Soaring food prices have suddenly become a major concern for policy makers in East Asia. The price of rice - which provides one third of the region's caloric intake - is a particular worry. Rice prices have been moving higher since around 2004, although this was from very depressed levels in the early years of the decade. Prices surpassed $300 a ton in early 2006 for the first time since the late 1990s, kept moving higher, and then took off at an accelerating pace from late 2007: up 11 percent in the the fourth quarter, then 56 percent in the first quarter of 2008 and then 61 percent in April 2008 alone. Prices touched over $1000 a ton on some days in April. Domestic food price and overall consumer price inflation has accelerated in most economies and the pace of poverty reduction in East Asia in 2008 is - at a minimum - likely to slow .
A new World Bank report I have co-authored on Rising Food Prices in East Asia: Challenges and Policy Options argues that regional and international cooperation could play an important role in addressing the problem of surging food prices. What, you say, is the World Bank advocating interference with market outcomes? Well, it may be more a case of cooperation to undo the consequences of earlier interventions in the market which have contributed to the present high prices.
As the report elaborates, among the key reasons for higher grain prices are biofuel policies in advanced countries (together with higher energy costs and the falling U.S. dollar). These policies aim to promote an alternative, more climate-friendly source of energy, but have also induced a sharp increase in world demand for grains and in grain prices. The impact on rice prices is a bit more indirect because rice is not directly used for biofuel and rice land is not easily switched to biofuel crops. However the surge in other grain prices has affected rice because rice and other grains like wheat are substitutes for rice in consumption and imports. So here there is a good case for more international dialogue to decide whether the benefits from current biofuel policies really justify the costs. Can a new global deal be struck which would allow a more open and stable global market in food, as well as continued progress towards environment-friendly energy sources?
More recently, upward pressure on prices has been sharply exacerbated by the unintended consequences of restrictions on exports introduced by some major rice exporting countries. This has then had a snowball effect, as other governments also judged it prudent to take such preemptive measures, contributing to the extraordinary recent surge in world rice prices that no government on its own would have aimed for. A "disarmament agreement" between the main participants in the international rice market to reduce or remove major restrictions could play an important role in lowering prices to sustainable levels. This could be in the interest of exporters, who wish to maintain a vibrant world export market in the future, and of importers, for whom high prices are inflicting hardship on consumers, particularly the poor.
The bulk of the report, though, looks at what domestic policies governments can take to help protect the more vulnerable as well as strengthen food security.
Interventions to ensure household food security by strengthening targeted safety nets should have the highest urgency, especially targeted cash transfers, which help to protect vulnerable groups directly without reducing incentives to local farmers. Many governments around the world have also responded by reducing food import tariffs and domestic taxes on staples, although attention has to be paid to the fiscal costs and financing of such measures. In the medium term there is also scope for increasing rice production in environmentally sustainable ways through more widespread use of existing agronomic technologies, reduction in post-harvest losses and more efficient water management, as well as increased agricultural R&D.