Governments in central European and Asian countries must not repeat their protectionist response to the 2008 food crisis as the latest surge in food and fuel prices threatens to cast millions of people into poverty, the World Bank has warned.
Theodore Ahlers, operations director for Europe and Central Asia (ECA) at the Bank, told Emerging Markets that countries needed to better target their social support and to invest in farming rather than impose price controls
He said the bank was providing $6 billion of funding to the region in the form of social assistance programmes and investment in areas such as agriculture technology and irrigation.
Last month the Bank said an additional 5.3 million people would be made poor as a result in the price spikes, pushing up the poverty rate – measured at $2.50 a day – by 1.3 percentage points.
Although prices have continued to remain high, Ahlers said the bank had not revised up the projections. “It was worrisome enough as we laid out because it does cause concern.
“There are a number of countries in eastern Europe and central Asia which are affected quite dramatically given their reliance on food and fuel imports and the implications that has on poverty.”
The worst-affected countries are those are already languishing in the low and lower income brackets, where food inflation averaged 13% and energy inflation 15% last year.
In the Kyrgyz Republic, one of the worst affected countries, the cost of food soared by 27% followed by George on 40%. The weight of food in the inflation index is more than 40% in both countries.
Armenia, Moldova and Tajikistan could also see potentially high increases in their poverty rates as a result of the twin threat from food and fuel prices, the Bank says.
This year has seen further strong rises in food prices and analysts believe that although prices are now closer to peaking, the risks are weighted towards further spikes to come.
“Prices across all agricultural commodities have continued to strengthen in 2011 following tightening fundamentals, triggering widespread agflation around the world,” said Kona Haque, a commodities analyst at Macquarie.
“A recurring theme we foresee is that even if prices drift lower they will not fall sharply due to historically low inventories. The intensity of agflation will ease but it may take a lag of six months before they filter down to food inflation levels.”
Macquarie says corn prices could rise 58% because of “perilously low” stocks and dangers of adverse weather conditions disrupting harvests, while wheat is set for a 31% rise this year.
Ahlers urged governments not to resort to the array of measures they used to combat the 2007-08 price spikes, including embargos on food exports, cuts in tax rates on imports and price controls, which it said did not help the poorest. “Avoiding trade restrictions and price controls is important.”
Instead he urged governments to invest into its farming and food sectors and improve distribution networks. He said countries should increase their social support budgets but acknowledged that would be difficult.
“Countries all face a much tighter fiscal situation than they did in 2008 so targeted and more efficient public expenditure for social assistance programmes are critical because parts of the populations are particularly vulnerable,” he said. “The most effective and least expensive way is clearly through targeted social assistance programmes.”