Poverty of policy

Published : May 23, 2008 00:00 IST

A rally near the presidential palace in Manila on April 22 seeking a total reform of the Comprehensive Agrarian Reform Programme.-LUIS LIWANAG/AFP

A rally near the presidential palace in Manila on April 22 seeking a total reform of the Comprehensive Agrarian Reform Programme.-LUIS LIWANAG/AFP

The current food crisis has been largely policy-driven, which is probably good news because it means that policies can also reverse the process.

THIS is not a sudden and unexpected crisis: the signs have been around for some time now. Even though international bureaucrats have been referring to the current problems in the world food situation as a silent tsunami, the truth is that this one could easily have been seen to be coming. Even so, its impact has been powerful and quite devastating as food shortages and rapidly rising prices of food have adversely affected billions of people, especially the poor in the developing world.

It is also very much a man-made crisis, resulting not so much from ineluctable forces of global supply and demand as from the market-oriented and liberalising policies adopted by choice or compulsion in almost all countries. These policies have either neglected agriculture or allowed shifts in global prices to determine both cropping patterns and the viability of farming, and also generated greater possibilities of speculative activity in food items. Cultivators in developing countries have been ravaged by the fearsome combination of exposure to import competition from highly subsidised agriculture in developed countries, removal of domestic protection of inputs and reduced access to institutional credit to the point that even the global increase in agricultural prices after 2002 did not compensate sufficiently to alleviate the pervasive agrarian crisis in much of the developing world.

What are the symptoms of this crisis? The most immediately evident feature is the rise in food prices. Globally, the prices of many basic food commodities have not risen faster for more than three decades. In fact, even in recent years, food prices internationally had shown only a modest increase until early 2007. But since then they have zoomed, such that the International Monetary Fund (IMF) data show more than 40 per cent increase in world food prices over 2007, and even more rapid increases in the first three months of this year. The food price index of the Food and Agricultural Organisation (FAO), which includes national prices as well as those in cross-border trade, suggests that the average index for 2007 was nearly 25 per cent above the average for 2006. Apart from sugar, nearly every other food crop has shown significant increases in price in world trade over 2007. This trend has accelerated in the first few months of 2008.

The increase has been marked in essential foodgrains, which are staples for most of the worlds population. Global prices of wheat increased by 77 per cent in 2007 and of rice by nearly 20 per cent, which are some of the most rapid annual increases in the past half-century. Since the start of 2008, world rice prices have soared even more, increasing by nearly one-and-a-half times just in the first 100 days of the year. Wheat prices have been highly volatile in the current year, increasing by 25 per cent in one day and then falling even more sharply in early April, but still well above the levels of most of last year. The price of corn another major staple especially in Latin America has more than doubled in the past two years.

Across developing countries there is evidence of growing shortage of food in retail trade, even if not always in domestic production. The price of foodgrains have varied in intensity with the ability of different governments to manage the global impact and ensure domestic supply. And prices of other food items ranging from meat and vegetables to edible oils have also skyrocketed.

The impact of this has been felt most sharply in poor countries where the majority of people tend to spend around half of their family budgets on food items. There have already been food riots in countries as far apart as Haiti, Guinea, Mauritania, Mexico, Morocco, Egypt, Senegal, Uzbekistan, Yemen, Bangladesh, the Philippines and Indonesia. And many more countries are threatened by social unrest as rising food prices cause not merely dissatisfaction but the spread of hunger. In several countries in Asia, such as Pakistan and Thailand, troops have been deployed to guard food stocks and prevent seizure of grain from warehouses.

Even the institutions that have encouraged policies that have brought the situation to this pass have had to sit up and take notice. World Bank President Robert Zoellick now estimates that such high food prices could push more than 100 million people in low-income countries into deeper poverty.

There are many explanations being offered for the recent increase in global food prices. It has been argued that this is essentially demand-led, the result of several years of rapid economic growth, rising incomes in some of the most populous nations (particularly China and India) and, therefore, the growing demand for food. It is pointed out that as per capita incomes rise, although people may spend less of their income on food, the absolute amount of demand still increases. And even when they consume less foodgrain directly owing to change in food consumption patterns, the indirect demand for grain still increases, often more than proportionately, because of increased demand for animal products, since livestock also need to be fed, and some livestock like cattle require even more grain than humans. It is estimated that each kilo of beef requires production of 7 kilos of grain.

