Simon Maxwell

FAOgraphsmall The G20 response to the food crisis of 2011 needs better politics and greater ambition

Are we in the middle of a world food crisis, or aren’t we? Yes, we are – but the political impetus is less than last time, in 2008, and the response inadequate.

Famine in Somalia dominates the headlines and rightly so. It is a world food crisis in the sense that famine, wherever it occurs, is a charge on the global conscience. But Somalia is essentially a localised problem, not one caused by food shortage on a global scale. All the more reason to make sure that the response agencies have the resources they need to help.

Globally, prices have eased a little in the last few weeks, but remain very close to levels last seen in 2007 and 2008, when the food crisis found itself centre-stage  - until displaced by the financial melt-down of late summer 2008. The World Bank’s food price index, published in August 2011, remained 33% above the level of a year previously, and only about 10% below the 2008 peak. Similarly, the FAO price index shows prices at more than twice the level reached before the 2007-8 price spike. No wonder the FAO’s efforts have been brought together under the rubric ‘Initiative on Soaring Food Prices’.

High global prices are mirrored at country level: unevenly, but in some cases with startling clarity. In countries as widely dispersed as Uganda, Dominican Republic and Kyrgystan, staple prices have doubled, or close to, in the past year. In many other countries they have gone up by a half or more. The World Bank report has details. In still other countries, rising food costs have been offset for consumers by increasing food subsidies: Egypt is an example.

On the international stage, there have been many international initiatives, with the G20, under French leadership, setting the pace. A multi-agency report on price volatility, commissioned by the G20, was published at the beginning of June.  Also in June, G20 agriculture ministers met in Paris: their communiqué will feed straight into the G20 summit in Cannes in November. Meanwhile, others are weighing in, not least the World Development Movement on speculation, and Oxfam UK campaigning on food justice  through its GROW campaign. ODI has a programme on food crises, as do others – ICTSD, for example, the International Centre for Trade and Sustainable Development, has just published an analytical review on food price volatility by Stefan Tangermann from Gottingen University. IFPRI, of course, the International Food Policy Research Institute, is all over this topic – see, for example, their seven steps to combat the food crisis.

All that looks reasonably engaged, so what’s the problem? To my mind, there are two unfavourable comparisons to be drawn with what I remember from 2007-8 – a period during which I and ODI were very much involved in the food issue, including helping to organise a ‘food price summit’ in Downing St in April 2008 (the origin of an appearance in Wikileaks, but that is a story for another day). For the record, I’m attaching here and making public for the first time, my powerpoint for the Downing St seminar and my notes on the event.

First, estimates of the impact seem to be more muted than they were last time. For example, Robert Zoellick, the President of the World Bank, warned last time that 100 million people would be driven below the poverty line as a result of the crisis, and that seven years’ worth of gains in poverty reduction would be reversed. I have not seen estimates of that kind this time. Also, macroeconomic issues had greater visibility last time. The IMF, for example, reported extensively on Balance of Payments and fiscal problems associated with food imports and social protection programmes, including food subsidies, and also tracked a significant boost to inflation. In September 2008, for example, the IMF estimated that additional food imports would cost 43 net food importing low income countries as much as $7.3 bn – or 0.8 % of GDP; the fiscal cost of food and fuel subsidies was estimated to exceed 2% of GDP (for a smaller group of countries); and inflation was expected to rise to double digit figures, averaging 13% by the end of the year. I have seen no similar estimates this time. For example, an otherwise useful analysis of food prices in the IMF magazine, Finance and Development, in March 2011, noted the macroeconomic issues of high prices, but provided no data. One exception:  the World Bank is tracking the impact of higher food prices on inflation. In Ethiopia, for example, food prices rose 45% in the year to July, driving a 38% increase in the overall consumer price index. Data are also provided for China, Vietnam and Guatemala.

Secondly, there seems to me to be less urgency in the politics, at least comparing the profile today with the period before the financial crisis broke in 2008. Yes, President Sarkozy has made food price volatility a G-20 priority; and Robert Zoellick (World Bank) and Josette Sheeran ( WFP) have been consistently present on food issues. But the food crisis does not seem to be engaging others in the same way. Remember, for example, that in 2008, Gordon Brown wrote personally to the Japanese Prime Minister, then chairing the G8, asking for food to be high on the G8 agenda. In 2008 also, Ban Ki Moon established a High Level Task Force on the Gobal Food Security Crisis, which produced a well-respected Comprehensive Framework for Action. Food security was also one of the headlines of the 2009 G8, at l’Aquila in Italy. Many agencies designed special programmes: for example, the EU launched a 1 billion euro food facility, and the World Bank launched the Global Food Crisis Response Programme. The Bank also took charge of the new Global Agriculture and Food Security Programme, eventually launched formally in 2010.

