There is a saying that “there are only seven meals between civilisation and anarchy.” The riots and social unrest around the world bear witness to this saying.

The severity of the global food crisis is undeniable. Prices of major commodities have increased substantially over the last three years, and especially, in the last few months. According to the World Bank, about 100 million people might be thrown back into the ranks of the poor because of these price rises. There have been riots in a number of countries, and the Bank has identified 33 as especially vulnerable. The poor are especially vulnerable because they spend the largest portions of their income on food. For example, in Nigeria, about 70 per cent of income is spent on food, 75 per cent in Vietnam, and 50 per cent in Indonesia compared with 12 per cent in the United States (though that figure is also now on the rise).

Unfortunately, pressure on food supplies, and associated high food prices, are likely to be a medium-to-long-term reality because some of the driving factors — rising prosperity in the developing world which creates more demand, high fuel prices, stagnant agricultural productivity, and climate-change induced pressure on agricultural supplies — are also of a durable nature. That recognition is important because as the world and the especially the U.S. forge their response, there will be need for actions in the short, medium, and long runs.
Short run

The immediate humanitarian imperative is to get food quickly and cheaply to the hardest hit parts of the world. The U.S. Administration and Congress have taken some excellent initiatives on food aid, which could be complemented by two additional steps.

First, Peter Timmer of the Center for Global Development (CGD) and Tom Slayton have an excellent proposal that would help the rice market and hence millions of poor and hungry in Asia, which still accounts for the bulk of the world’s poor and where rice is the staple of the diet ( http://www.cgdev.org/content/publications/detail/16028/ for full proposal). The rice market has essentially seized up because three major exporters Thailand, India, and Vietnam have either imposed export restrictions or are struggling to export. More food aid simply cannot resolve this problem. But Washington can take immediate action by exerting leadership to get new rice supplies, from Japan to the world market.

How can this be done? Japan has large stocks of rice (about 1.5 million tons) based on its WTO obligation to import rice. These stocks are not sold domestically; instead they are allowed to decay and then used as livestock feed. Last year about 400,000 tons of rice was disposed in this manner. Japan cannot re-export this rice, unless the U.S. allows it, which would then allow Japan to sell its stocks commercially or as aid.

Second, on food aid, the U.S. can easily increase its assistance — by up to 50 per cent — without providing any additional money. All it needs to do is to eliminate the current requirement that food be sourced from the U.S. On my rough estimate, every dollar of food aid could feed another one million children if the tying requirement is eliminated (just from the saving in increased shipping and distribution costs).

The two proposals relating to rice and untying food aid will encounter resistance from farm interests. But in the current context, farming interests will not be sacrificed for a simple reason: at this moment, we are in a supplier’s market and farmers face little competition. This is an excellent time to eliminate the tying requirement.

Medium run

To boost agricultural supply in the medium run, we need to fix the incentives facing agriculture globally. But not only are we far away from that objective, we are moving in the wrong direction.

In the U.S., the combination of the Renewable Fuels Standard (the ethanol mandates), the blenders’ tax credit, and tariffs on imported Brazilian ethanol have diverted land, especially from wheat and soya bean production, and contributed to food price increases. Estimates vary on the magnitude of this contribution. One estimate says that eliminating all three of these measures would reduce prices by 16 per cent, while another suggests that a moratorium on biofuel production in developed countries through 2008 would ease corn prices by 20 per cent and wheat prices by 10 per cent.

Meanwhile in the developing world, tightened restrictions on exports of foodstuffs are obstructing a long-term solution, even as import barriers come tumbling down. Each country is trying to keep domestic supplies high on the justifiable grounds of food security (and WTO rules do allow such restrictions). But export bans hold prices artificially low and keep the market from sending accurate demand signals to domestic farmers. This penalises farmers, who can’t get the full world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply.

Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up. Maros Ivanic, Will Martin, Aaditya Mattoo and I (in our forthcoming paper) estimate that world prices go up substantially — up to 20 per cent — due to export restrictions, with effects particularly harmful in the case of rice.

Trade and economic incentives

First, U.S. policies related to ethanol. There is a big debate about the contribution they make toward raising food prices. Eliminating or reducing the distortions generated by the ethanol programme will help dampen food prices. Moreover, these policies are one of the few factors responsible for the crisis that we can control — more than we can control climactic factors that affect supply or the increased demand due to prosperity in the developing world.