However, this argument regarding increasing global demand, while it has a role, should not be overplayed, especially in the case of China. In fact, a study by Germanys National Office for Agricultural Produce Prices rejected the claims that growing demand in China is the main reason for the current spike in world food prices and said that Chinas alleged influence on markets is often exaggerated. It noted that while Chinese domestic consumption of milk and dairy products rose by more than five times over the past decade, the bulk of this increase in demand was satisfied by a simultaneous expansion in Chinese production. Currently, China meets more than 90 per cent of its needs in wheat, maize and rice, and is aiming to produce 95 per cent of its estimated future demand for these items.

In certain products, Chinas involvement in global markets has played a role in affecting price. In 2006 and part of 2007, Chinese pork production collapsed because of animal disease, causing higher imports of both pork and corn-feed for pigs to increase domestic pork supply. Similarly, 40 per cent of world production of soya bean is currently imported by China, largely for use as animal feed. Chinese imports of other primary products such as cotton, vegetable oils, rubber, timber and animal skins have soared. But these are not responsible for higher world prices of wheat and rice.

In any case, it should be noted that this is not the first time that the world economy has witnessed increases in income of a significant portion of the population, and these phases have not been accompanied by such sharp increases in food prices in the past.

Rather than these simplistic explanations, it is likely that there are other forces at work. Five major aspects affecting supply conditions have been crucial in changing global market conditions for food crops.

First, there is the impact of high oil prices, which affects agricultural costs directly and indirectly in a variety of ways. This is because of the growing significance of energy as an input in the cultivation process itself as well as in transporting food. Changing cultivation technology has meant ever growing reliance on chemical fertilizers whose production costs are directly affected by oil prices. Greater mechanisation of agriculture in the form of tractors, harvesters and threshers requires more oil to run these machines. The spread of irrigation, especially groundwater exploitation, requires energy in the form of diesel or electricity to run pumpsets.

The impact of the rise in energy costs is more now than before because in most countries, especially in the developing world, governments have reduced protection for and subsidies on agriculture. This means that high costs of energy directly translate into higher costs of cultivation, and, therefore, higher prices of output.

Second, there is the biofuel factor: the impact of both oil prices and government policies in the United States, Europe, Brazil and elsewhere that have promoted biofuels as an alternative to petroleum. This has led to significant shifts in acreage to the cultivation of crops that can produce biofuels, and diversion of such output to fuel production. For example, in 2006, the U.S. diverted more than 20 per cent of its area under maize production to the production of ethanol; Brazil used half of its sugarcane area to make biofuel, and the European Union (E.U.) used the greater part of its area under vegetable oil seeds production as well as imported vegetable oils, to make biofuel.

The U.S. has led this shift globally. President George Bush provided an impetus to domestic ethanol production by providing large subsidies in a desperate attempt to reduce dependence on petroleum once it became evident that the imperialist attempt to control West Asian oil supplies had come unstuck with the failed invasion of Iraq. According to the IMF, corn ethanol production in the U.S. has accounted for a minimum of 50 per cent of the increase in global corn output since 2006.

In addition to diverting corn output into non-food use, this has also reduced acreage for other crops and has naturally reduced the available land for producing food. Soya bean production has been affected by the acreage shift, and as such oilseed prices have gone up. Meanwhile, the use of maize to make ethanol has pushed up corn prices, and increased the price of animal feed, thereby causing increased prices of livestock and meat and dairy products.

The irony is that biofuels do not even fulfil the promises of ensuring energy security or retarding the pace of global warming. Ethanol production is extremely energy-intensive, so it does not really lead to any energy saving. Even in countries such as Brazil where sugarcane rather than corn is used to produce ethanol, it has been argued that the push for such production has led to large-scale deforestation of the Amazon jungles, thereby further intensifying the problem of global warming. Indeed, recent scientific research suggests that the diversion of land to grow biofuel crops can produce an enormous CO{-2} debt from the use of machinery and fertilizers, the release of carbon from the soil and the loss of carbon dioxide sequestration by trees and other plants that have been cleared for cultivation.

