In The News

The G20 and Persistent Food Insecurity

September 23, 2009

World leaders will gather this week for the G20 Summit in Pittsburgh – a city that has re-invented itself, leaving behind its dependence on steel and heavy industry and moving forward into services, information technology, and education.

Last week, the United Nations (UN) called on all nations to honor their commitments to aid in the fight against global poverty, calling attention to a 20-year low in food aid, despite the number of hungry people rising this year to its highest level ever – surpassing 1 billion.

Economic recovery will, of course, be high on the agenda at the Summit. Attention to resolving continuing international food insecurity is an important component of economic recovery. The most recent world food price crisis peaked in August 2008 as the financial crisis spread beyond the U.S. With the world’s poor already in precarious straits, the food price crisis rendered their deprivation even more dire.

The Asia-Pacific region, home to over half of the world’s population and to two-thirds of the world’s hungry, underwent a volatile rise in the price of rice beginning in mid-2008 when the cost of basic foods reached the highest levels in 30 years. The hike in food prices drove widespread anxiety over food accessibility and affordability worldwide.

In 2007 and 2008, largely due to this price spike, an additional 115 million people were pushed into chronic hunger. Since most of the world’s poor don’t grow their food, yet spend most of their income on food, they are particularly vulnerable to fluctuating market prices.

It might come as a surprise that declining world rice stocks were not the trigger for the 2008 price bubble. Around this time, there was no physical shortage of rice on the world market. In fact, overall world rice production reached a record in 2007 and hit a new high in 2008.

Why, then, did world prices spike so suddenly in 2008? The spike was due in part to an unfortunate convergence of events, including mistakes in trade strategy and policy made worse by panic, leading to food hoarding by governments, farmers, traders, and consumers across Asia.

In addition, a drought in Australia in 2006-07 caused wheat prices to spike, shifting global demand toward rice. High corn prices, due to increased ethanol fuel production, also shifted the demand to rice. The shift pushed international prices up, prompting several major rice exporters, especially India and Vietnam, to worry about their supplies and begin to restrict their exports in late 2007. The export restrictions, while not new for Vietnam, were maintained over a longer period. Egypt also banned rice exports in January 2008, followed by Cambodia implementing restrictions.

The spiraling situation was also exacerbated by political posturing. For example, Thai government officials openly discussed the possibility of export restrictions, which have not been used by Thailand in more than 30 years. The same Thai officials also floated the idea of organizing a rice cartel – called the Organization of Rice Exporting Countries (OREC). The sense of urgency over demand and price increases, further stoked by media hype, combined with general increases in a range of world commodity prices such as oil, corn, wheat, and metals, turned concern into panic and encouraged speculative impulses in the world market.

The real surge in prices, however, came in March 2008, when the Philippines, the world’s largest importer of rice, signaled that it would import 2.1 million tons of rice, much more than the 1.6 million tons expected, and would be willing to pay a substantial price premium for the additional rice. The Philippines’ attempt to increase its level of stocks during a time of volatile price fluctuations had an enormous impact on world prices, both in terms of actual actions as well as global expectations.

Japan, in effect, ended the crisis by bursting the rice price bubble when it announced that it would sell its excess rice stocks to the Philippines. The Japanese rice stocks – kept to fulfill WTO-sanctioned, U.S.-demanded requirements – were released following urgent, behind-the-scenes discussions among key WTO members. In the face of the announcement alone, panic in the rice market subsided.

This year food prices have declined dramatically, driven lower by the end of panic, the impact of the financial crisis, emerging world recession, falling oil prices, and an appreciating U.S. dollar. However, food prices are still high by recent historical standards. And the structural problems underlying the vulnerability of developing countries to volatile international prices remain.

The need to protect consumers from higher food prices must be balanced with maintaining incentives for steady and continuing productivity-raising investment in agriculture. Small-scale farmers in Asia continue to need assistance, particularly with their access to public goods that generate broad benefits for farmers and non-farmers alike: irrigation facilities and efficient water management, science-based production technology, extension and communication services, efficient transport, secure rights to land, access to financing, and rational, stable policies.

Prior to the food price crisis, the Asia-Pacific region had achieved some progress in reducing the prevalence of hunger from 20 to 16 percent, as well as a moderate reduction in hungry people from 582 million to 542 million. The food price crisis has nullified these advances. The largest increases in the number of undernourished people as a result of rising food prices have taken place in Asia and in sub-Saharan Africa. These two regions combined already accounted for 750 million, or 89 percent, of the hungry people in the world in 2003-05. The Food and Agriculture Organization of the United Nations (FAO) estimates that rising food prices have driven an additional 41 million people in Asia and 24 million in sub-Saharan Africa below the hunger threshold.

The 2008 rice price bubble serves as a timely reminder for how global economies are intimately interlinked, and yet still caught in protectionist constraints on trade and open exchange. Rising prices induced knee-jerk bans and supply controls, worsening instead of resolving the problem. Modern news cycles, focused on the immediate and emerging, fed speculative impulses. The same trade constraints that helped drive the spike in rice prices also underlie the pricking of the price bubble by the mere expectation – not the actual release – of additional supplies.

With the U.S. economy showing signs of recovery, and the UN reiterating the need to combat global poverty, the leaders at the G20 Summit have a full agenda in front of them, and hopefully the wisdom, as well as the courage, to take joint action on their agreements.

V. Bruce J. Tolentino is The Asia Foundation’s Director for Economic Reform and Development Programs. He served as Undersecretary for Policy and Planning of the Department of Agriculture, and concurrently as Executive Director of the Agricultural Credit Policy Council of the Philippines from 1986-1992. He can be reached at btolentino@asiafound.org.

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