How to solve Asia's food crises
Asia's policy-makers must act fast to curb sharp food price rises, says Joachim von Braun. But specific policies are needed to combat both causes and effects of the surge
The price of food matters for Asia’s growing middle class and even more so for its poor people, most of whom live in rural areas. The sharp increase in food prices over the past couple of years and the explosive change in the price of rice in particular raise serious concerns about the food and nutrition situation of poor people, about inflation, and even about civil unrest. Governments have crucial roles to play in bringing prices under control and helping poor people cope with higher food bills. A two-track strategy of social protection and of agricultural growth promotion is called for, accompanied by a more open rice trade regime and new grain reserves policies, which should be coordinated at a regional level in Asia.
Since 2000 – a year of low prices – world wheat and rice prices have quadrupled, and maize prices have almost tripled; dairy products, meat, poultry and palm oil have also experienced price hikes. The global surge in food prices has been translated at the national level. Food price inflation in China now contributes to about 90% of overall inflation. National governments and international actors are taking various steps to try to minimize the effects of higher prices and mitigate impacts on particular groups.
Some of these actions are likely to help stabilize and reduce food prices, whereas others may help certain groups at the expense of others or actually make food prices more volatile in the long run and distort trade. What is needed is more effective and coherent action to help the most vulnerable populations cope with the drastic hikes in their food bills, to help farmers meet the rising demand for agricultural products and to translate the price crisis into opportunities for the rural poor in Asia.
The sources of current price increases
The combination of new and ongoing forces is driving the world food situation, and in turn, the prices of food commodities. Income growth, globalization, urbanization and subsidized biofuel production are major forces on the demand side altering the food equation. In recent years, many parts of the developing world have experienced high economic growth, and developing Asia continues to show strong sustained growth – between 2005 and 2007, average real GDP in the region increased by more than 9% per annum. Yet hunger and poverty continue to persist, and Asia will be home to half the world’s poor by 2015. Rising prices will have a serious impact on poor consumers in this region.
With higher incomes, shifting rural-urban populations, and changing preferences, domestic consumer demand for food has increased and shifted towards high-value products in developing countries. Food consumption patterns are shifting from grains and other staple crops to vegetables, fruits, meat, dairy and fish. Consumers in Asia, especially in the cities, are now exposed to non-traditional foods, and due to globalization of diets in the region, consumption of temperate-zone vegetables and dairy products has increased.
A key factor behind rising food prices is the high price of energy. Energy and agricultural prices have become increasingly intertwined [see chart]. With oil prices at an all-time high of more than $110 a barrel and governments of some OECD (Organization for Economic Cooperation and Development) countries subsidizing crops for energy, farmers have shifted their cultivation towards biofuel feedstocks. High energy prices have also made agricultural production more expensive by raising the cost of irrigation, inputs like fertilizers and pesticides and transportation of outputs. On the supply side, land and water constraints, climate change and underinvestment in agriculture innovation are impairing productivity growth and the needed production response. Poor weather and speculative capital have also played a role in the rise of food prices.
The impact of high food prices
Higher food prices have radically different effects across countries and population groups. At the country level, net food exporters will benefit from improved terms of trade, although some of them are missing out on this opportunity by banning exports to protect consumers. Net food importers, however, will struggle to meet domestic food demand, and given that many developing countries are net importers of cereals, they will be hard hit by rising prices. At the household level, surging and volatile food prices hit those who can afford it least – the poor and food insecure. The few poor households that are net sellers of food will benefit from higher prices, but households that are net buyers of food – which represent the large majority of the world’s poor – will be harmed. Adjustments in wages, employment and capital flows to the rural economy, which can create new income opportunities, will take time to reach the poor, but opportunities exist to transform the challenge into gains for the poor.
The nutrition of the poor is also at risk when they are not shielded from the price rises: higher food prices lead poor people to limit their food consumption and shift to even less-balanced diets, with harmful effects on health in the short and long run. At the household level, the poor spend about 50–60% of their overall budget on food, so for a five-person household living on $1 per person per day, a 50% increase in food prices removes up to $1.50 from their $5 budget. Growing energy costs also add to their adjustment burden.
Policy responses so far
Many countries are taking steps to try to minimize the effects of higher prices on their populations. In Asia, Cambodia, China, India, Indonesia, Thailand and Vietnam are among those that have taken the easy option of restricting food exports, setting limits on food prices, or both. For example, China has restricted rice and maize exports; India has banned exports of non-basmati rice and pulses, and raised the minimum export price of basmati rice. Other countries are reducing restrictions on imports: Indonesia, for instance, has removed tariffs on wheat and soybean imports, while Mongolia has eliminated value-added tax on wheat and flour imports.
How effective are these responses likely to be? Price controls and changes in import and export policies may begin to address the problems of poor consumers, but some of these policies are likely to backfire by making the international market smaller and more volatile. Price controls reduce the price that farmers receive for their agricultural products and thus reduce farmers’ incentives to produce more food. Any long-term strategy to stabilize food prices will need to include increased agricultural production. In addition, by benefiting all consumers, price controls divert resources toward helping people who do not really need it. Export restrictions and import subsidies have harmful effects on countries dependent on imports and also give the incorrect incentives to farmers by reducing their potential market size. These national agricultural trade policies undermine the benefits of global integration, as the rich countries’ long-standing trade distortions with regard to developing countries are now joined by developing countries’ interventions against each other.
Sound policy actions
In response to increased food inflation, it would be misguided policy to use general macroeconomic instruments. Rather, specific policies are needed to deal with the causes and consequences of high food prices. Although the current situation poses policy challenges on several fronts, there are effective and coherent actions that can be taken to help the most vulnerable people in the short term while working to stabilize food prices by increasing agricultural production in the long term.
First, coordinated actions are needed in Asia and globally to calm markets quickly, and especially rice markets. These should include: ending export bans; making speculative futures trading more costly at the commodity exchanges; and establishment of a regional public grain stock, for instance as a coordinated set of pledges among a coalition of main nations of producers and traders, with coordinated releases from such a reserve when prices increase excessively.
Second, also in the short run, developing-country governments should expand social protection programmes for poor people (that is, safety net programmes like food or income transfers, and nutrition programmes focused on school feeding and early childhood nutrition). Higher prices could mean serious hardship for millions of poor urban consumers and poor rural residents who are net food buyers, and these people need direct assistance.
Third, to achieve accelerated agricultural growth, developing-country governments should increase their medium- and long-term investments in agricultural research and extension, rural infrastructure and market access for small farmers. Rural investments have been sorely neglected in recent decades in Asia, and now is the time to reverse this trend. Farmers in many Asian countries are operating in an environment of inadequate infrastructure, poor soils, lack of storage and processing capacity, and little or no access to agricultural technologies that could increase their profits and improve their livelihoods. The expansion of agriculture investment by 20–30% in China and India in 2008 is the appropriate response, but more is needed at the level of the whole region, including by the Asian Development Bank.
The response to high prices must facilitate productivity and expansion along the whole food value chain – from water management to retail industries – and not only on the farm.
The food price problem may not continue to expand as much, but it will not go away because it has structural reasons and is partly caused by policy neglect. The time to act is now.
Joachim von Braun is director-general of the International Food Policy Research Institute, Washington DC