Yet, as long as government subsidies remain in the U.S. and elsewhere, and world oil prices remain high, biofuel production is likely to continue to be encouraged despite the evident problems. And it will continue to have adverse effects on global food production and availability.

Third, the impact of policy neglect of agriculture over the past two decades is finally being felt. The prolonged agrarian crisis in many parts of the developing world has been largely policy-determined. Once again, even international officials are now admitting what has been obvious to independent observers for several years. Jacques Diouf, Director of FAO, has admitted that the crisis has been building for decades: The situation we are in is the result of inappropriate policies over the past 20 years.

These inappropriate policies have several aspects, but they all result from the basic neoliberal open market-oriented framework that has governed most economic policymaking over the past two decades. One major element has been the lack of public investment in agriculture and in agricultural research. This has been associated with low-to-poor yield increases, especially in tropical agriculture, and falling productivity of land. Greater trade openness and market orientation of farmers have led to shifts in acreage from food crops to cash crops that have increasingly relied on purchased inputs. But both public provision and government regulation of input provision have been reduced progressively, leaving farmers to the mercy of large seed and fertilizer companies, input dealers and allowing input prices to increase quite sharply. There have also been attempts in most developing countries to reduce subsidies to farmers in the form of lower power and water prices, thus adding to cultivation costs.

The lack of attention to relevant agricultural research and extension by public bodies has denied farmers access to knowledge. It has also been associated with other problems such as the excessive use of groundwater in cultivation; inadequate attention to preserving or regenerating land and soil quality; the overuse of chemical inputs that have long-term implications for both safety and productivity. Similarly, the ecological implications of both pollution and climate change, including desertification and loss of cultivable land, are issues that have been highlighted by analysts but largely ignored by policymakers in most countries.

Reversing these processes is possible, and of course essential, but all this will take time and require substantial public investment. So, until then global supply conditions are likely to remain problematic. Meanwhile, increases in global prices of food are likely to be exploited by large agribusinesses based in the North rather than benefiting farmers in low-income countries.

There are also issues related to the loss of cultivable land because of industrialisation. Predictably, this has been most rapid in recent times in fast-growing Asia, but that is also because the process was already more advanced in the more industrialised regions of Latin America. For example, in Vietnam it is estimated that around 40,000 hectares of rice cultivation area is lost every year to urban construction, industrial zones and roads. In Thailand, the amount of land under cultivation dropped by more than 13 per cent between 1995 and 2005.

Climate change

Fourth, there is the impact of climate change, which has caused poor harvests in different ways ranging from droughts in Canada and Australia to excessive rain in parts of the U.S. It is projected that warmer and earlier growing seasons will increase crop susceptibility to pests and viruses, which are expected to proliferate as a direct result of rising temperatures. Some more arid regions are already more drought-prone and in danger of desertification. The rapid melting of glaciers in Asia is of huge consequence to China and India, where important rivers such as the Yangtze, Yellow and Ganga are fed by such glaciers. This will deprive the hinterland of much-needed irrigation water for wheat and rice crops during dry seasons, which is of global significance since China and India together produce more than half the worlds wheat and rice. Once again, official policy has been tardy in considering such problems, much less addressing them.

Fifth, there is the impact of changes in market structure, which allow for greater international speculation in commodities. It is often assumed that rising food prices automatically benefit farmers, but this is far from the case, especially as the global food trade has become more concentrated and vertically integrated. A small number of agribusiness companies worldwide increasingly control all aspects of cultivation and distribution, from supplying inputs to farmers to buying crops and even in some cases to retail food distribution. This means that marketing margins are large and increasing, so that direct producers do not get the benefits of increases expect with a time lag and even then not to the full extent. This concentration also enables greater speculation in food, with more centralised storage.

It is probably not a coincidence that this has happened over the same period that governments across the developing world, in particular (with the notable exception of China), have reduced public holding of food stocks. The U.S. Department of Agriculture estimates that global stock holding of wheat is at its lowest level in 30 years, despite substantially increased world demand. It should be noted that the same multilateral donors (the IMF and the World Bank), whose representatives are now breast-beating about the food crisis, have earlier played a major role in this reduction of state involvement, by encouraging or forcing developing country governments to reduce wasteful and expensive holding of foodgrain stocks.