This time, the lead seems to have been taken by G20 Ministers of Agriculture. Frankly, that is ever so slightly worrying. If we know one thing about food crises, it is that they have implications going well beyond agriculture – especially into the realms of social welfare and macroeconomic management, as well as trade policy. After the world food crisis of 1972-74, the UN set up a World Food Council to try and prevent future crises, but it foundered by 1993, partly because it was owned by Ministers of Agriculture who did not have the remit required to tackle such a cross-cutting issue. John Shaw has documented this sad story. Food discussions in FAO suffer from a similar problem.

Can the difference between 2008 and 2011 be explained? Perhaps the world has become blasé about high food prices? Perhaps there is too much else on, with recession again on leaders’ minds? It is significant that rice has been less affected so far, which has limited the scale of the problem. One theory is that there was perhaps an over-reaction in 2008, ignoring the positive benefits of higher food prices for poor producers and others employed in agriculture. It is interesting, for example, that increased wages and increased incomes for net food producers have been shown to have reversed between a quarter and a third of the first round impact on poverty caused by the price spike in 2008. This was an issue we debated at the time but could not substantiate.

Or maybe I am wrong, and Nicolas Sarkozy will pull the rabbit out of the hat in Cannes. Let’s hope so, because there are serious issues at stake: feeding a growing population, with higher incomes and changing tastes; tackling malnutrition; preventing famine; adjusting to water scarcity; and both preventing and dealing with the consequences of climate change.

The best place to find an overview of current thinking is in the multi-agency report on price volatility, published in June, itself heir to the Comprehensive Framework for Action. The communique of the Ministers of Agriculture is a good guide to what might follow at the G20, though it received a negative reception from the likes of Duncan Green and Felicity Lawrence.

The report on price volatility (N.B. not high prices per se) consists of six chapters.

  • Chapter 1 defines volatility and reviews trends in global and national markets.
  • Chapter 2 identifies the impacts of price volatility and reviews the measures taken in 2007-8, which it describes as largely ad hoc.
  • Chapter 3 sets the scene for discussion of measures to deal with volatility by emphasising that ‘a key element in any long term solution is investment in increasing the productivity and resilience of developing country agriculture’ (Pg 15).
  • Chapter 4 looks at policy options to reduce price volatility: market information and transparency; international food stocks; futures markets; domestic and trade policies; and dealing with waste.
  • Chapter 5 explores policy options to deal with the consequences of price volatility if it occurs, particularly for the most vulnerable: buffer stocks, emergency food reserves, national and international safety nets, and market-based mechanisms to protect producers and and stabilize food import bills.
  • Chapter 6 makes proposals for improving policy coordination, for example by better market information.

There are few surprises in the document. Why should there be? It is only three years since we went through all this last time. The document is in favour of: investment in agriculture; better market information; strategic emergency reserves; targeted safety nets and social welfare programmes; financial transfers to affected governments; and better policy coordination. It is against: large buffer stocks or international commodity agreements; export restrictions or trade restrictions, especially for humanitarian supplies; and subsidies to biofuels. To the chagrin of some (probably including President Sarkozy), the document is agnostic on whether speculation is at the root of price rises. It is, however, generally supportive of better market regulation. All this sounds about right.

The Ministers of Agriculture cover some of the same ground. They propose a five-point Action Plan to be adopted by G20 leaders:

  1. Improve agricultural production and productivity;
  2. Increase market information and transparency;
  3. Strengthen international policy coordination
  4. Improve and develop risk management tools; and
  5. Improve the functioning of agricultural commodity derivatives’ markets.

A startling omission from this list is the issue of safety nets, but it turns out that the chapter of the communiqué which deals with the fourth part of the Action Plan, risk management, has been re-labelled as ‘reducing the effects of price volatility for the most vulnerable’, with one sentence on safety nets, among 10 paragraphs dealing mostly with market-based risk instruments and public-private partnerships. Hm. That looks to me as though a progressive donor has arranged for a sentence to be dropped in.

The critics have focused mainly on the treatment of the impact of biofuels (mainly maize in the US, but also Europe) and the alleged need for global food reserves, as well as weak language on the alleged impact of speculation on food prices. I think there are two other problems.

First, the macroeconomics, including the fiscal cost of social protection, have simply dropped off the agenda. There has been a lot of work on shock facilities since the food, fuel and financial crisis hit in 2008, some of it at ODI. The EU (VFLEX), the IMF, and the World Bank (through the IDA Crisis Response Window) all either strengthened existing shock facilities or introduced new ones. But is the scale sufficient, and are these modalities sufficiently fast to help poor countries cope with the fiscal and Balance of Payments shocks of food price spikes?

