Poverty Reduction

Food prices are finally coming down after a year of spikes and high volatility. But we must remain vigilant. Prices of certain foods remain very high, and millions of people around the world are still at risk of suffering from malnutrition and hunger.

Let’s get to the numbers first. According to the World Bank’s latest Food Price Watch quarterly report released this week, global food prices declined 8 percent between September and December of 2011 due to increasing supplies and continuing uncertainty about the global economy. So in December 2011, the World Bank Food Price Index closed 7 percent below the December 2010 levels, and 14 percent lower than its February peak. Yet, the 2011 index average is 24 percent higher than the year before, and domestic prices of key staples remain dangerously high in many countries.

Take the case of maize. In Mexico, for instance, maize was up 106 percent from December 2010 to December 2011, making tortillas more expensive. The price of wheat in Belarus went up 88 percent, and sorghum increased 57 percent in Burkina Faso. No matter where you look, someone somewhere is paying more money to put food on the table, whether it is Mexican quesadillas or Burkinabe “to” (porridge).

It’s true that high food prices are not bad for everybody. While the poor in urban areas and rural net consumers of food are usually threatened the most, farm producers tend to benefit. Yet when there is so much price volatility--as we experienced last year--uncertainty very often gets in the way of reaping any gains.

Global food prices remain high and volatile, affecting the poorest countries the most. Global prices might not be at their 2008 record high, but they are still well above their levels a year ago. For millions who are already vulnerable, events like the droughts in the Horn of Africa add to their hardships while continued market turmoil increases uncertainty in the global economy.

And yet, for many it would look like the food crisis and the economic woes -- both past and present -- are two different events with little in common. In fact, experts will explain to you that a weak economic recovery would be a good thing for people struggling to put food on the table because lower demand would push food prices down. That's true, but the food price crisis and the financial troubles are not two completely separate things.  The food-price crisis that began in 2008 and the financial crisis of that year were intimately connected. Therefore, financial reform must include derivatives and other financial instruments related to developing countries and their farming sectors.

As Vera Songwe shows in the Economic Premise series note Food, Financial Crisis, and Complex Derivatives: A Tale of High Stakes Innovation and Diversification, "developing countries, particularly food-importing ones, were part of the early wave of the financial crisis via food price increases." 

Turmoil is not solely circumscribed to Wall Street and stock markets around the world. Volatility is also affecting global food prices, and with them, millions of people in developing countries. So, just as the world marks the birth of the 7 billionth baby this week, his or her family might be struggling to put food on the table.

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The poor in the most vulnerable countries have been the most affected, first by the record highs of 2008, and then by the 2011 February spike. Although global food prices have dropped from the February peak and dipped marginally in September of 2011, they remain 19 percent above September 2010 levels, and are now very volatile, especially in the poorest countries.

Debt and credit ratings keep making headlines. But for a moment, forget about their impact in the U.S. and Europe, where an abundant set of economic data exists both for international investors and bondholders. Instead, think of what would happen if you lived in one of the 58 developing countries that remain unrated by Standard & Poor’s, Moody’s, and Fitch, the three international credit rating agencies. You would have very limited access to capital and investment, and the cost of borrowing would be significantly higher.

Let me explain why. In the case of countries not routinely tracked by the majority of investors, the absence of information on creditworthiness – which is costly to acquire – is a disincentive for bond purchases. Sovereign ratings act as widely available and internationally comparable indicators of a country’s fiscal performance, collectively economizing on costs of information collecting and processing. Even if a government is not issuing bonds, the rating often fulfills a function as a “ceiling” for the private sector and its absence can negatively affect access to the international capital market. In addition, assessments of sovereign creditworthiness are also taken into account by donors providing official development aid.

So if you are one of the 58 developing countries still not rated by the three international agencies, you remain pretty much cut off from the many potential bond holders. This is unfair because an unrated country is not necessarily at the bottom of credit worthiness.