This has inevitably reduced the capacity of public intervention to prevent speculative activity from dominating markets and prices. And because public food reserves necessarily take time to build, they cannot quickly be created to ensure a reduction of speculation-induced price rises. The point has been made bluntly, if belatedly, by Jose Graziano, FAOs Regional Representative for Latin America and the Caribbean: The crisis is a speculative attack and it will last... Speculative attacks become possible when you have low reserves.

The point is that such speculation is not likely to dissipate any time soon. As the global financial system remains fragile with the continuing implosion of the U.S. housing finance market, investors will continue to search for other avenues of investment to make up their losses and find new sources of profit. Commodity speculation has increasingly emerged as an important area for such financial investment. Such speculation by large banks and financial companies explains at least partly why the recent period has seen such sharp hikes in price. Once again, government policies, especially with respect to the financial sector, are largely responsible for this, since financial deregulation has allowed many more complex forms of speculative activity that affect trade in commodities.

The role played by private traders and speculators has been especially evident in countries where aggregate domestic supply has been adequate to meet demand but there has not been enough in the hands of the public agencies. Thus in India, private trade played a role in pushing up prices of essential items even though there was no absolute shortage in aggregate terms, because the public agency had not procured enough to dampen market expectations of prices rises.

So it is clear that the entire process that has led to the current food crisis has been largely policy-driven, which is probably good news because it means that policies can also reverse the process. But it is important for governments to recognise the precise role played by specific policies and think strategically on how to change them in a progressive and sustainable manner, rather than simply engage in knee-jerk reactions.

Unfortunately, though it seems that knee-jerk responses are dominating at present. Of course, some of these are necessary to deal with the immediate crisis and ensure access to food especially for the poor. Of the 58 countries whose reactions are tracked by the World Bank, 48 have resorted to price controls, consumer subsidies, export restrictions or lower tariffs. But another response has been to slash import duties: at least 24 nations have reduced duties and value-added taxes on food items and allowed cheaper imports. Many countries are restricting or prohibiting exports, especially of rice or wheat. These include Egypt, Argentina, Kazakhstan, Cambodia, India and China. Meanwhile, net importers, often poor countries in Asia and Africa, are scrambling to secure supply contracts as the domestic production of food staples cannot meet consumption requirement.

Meanwhile, governments are once again turning their attention to the need to maintain public food stocks. In January, the Malaysian government announced that it would create a new agency to stock up on oil, rice and other items. Other countries in Asia are also busy stockpiling grain. The Indian government has put fresh energy into ensuring that the public agency procures enough wheat from the recent harvest to ensure more than adequate buffer stock.

Another fallout of the food crisis is the greater willingness of some governments to consider genetically modified (GM) crop production. Thus, the Mexican government, which had banned GM crops for a long time, is now considering lifting the ban on GM corn. It is possible that similar bans in the E.U. and some countries of Africa could also be reconsidered if the aggregate shortages continue.

In this context, it is worth considering the case of countries that have managed to avoid severe crisis. Venezuela in Latin America stands out as a country where food prices have increased only marginally, largely because oil revenues have been used to subsidise essential items consumed by the poor. In Africa, Malawi has not only weathered the current storm but has achieved recent success in food production, allowing it to achieve food self-sufficiency and even export, by ignoring World Bank advice and extending substantial subsidies for fertilizer and other inputs to farmers. Even China, blamed so often for high global prices, has actually increased domestic production to meet domestic needs and also stockpiled large quantities of grain, so that rice and wheat prices have not risen much in China despite rapid global inflation.

In India, the banning of futures trading in four essential commodities last year, the recent control of trade and the ability of the government to use public procurement to feed the Public Distribution System have played some role in keeping grain price rises below the global increases.

However, in India even small increases in food prices directly impact upon the poor and adversely affect food consumption, because most workers do not get inflation-indexed incomes. In India, the problem is more severe because such a large proportion of the population is already malnourished and thereby, more prone to debilitating illness and inability to achieve normal growth. Even small reductions in food consumption can have devastating social effects in such a context, quite apart from the political destabilisation that can occur.

All this suggests that real solutions to the present food crisis will not be found until governments across the world seriously reconsider the neoliberal economic strategies that have created the crisis in the first place.

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