The ethanol issue should also be seen from other perspectives. With oil prices at $126 a barrel, the market by itself is providing a lot of help and incentives for ethanol production. There seems little need for additional help and incentives at taxpayers’ expense.

While ethanol interventions originally had good motivations (reducing dependence on fossil fuels and imported fuels), they have led to some unintended consequences that are now becoming evident. The question now from an environmental perspective is this: insofar as the U.S. government needs to provide incentives for the search for alternatives to fossil fuels, why favour one particular alternative, namely ethanol (which, according to experts is not even the most environmentally efficient one)? Why not level the playing field so that all new avenues, all potentially new ideas have a good shot at being explored and discovered? The aim should not be to pick winners but to find winners.

Second, Nancy Birdsall, President of CGD, and I have argued that we need a new global compact on agricultural trade

http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=921). Aaditya Mattoo of the World Bank has pointed out that we have ended up having the worst of all possible worlds. Under normal agricultural conditions, we have huge distortions in terms of costly taxpayer support to reduce imports and encourage production and exports. Under abnormal conditions, we see the opposite where countries liberalise their imports but prevent exports. We need a system where both imports and exports remain free to flow in good times and bad. This is especially important if trade is to remain a reliable avenue for food security. If in bad times, importing countries are subject to the export-restricting actions of producing countries, they will consider trade an unreliable way of maintaining food security and will reconsider how to manage their agriculture. By the same token, if in good times, exporting countries cannot have access to markets because of import barriers and other subsidies, they will be reluctant to give up the right to restrict exports during bad times.

Unfortunately, the ongoing Doha Round of trade negotiations won’t on its own address these problems. The round has been devoted to traditional forms of agricultural protection — trade barriers in the importing countries and subsidies to food production in producing countries — which are becoming now less important as food prices have soared and import barriers have declined. We need to enlarge the trade agenda so that biofuels more broadly, and all trade barriers, import and export, are put on the trade agenda.

Long run

If there is one positive fall-out from this current crisis it is to bring agriculture, which has long-suffered from inattention, back into focus. In 1980, 30 per cent of annual World Bank lending went to agricultural projects. This declined to 12 per cent in 2007. The overall proportion of all Official Development Assistance going to agriculture is currently only 4 per cent.

The U.S. and international community should go on a war footing to engineer a new green revolution, particularly in and for Africa. Africa has not had technological productivity improvements in agriculture to the extent that Asia and Latin America have had. Investment in agricultural research provides the biggest bang for the outsider’s buck. According to the World Development Report 2008, investment in agricultural research “has paid off handsomely,” delivering an average rate of return of 43 per cent in 700 projects evaluated in developing countries. It should be remembered that the green revolution was the result of agricultural research done by Nobel Peace Prize laureate Norman Borlaug and others with the assistance of the Ford and Rockefeller Foundations.

Today, we need similar initiatives in the public as well as private sectors. Private sector initiatives alone will not be enough to generate research for African agriculture because of the limited purchasing power in Africa. If markets are small, returns are correspondingly small, reducing the incentives for private sector research.

The international consortium of agricultural research under the aegis of the Consultative Group on International Agricultural Research (CGIAR) needs to be revitalised and provided with extra funding. Monsanto, the private corporation that is a major player in agriculture, spends about $700 million on R&D compared with total spending by the international public agricultural research institutes of only about $100 million (of which less than $20 million is spent on agricultural research for Africa).

The recent crisis has also made clear that food prices are now inextricably linked to fuel prices. Higher fuel prices add to the cost of agricultural production. More importantly, they increase the attractiveness of diverting land and agricultural products toward producing fuel. With grain used for fuel rather than for human consumption, food is now fodder for fuel. Any long-run strategy to increase food supplies will need to include action to reducing dependence on fossil fuels.

Corrections and clarifications

(Dr. Arvind Subramanian is Senior Fellow at the Peterson Institute for International Economics and at the Center for Global Development, both in Washington D.C. He is also Senior Research Professor at the Johns Hopkins University. This article is an edited excerpt from his recent written testimony to the U.S. Congressional House Committee on Financial Services.)

http://www.hindu.com/2008/05/19/stories/2008051951111100.htm

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