Bad Economics

LAHORE: The years 2007-2008 saw a dramatic surge in the world food prices, bringing a state of global crisis and causing political and economical instability and social unrest in poor and developed nations. Systemic causes for the worldwide food price increase have been currently identified as climate change, (which has resulted in droughts and floods), rising oil prices, (which has heightened the costs of fertilisers, food transport, and industrial agriculture), the increasing use of bio-fuels in the developed countries and an increasing demand for a more varied diet, (especially meat) across the expanding middle-class populations of Asia. These factors, coupled with falling world food stockpiles and instability brought about by the sub-prime mortgage crisis, have all contributed to the dramatic worldwide rise in food prices.

"This is a silent tsunami," says Josette Sheeran of the World Food Programme (WFP), a UN agency. Riots have erupted over food shortages in the Caribbean and Africa and hunger is approaching crisis stage in parts of Asia. In 2007, the food price index calculated by the Food and Agriculture Organisation rose by nearly 40 percent, compared with nine percent the year before, and in the first months of 2008 prices jumped again. Nearly every agricultural commodity is part of this rising price trend.

The UN Chief Executive Board called on the international community to urgently provide $ 755 million in emergency funds needed for the UN to feed millions of hungry people worldwide, as the first of a series of concrete measures to be taken. "We see mounting hunger and increasing evidence of malnutrition which has severely strained the capacities of humanitarian agencies to meet humanitarian needs, especially as promised funding has not yet materialised," UN Secretary General Ban Ki-moon told a news conference in Bern. Ban Ki-moon warned that "without full funding of these emergency requirements, we risk again the spectre of widespread hunger, malnutrition and social unrest on an unprecedented scale".

Haiti faces a ´major crisis´ if international donors fail to provide urgent aid to help feed its poor. According to the WFP figures, 66 percent of Haitians live on less than $ 1 dollar a day and 47 percent are undernourished. At least six people were killed during riots in Haiti last month as protests against rising food prices and the high cost of living turned violent. The WFP appealed for $ 54 million in fresh funding to offset soaring food prices in Haiti and provide the country with about 50,000 tonnes of food between now and December.

In Bangladesh, two floods and a devastating cyclone last year, combined with a sharp rise in global rice prices, have left some 60 million of poor, who spend about 40 percent of their small income on rice, struggling to feed themselves. In China, food prices have been rising fast in recent months, but the main impact has been on meat. Rice and wheat price increases have been modest, except for high-quality imports, a small share of domestic consumption. China produces more than 90 percent of the grain it consumes. There has been a long debate in China over whether the country´s grain policy, which calls for 95 percent self-sufficiency, is too conservative given the potential for imports. On grain, however, conservative thinking is now back in vogue. To be sure, India has not yet experienced riots over rising food prices that have hit other countries like Zimbabwe and Argentina.

But what is worrying everybody is that the current rise in inflation is driven by high food prices. In Delhi, milk costs 11 percent more than what it cost last year. Edible oil prices have climbed by a whopping 40 percent over the same period. More crucially, the price of rice has risen by 20 percent and prices of certain lentils by 18 percent. Rice and lentils comprise the staple diet for many Indians. The current crisis in Indian agriculture is a consequence of many factors – low rise in farm productivity, un-remunerative prices for cultivators and poor food storage facilities resulting in high levels of wastage.

"World agriculture has entered a new, unsustainable and politically risky period," says Joachim von Braun, the head of the International Food Policy Research Institute (IFPRI) in Washington, DC. Between November 2007 and February 2008, rice exports from Thailand (the world´s biggest exporter) were running at one million tonnes a month – an unprecedented bonanza. But even for producers and traders, the blessing was mixed. Some farmers sold their crop before prices soared. Millers tried to keep supplies back, waiting for higher prices. The government capped exports below last year´s levels. The secretary-general of the Thai rice exporters´ association said that, "We do not know where the 2007 harvest is."

In Pakistan, the food crisis reflects lack of planning on the part of the government and growing prices of wheat flour and other food items. Easy access of the population to food is necessary and the government should prepare a plan for the future to ensure the same. If food crisis is not controlled, it might create a security situation and increase street crimes. Inflation in prices of food items is hitting the consumers hard and the dissolution of magistracy system, which used to keep a check on food prices, had also contributed to the rise in prices. The government should announce the support price of a crop at the time of its cultivation, which will encourage the farmers to sow it. But the recent increase in the support price of wheat gave a chance to those people who have a monopoly over the market to steer it where they want.

In the US, farmers have massively shifted their cultivation towards bio-fuel feed stocks, especially maize, often at the expense of soybean and wheat cultivation. About 30 percent of US maize production will go into ethanol in 2008 rather than into world food and feed markets. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation, inputs like fertilisers and pesticides, and transportation of inputs and outputs.

At the same time, the growing world population is demanding more and different kinds of food. Rapid economic growth in many developing countries has pushed up consumers´ purchasing power, generated rising demand for food, and shifted food demand away from traditional staples and toward higher-value foods like meat and milk. This dietary shift is leading to an increased demand for grains used to feed livestock. It is more important to let the developed country farmers decide on what they will plant, based on the relative prices and on the international prices, but not subsidised prices.

The hardest hit by the rising food prices in Asia Pacific include 600 million people who survive on a dollar a day or less, and about the same number who live on just above a dollar – making up a group of about 1.2 billion who are vulnerable. The regions usually spend about half of their budgets on food, but recent increases have pushed that proportion to about 80 percent in some parts of South Asia. The nutrition of the poor is also at risk when they are not shielded from the price rise. 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. Donors should expand food-related development aid, including social protection, child nutrition programmes, and food aid. At the same time, developed countries should eliminate domestic bio-fuel subsidies and open their markets to bio-fuel exporters.

The crisis is spreading like fire and calls for policy actions in three areas: comprehensive social protection and food and nutrition initiatives to meet the short and medium-term needs of the poor; investment in agriculture, particularly in agricultural science and technology and in market access at a national and global scale to address the long-term problem of boosting supply; and trade policy reforms, in which developed countries will revise their bio-fuel and agricultural trade policies and the developing countries would stop the new trade, distorting policies with which they are hurting each other.