No-one in the food community seems to have done the work, but the numbers could well be very large. Minimal social protection is reasonably cheap, and affordable even by low income countries, as Andrew Shepherd and colleagues have shown in their work on chronic poverty. Take a very simple example. Say an extra 200 million people become hungry, as happened in 2008, and say additional social expenditure is targeted on this group. Say the intention is to provide about half a minimum ration for a year to each of these people, 100 Kg of basic grains. And say the cost of providing the ration or subsidy is $US 500/t. Then the total cost would be $US 10 bn a year  - a small amount in the context of the financial crisis, and manageable even in terms of global aid expenditure of about $US 130 bn a year.

The problem is that social protection is rarely as well targeted as the above numbers imply. In Egypt, for example, wide-ranging food and energy subsidies account for a third of government spending. Middle class consumers across the world will demand help with food bills, greatly increasing the cost. Subsidies in turn are likely to cause fiscal deficits and lead to increased inflation, leading to demand for further subsidy: a vicious spiral.

Furthermore, food importing countries can find themselves facing large increases in food import bills. FAO estimate that developing country food import bills will rise sharply in 2011, to $US 460 billion, a 25% increase on 2010 and an 80% increase on 2007. For low income food deficit countries alone, the import bill in 2011 will be $US 210 bn.

Put these facts together more systematically, and it is likely that substantial shock facilities will be required. ODI work for the EU, led by Dirk Willem te Velde, concluded that the 2009 shocks amounted to € 130 bn (for ACP countries) and recommended that about 5% of aid resources should be reserved for shock facilities. This is based on actual figures for IDA, and would amount to about $US 6.5 bn p.a. for aid as a whole. It is not clear to me whether this amount would be sufficient to make a significant contribution to off-setting disruptions to growth associated with food shocks, of the kind experienced in 2008 and surveyed above. Has anyone made calculations? On World Bank data, the total GNI of all low income countries was $US 425bn in 2009 and of lower middle income countries $US 8758 bn. If the cost of a food shock were 1% of GNP, that would be equivalent to $US 4 bn for low income countries and $US 87 bn for middle income countries. Obviously, the total cost depends very much on whose needs are being met, and to what extent.

The second problem is the politics. The conventional wisdom, as represented in agency and G20 reports, is that countries should strongly be discouraged from obstructing world trade. In particular, export restrictions by countries which normally export food amount to a ‘beggar my neighbour’ policy which pushes up world prices and further destabilises world markets. Precautionary buying by food importing countries worried about future supply should also be discouraged.

This is true, but masks the political reality facing Governments at times of uncertainty and price spikes. It is really not surprising that 43 of 81 countries surveyed by FAO during the last crisis reduced import taxes and that a further 25 either banned exports or increased taxes on them. It is well known that rising food prices helped to trigger unrest in Egypt in early 2011, and that ex-President Mubarak decreed an increase in subsidies to respond. In April 2011, US 168m was allocated to food subsidies, just to cover the period to end-June. More recently, FAO have reported on a whole list of countries attempting to manage grain markets, from Argentina setting a quota on exports, to Mexico intervening in the maize futures market, to Tanzania banning the export of maize. There are 26 countries on FAO’s list. Thailand’s commitment to increase rice prices to producers post-dates the FAO count, designed specifically as a political strategy, and expected to increase prices across the region.

Here’s the question: what would you do? The picture I drew at the Downing St meeting in 2008 was of the President sitting in his or her office with the window open on the garden, reading a letter from Bob Zoellick about the importance of maintaining free trade, while the whiff of tear gas drifts in over the rose bushes from the food riots in the street beyond the wall.

If this problem is to be overcome, then compensatory mechanisms need to be large-scale, immediate and effective. Presidents and prime ministers in developing countries need a cast-iron guarantee that resources will be available, and sufficient support to roll-out measures which will help them manage the politics. In this sense, the macro-economic and political issues are linked – and that makes it all the more a pity that they are not fully covered in the agency report or the conclusions of the G20 Agriculture Ministers. The measures on supply and free movement of humanitarian aid do very little to offset this problem.

That conclusion leaves space for something new. It means G20 leaders thinking again about the food crisis of 2011: recognising its importance; acknowledging the macro-economic and political risks; supporting the investments in agriculture, of course, and the other recommendations about transparency and locally-managed stocks; perhaps moving a little on speculation and (especially) biofuels; but then facing head-on the need for much larger and more reliable shock mechanisms. This would be good economics and good politics. Are they up for it – and to it?

 

An abridged version of this article was publsihed by Open Democracy on 8 Sept 2011.

 

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