The food price spiral By S.M. Naseem - Thursday, March 10, 2011

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WHILE the developed world is battling to fight deflation through an expansionary monetary policy, much of the world’s poor are being administered a second dose of food price inflation in three years.
In February 2008 commodity prices posted their biggest monthly gains since the oil crisis of the 1970s and enjoyed their strongest start to any year for half a century. The rapid and simultaneous rise in world prices for all basic food crops — corn (maize), wheat, soybean and rice — along with other foods like cooking oils had a devastating effect on poor people all over the world. Food prices hit a record high again in December 2010, surpassing the levels seen during the 2007-08 crisis, increasing fears of a replay of events which pushed countless people into poverty. Although the price of rice has remained stable during the past three years, that of wheat is rising fast on the back of poor harvests, while oil is back above $100 a barrel, although well below the peak of $170 it reached in 2008.
As other Middle Eastern countries, especially Libya, are drawn into the vortex of turmoil in the wake of the Tunisian and Egyptian uprisings, the oil price could shoot up sharply, bringing the current scenario closer to that of 2008.
Food prices have often been a trigger in creating political turmoil in developing countries. It may seem simplistic to attribute the popular revolt in Tunisia in January, followed by the unending demonstrations in Tahrir Square and elsewhere in Egypt, primarily to food price inflation. Obviously, other factors such as political repression, dynastic succession, corruption, growing unemployment and social deprivation, along with powerful motivators as the Internet, provided the combustible ammunition.
But the trigger or the immediate cause, significantly, was the steep rise in the prices of food and fuel, igniting the passions of the deprived underclass. The rising food prices that shook Tunisia and brought down the Ben Ali government came at the turn of the new year when global food prices broke record highs.
The spark was provided by the self-immolation of an unemployed engineering graduate when his fruit and vegetables’ pushcart was seized by an overzealous policewoman fed on the reigning developmental holy grail of ‘good governance’.
Ironically, the same doctrine also preaches the unhindered freedom of market forces which underlies the skyrocketing of food and fuel prices which continually buffet the poor.
The commodity price boom in 2008 was fuelled not only by real supply and demand factors such as widespread supply disruptions and enhanced demand from fast-growing emerging economies. It was also spurred by speculative demand for commodities as a hedge against rising inflation and the weakness of the US dollar, as well as a defensive play against the turmoil affecting equity and credit markets.
It can be argued that the 2008 surge in food prices could be blamed as much on the falling asset prices in other financial market segments, such as the sub-prime mortgage crisis which emerged in 2007, as on supply constraints or other real factors underlying the commodity price boom. More than $200bn were reportedly poured into food commodity markets by speculators hunting for profit, creating unprecedented volatility. There is less evidence of speculative activity in the 2011 commodity boom because of more buoyant equity markets.
Speculation-induced volatility in global commodity markets, however, is not the only major source of the 2008 and 2011 spikes in food prices. A major long-term factor has been the neglect of the agricultural sector since the advent of the green revolution, which marked a watershed in achieving food security through major increases in crop yields and food production, from the 1960s to the 1980s, with considerable government and international support. At its culmination in the 1980s, it gave way to new policy priorities and paradigms which de-emphasised government interventions in agriculture, as well as other economic activities. Despite the warnings of agricultural experts against complacency, food security fell off the agenda of global development and forced many developing countries to run huge food import bills and orient agricultural production towards exports. Typically, governments in South Asia, including Pakistan’s, procured crops from food producers at guaranteed prices or subsidised production, and sold at affordable prices through reasonably well-functioning public distribution systems.
Such food security policies and practices were widespread before the pro-market structural adjustment programmes in the 1980s, carried out under the IMF-World Bank-inspired Washington Consensus, rendered them obsolete and dysfunctional on the plea that subsidies and controls create distortions and inefficiency, forgetting their beneficial impact on the poor.
The acrobatics of the macroeconomic tightrope walk demonstrated recently by the Pakistani government’s yielding to populist pressures on the one hand and in making drastic cuts in the already whittled down development expenditure targets in compliance with the stand-by agreement, on the other, bring out the poignancy created by the new inflationary spiral.
In 2011, the government will be faced with even graver challenges, as its popular support dwindles and the prospects of early elections become stronger. The food price dilemma involves many actors besides the farmer (not exclusively landowning) and the consumer (not exclusively the urban middle class) between whom the battle lines are usually drawn.
As a highly indebted and foreign aid-dependent country, Pakistan will continue to need large external capital inflows to meet the needs not only of development and debt servicing, but also of security and rehabilitation of flood-affected and terrorist-targeted areas and people. Any further setback in global economic recovery or turbulence in global financial and commodity markets will seriously jeopardise the country’s efforts to tackle its myriad problems.

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