n What do we know about rising food prices and their impact in the region?
Rising food prices are a growing policy challenge for both middle-income and low-income countries in the region. Between March 2006 and March 2008 the international food price index nearly doubled in nominal terms, rising 82 percent. Yet by historical standards food prices remain relatively low—in real terms the price of wheat in 2007 was 10 percent lower than its average during the 1960s and 1970s. It appears that a fundamental shift in global supply and demand is behind current food price inflation. This shift has been shaped by factors ranging from increased demand for biofuels and higher energy prices to poor harvests in key producers and climate change. Although these factors are structural and cyclical, countries must act as though high food prices are here to stay. The payoff to sustainable policies is high, as history suggests that poorly designed schemes—typically those introduced under crisis conditions—are difficult to change later. While the region as a whole is a net food exporter, food price inflation still has a detrimental impact on the income, nutrition, and health of poor consumers. Even if a country is a net seller of food, most people are net buyers and negatively affected by rising food prices. Poor people are disproportionately affected because they spend a larger share of their income on food. Rising food prices thus reduce the real income of the most vulnerable people, with serious nutritional and health consequences. Additionally, the increase in food prices and differences in trade patterns can interact to create negative consequences even for food exporting countries. We should note that the price of some food staples has risen more than others: from March 2006 to March 2008 the international price of wheat increased 152 percent and the price of maize 122 percent, while the price of beef increased 20 percent and the price of bananas 24 percent. One implication is that even some countries that are net food exporters may see their food trade balance decline, depending on the composition of their import and export baskets.  Understanding the impact of food price inflation on the poor requires an analysis of how households respond to food price increases. Households are not passive in the face of food price increases. Their response is driven by both consumption and production substitution effects, with production substitution effects more likely to be jagged because of constraints that impede smooth adjustment in supply responses. Even poor households may have risk mitigation strategies—for example, relying on multiple sources of income that permit labor supply to be rapidly increased. Subsistence farmers may be somewhat insulated from global market phenomena. Substitution effects and risk mitigation strategies not only determine the pass-through from international to local prices but also shape public policy intervention impacts. For example, explicit subsidies may affect factor allocations and therefore real wages and supply responses.
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n What can governments do? Food policy interventions aimed at protecting the consumption of the poor can be justified on both equity and efficiency grounds. The health and nutrition of the poor are a priority for reasons of equity, but they are also public goods because too little healthful and nutritious food may be provided at market prices. And agricultural activity is high-risk, and markets provide limited means of risksharing, so government support may be warranted. While these considerations provide a rationale for policy action, public policy is constrained by several factors, including political economy and efficiency considerations as well as organizational and institutional capacity.  Public policy needs to account for food price volatility, the incentives and disincentives of policy actions, and fiscal implications. Implicit subsidies, such as price controls, keep agricultural prices artificially low and thereby adversely affect agricultural supply. In contrast, targeted policy interventions such as school feeding programs, food stamps, and food for work programs protect poor people’s real income and insulate their consumption from volatile food prices. While well targeted programs achieve welfare objectives at the lowest possible cost, there are also costs associated with implementing, enforcing, and monitoring targeted programs. A realistic appraisal of costs, benefits, and links with other sectors in the economy should thus be the basis of policy interventions.
Governments are focusing on strategies to help households cope, recognizing that macroeconomic policy can play only a limited role. Rising food prices pose a serious challenge to monetary policy. On the one hand tightening monetary policy would be ineffective in the face of an exogenous shock to relative prices—which may be behind recent food price inflation. Moreover, tightening monetary policy could choke the agricultural supply response and dampen growth in countries experiencing a slowdown at the same time that food and energy prices are high. On the other hand loosening monetary policy, driven by the need to manage capital inflows and real exchange rate appreciations, would exacerbate the situation. Governments are also reorienting trade policy by, for example, easing import restrictions. Eliminating tariffs can help boost supply, but if global prices remain high and volatile, well designed policy interventions to protect the poor would still be needed. [Top]
n What can the World Bank do to help? The Bank stands ready to assist through a mix of rapid response and longer horizon programs. Support can be through coping programs, the only option in the short-run, and curing programs, which have a longer horizon. The objective is to act now while continuing to think about how best to advise and assist in implementing sustainable and effective policy in the medium term. Bank support to regional governments thus includes financing, technical assistance, and analytical work. Intensive policy dialogue with governments is needed to ensure that these components are tailored to a country’s specific circumstances while bringing to bear operational lessons from cross-country experiences.  Rapid response will require emergency financial support and quick evaluation of the ability to expand existing programs. Information on vulnerable households gained from existing targeted schemes, like conditional cash transfer programs, will be critical for a rapid policy response. The World Bank also can scale up financial support to cash transfer programs if doing so would not undermine the program as a whole. The Bank has a variety of other aid mechanisms at its disposal, including accelerating disbursements on existing loans, quickly providing grants to International Development Association countries and coordinating donors for additional concessional financing. In addition, the deferred drawdown option can provide a contingent line of credit in certain cases.
With a longer run perspective, the focus should remain on increasing agricultural productivity and creating well-targeted programs where there is need. The current food price inflation has refocused the world’s attention on food policy and on the importance of mechanisms to help the poor cope with rising food prices. Where needed, the Bank is also providing technical assistance and necessary support to create or further develop targeted programs. In addition to measures that will help households cope, the Bank has a role to play in enhancing food access in the medium-term through supply-oriented measures. The Bank is expanding its portfolio of projects aimed at improving agricultural productivity—for example, through rural development and infrastructure programs. [Top] |
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