This is the situation today. Food prices have surged as higher demand has been turbocharged by other factors. Caught by surprise, policymakers at both the national and international levels are scrambling to understand and fix the situation.
At its root, the increase in food prices is part of the bigger phenomenon of the economic development of key emerging economies like China and India. As they become richer, populations in these economies consume more cereals and meat—a testament to their success in sustaining high growth and, more important, reducing poverty in a sustained fashion. While such consumption in China and India remains well below that of industrial countries, the rate of change has caught many by surprise.
This surge in demand is an important part of the explanation for the current wave of food inflation—but not all of it. A number of other, more controversial forces are also in play. Biofuel initiatives, driven by high oil prices and environmental considerations, have also driven the run-up in grain prices. Investors, too, have played a part in disrupting the balance of food supply and demand by snapping up commodities to diversify their portfolios and increase returns. In addition, speculators have piled in, buying commodities via futures contracts that they can then sell at even higher prices. Protectionism and other shortsighted government policies are adding fuel to the fire. Countries such as Russia and Argentina have recently banned the export of locally produced cereals. In an attempt to safeguard supply for their own nationals, they have inadvertently given a new and more sinister meaning to the “beggar thy neighbor” concept that can so distort international trade and global welfare.
It’s no wonder, given all this, that there’s been a 150 percent increase in the price of rice since the start of 2008. Indeed, the higher prices are quickly hitting consumers in their wallets. According to International Monetary Fund data, in 2007 foodstuffs already accounted for two thirds of the increase in the consumer price index for Asia, and almost half for Africa. The numbers for 2008 will be significantly worse.
What’s particularly striking about the current crisis is that this combination of factors has taken the world by surprise. In the past, price spikes have tended to be caused by clear-cut supply disruptions, whether they’re droughts, floods or other natural disasters. This time around, the confluence of events has been different. Because of that, policy responses have been slow, suboptimal and uncoordinated. In some cases, one country’s food hoarding has made it impossible for more vulnerable populations in other countries to secure basic consumption needs.
Fortunately, help is already on the way. One upside of the rapid increase in prices is that it has created a bigger incentive for farmers to grow more food. National policymakers have become more open to removing obstacles that inhibit proper supply responses. China, for example, is enhancing the availability of fertilizers, and improving credit for farmers (as is India). Ukraine is streamlining food delivery to market. And multilateral institutions are improving cross-border policy coordination.
These are welcome steps, but they’ll take time before they have an impact. Bolder moves are thus needed now to offset the adverse impact of higher food prices on the most vulnerable segments of society. To this end, many developing countries, and especially those with better-functioning policy infrastructures, can and must act to offer well-targeted cash subsidies, lower sales taxes on food and eliminate tariffs on imported foodstuffs. The poorest will find it more difficult, and will look to the better-off members of the international community to provide them with timely assistance to ward off further suffering. The adequate provision of this is now a moral obligation.
It is often said that even the darkest cloud can have a silver lining. In this case, it comes in the form of opportunities for the many developing countries in Africa, Asia and Latin America that are large producers and net exporters of cereals. For them, the challenge will be to manage the significant windfalls from higher prices, saving part of the proceeds for more difficult times down the road.
The next few months will not be easy, as countries both poor and rich react to the surge in food prices and its myriad ramifications. But the world has the ability to better navigate this phenomenon—which, at its root, is influenced not by supply disruptions but by a fundamental growth in global wealth and prosperity. The trick now is how we respond: we can make things better, or much, much worse.
