Catastrophic flooding and crop losses in Thailand, the world's leading riceexporter, are raising concerns that another food crisis may be in the offing.Further disquieting is the possibility that the world may have already entereda new era where persistently high food prices are the “New Normal.”
In his article to Vietnam Plus, Iwan J. Azis, Head of theAsian Development Bank’s Office of Regional Economic Integration, said that ata time when policymakers are grappling with a host of thorny economic issues,the possibility may be unwelcome, but must not be ignored.
“Although volatility in commodity markets is nothing new, there are worryingsigns that food price fluctuations are now taking place within a much higherband-with than ever before,” he said.
For Asia’s poor, whoalready spend 60 percent of their household budget on food, even the smallestfluctuation in food prices forces unenviable choices on where best to devotetheir scant resources. It means that those striving to escape poverty are lesslikely to do so, while millions more risk falling below the 1.25 USD a daypoverty line.
The ADB estimates that a 10 percent rise in domestic foodprices in developing Asia threatens to push anadditional 64 million people in to poverty. With food price inflation in many emerging Asian economies averaging 11 percentin the first half of 2011 alone, the growing numbers of families facing thescourge of dire poverty is staggering.
Much of the sharp increase in the region’s food prices isdue to production shortfalls caused by extreme weather events, such as droughtsand floods, and subsequent export bans by some food producing countries.Growing appetites for grains, oil, seeds, sugar, and livestock in emergingeconomies like China and India areexerting further upward pressure on supply.
Additionally, Azis he stressed a growing trend of“financialising” commodities over the past decade, which has turned food intoan important tradable asset class, like stocks, bonds, currencies, or realestate, and of course the weakness of the US dollar, in which most foodcommodities are denominated, as well as high oil prices, which raise costs atalmost every step of the food supply chain.
With a “New Normal” of persistently high and volatile foodprices here to stay, what are policymakers to do?
The ADB official said there are no easy solutions, but whenfaced with bouts of soaring food prices, governments must be both pragmatic andflexible.
According to Azis, tightening monetary policy, like raisinginterest rates, is a standard tool to combat inflation and cool economicoverheating.
“It is a fairly ineffective tool if the inflationary pressure is supply-side,however, and relatively blunt if price movements are volatile. Rate hikes takemonths to show results, and if overblown can tighten the economic leash untilit chokes growth, especially for small and medium businesses,” he said.
Inflation targeting is also of questionable value if the public does not viewthe measures as credible, he said, adding with food price inflation on therise, social programmes that target the most vulnerable members of society fromthe effects of higher commodity prices can be used where budgets allow.
“This measure is less costly for the economy as a whole compared to tighteningmonetary policy.”
There are other levers policymakers can pull, including a broad range ofsupply-side policies that can reduce bottlenecks in commodity-based industries,improving access to global markets and increasing productivity. The furtherreduction of trade barriers between countries should be pursued through regionalcooperation and other forums, he further said.
In large countries overall food supply may not be a problem, yet there arestill serious problems in some sub-national regions. In such instances,improved distribution channels to ensure a more reliable supply of commoditiesto remote and isolated areas can play a critical role.
Taken together, it is clear that a globalised approach is needed to effectivelyaddress food price inflation. Countries normally address their own needs asthey see best, but the demands of rapid economic growth and developmentincreasingly cross borders.
“While acting nationally, policymakers will need to think globally andcoordinate regionally. Only then can we be assured enough resources will beavailable to keep growing appetites satisfied at reasonable costs,” he affirmed./.