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The Poor Are Paying the Price of the Food Cost Spike

Otaviano Canuto's picture

2008 is so last decade. And yet, the recent hike in food prices is bringing food costs near the dangerous levels of that year, creating enormous vulnerabilities in developing countries.

The World Bank’s food price index increased by 15 percent between October and January, is 29 percent higher than a year earlier, and only 3 percent below the 2008 peak. According to our latest update of Food Price Watch, a brief that tracks the trends in domestic food prices in low- and middle- income countries, the increase over the last quarter is driven largely by increases in the price of sugar (20 percent), fats and oils (22 percent), wheat (20 percent), and maize (12 percent).

The impact of these growing food prices on poverty has already been felt. Estimates by World Bank economists show that 44 million people have fallen into extreme poverty in developing countries as a result of the food price increase since last June. In case you are wondering, the figure was estimated by subtracting the 24 million net producers of food who came out of poverty from the 68 million net consumers of food who fell below the US$1.25 a day poverty line.

The poverty effects go beyond the numbers. If the upward trend continues, there will be higher malnutrition since the poor spend more than half of their incomes on food. In effect, higher food prices are forcing families to eat less and substitute cheaper staples in place of more expensive, nutritious food.

On top of the human suffering, the price hike also creates macroeconomic vulnerabilities, particularly for countries with a high share of food imports and limited fiscal space. There are many countries with good safety net programs in place to cushion the impact of food prices on poor people. But if external and fiscal balances are tight, the capability to protect those who need it most is in serious jeopardy. So at the end of the day, the fiscal impact of the food price hikes will depend on the extent to which food tax revenues increase and expenditures on mitigating measures, such as social protection programs, get higher.

Fortunately, two encouraging factors have prevented even more people from falling into poverty. First, good harvests of key staples, such as maize in many countries in Africa, have allowed for the substitution of imported wheat and rice. Second, the fundamentals of rice market supply in Vietnam and Thailand remain strong. After having experienced the 2008 food price crisis, this time we need to leverage these advantages and do things right.

As the World Bank’s President Robert B. Zoellick first stressed this year in his  January Financial Times op-ed, there’s much to do, like increasing public access to information on the quality and quantity of grain stocks, ensuring effective safety nets, and preventing export restriction, among many others. This week, he again urged the G20 to put food first, just ahead of the Group’s Meeting of Finance Ministers and Central Bank Governors in Paris.

Indeed, there are several measures policy makers can take to prevent the worst. Food Price Watch indicates the “panic buying” can be prevented through the publication of regular data. And safety net and nutritional programs can be scaled up in the most vulnerable countries. Likewise, more investments in agriculture, the development of less food-intensive biofuels, and climate change adaptation, are also needed.

We are reaching the very dangerous levels of 2008, that’s true. But there is much we can do to prevent another catastrophe.
 

Comments

Submitted by Anonymous on
The millions that will cyclicaly fall in poverty , the workers and producers always in risk , are by no means , a minor part in need of protection. Now , that the weather disruptive power speaks loud and clear , besides changing Agricultural Geography and hand in hand with scientific reseach to enhance productivity and resilience in products maybe is the proper time to reexamine economic tools as well. The uncertainty induced by floods, wildfires and speculation may change more then Agriculture Geogrphy. The role of hedging, of course , as a major tool to move forward. Perhaps now the psichological barriers can be thrown down and market can get innovated , as the awareness for goog regulation and great surveillance is on the table. The mid-19th century idea of futures market can get there, and create liquidity . The trade volume can be pretty high , helping people sharing their risks in diversified geographic areas and bringing relief to national budgets both for expoters and importers can be interesting . Social networks and international help can fill a much smaller gap and the risk management become easier .The yearly changing pattern creates such a volatility that maybe this time people will give it a second thought and even a chance . Accidents of history played a major role in the futures market , maybe weather will do it too , as people understand the tremendous task ahead in dealing with its human and economic effects for the global society. Sharing the planet is also sharing risks and costs , one valuable tool is creating liquidity for food.

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