barriers to prevent that ethanol from coming into the United States, motivated by the same kind of political economy factors that lead to the subsidies domestically. So politics is a huge factor here as well.

SCIENCE AND POLITICS: THE ROLE OF GENETIC MODIFICATION
BC:  Speaking of politics, let me close with a final question on the boundary of politics and, shall we say, science. I would like to ask about genetically modified (GM) food, which has been a huge issue in Europe in particular. Do you see a role for scientific innovations like GM playing a role in these dynamics that we just talked about? 

SB:  I think genetic modification is here to stay. It’s only going to become more prominent. I think it has the potential for great benefits to poor farmers in developing countries. 

That said, I don’t think the kinds of developments in genetically modified crops that we’ve seen to date are going to have a huge impact on these land acquisitions. In part this is because only some of the land acquisition is driven by food security concerns in the buying countries. A more subtle point is that a lot of the advances in genetic modification have occurred not in basic grains, but more in high value commodities. Also, a lot of the goals of genetic modification are not yield-oriented.  They’re breeding for a pest resistance or weed resistance, and that will have an effect on yield. But they are also breeding for drought tolerance or cold tolerance or heat tolerance, in particular given concerns with global warming. The primary goal has not really been yield increases.

The whole issue of the potential contributions of genetic modification to food security in poor countries is sort of a separate question. I don’t see land acquisitions as a vehicle for that kind of technology transfer because the technology is expensive and more limited to particular crops. I can talk more about genetic modification and food security in developing countries, but that’s for another conversation. 

FINAL THOUGHTS

BC:  Any closing thoughts, Steve, as you revisit the original question?

SB:  The original question was about cheeseburgers. To link from land acquisition to cheeseburgers is metaphorical, of course, but it does reflect broader underlying trends in the world economy that have been in place for a few decades. We can expect that to continue to the extent that an increasingly wealthy global population wants to consume larger quantities of meat, and to the extent that those animals will be fed in some form of competition with poor people for basic grains.  These issues aren’t going to go away, especially given population density increases and water resources diminishing in some of these countries. These countries can afford to buy land in other places, and the incentive to do so is only going to grow.  The availability of such land in Africa is still quite substantial.  The need for African governments to attract foreign investment is substantial. So I think it is reasonable to expect these kinds of developments to continue. 

The rash of land acquisitions in the last few years has been driven in part by a spike in food prices, and that spike reflects a substantial departure from what had been a century-long trend of food prices declining. We don’t yet know whether this is a historic change in that pattern. If it is, it will accelerate the demand for land acquisitions overseas in particular from places like China and Saudi Arabia.

BCThank you, Steve.

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