How Can Governments Better Respond to Global Food Price Fluctuations?
Much of UNU-WIDER’s research in the last few years was initiated under the 2010-13 work programme on the triple crisis of finance, food, and climate change. The financial crisis from 2008 onwards has received massive worldwide attention. This year, efforts will be made to negotiate an internationally-binding regime to limit climate change. So where does that leave food?
There are of course many jokes about history repeating itself—one is that it has to, as no one listened the first time. In 1993, the great economist J.K. Galbraith published a book with the wonderful title ‘A Short History of Financial Euphoria’, warning of the way in which excessive enthusiasm for investments (whether in the South Sea, or in tulips, or in other commodities) keeps leading to financial crashes—but we had another one in 2008 centered on banking and the property market.
Could food prices be the next venue for such a crisis? If there are sudden spikes in food prices, how can repetition of previous mistake be avoided?
Box 1 - Policy seminar: Food price policy in an era of market instability - a political economy analysis
Chief Guest: Professor Bibek Debroy, National Institution for Transforming India Aayog
Professor Bibek Debroy, National Institution for Transforming India Aayog
Dr Rajat Kathuria, Director and Chief Executive, ICRIER
Professor Finn Tarp, Director, UNU-WIDER
Professor Per Pinstrup-Andersen, World Food Price Laureate and Senior Non-Resident Research Fellow at UNU-WIDER
Professor Prabhu Pingali, Cornell University
Professor Ashok Gulati, Infosys Chair Professorfor Agriculture, ICRIER
A major study has now appeared compiling a series of national case studies—mainly from the global South, but also including the USA and the EU—as well as a comparative analysis. Per Pinstrup-Andersen, the project leader and editor of the book, fresh from launching it at USAID in Washington DC, followed up with an event in Delhi, hosted by the prestigious Indian Council for Research on International Economic Relations–ICRIER (see Box 1 for participants).
How did policymakers respond to the food crisis in 2008?
The evening began with Ashok Gulati posing the dramatic question – what happens when food prices go up by 60-70% in a short space of time? What do policymakers do? Per Pinstrup-Andersen suggested that to answer this question we need to understand the motivations of policymakers. Without this understanding, we cannot influence policy.
In the 2007-8 crisis governments basically followed two types of policy: either to attempt to de-couple the domestic prices from the world market or to compensate particular groups in society in order to maintain the legitimacy of the government. In the latter cases it was often a response to food riots in the capital city, which represented a significant threat to a government. Lower-middle-class urban dwellers had the capacity and opportunity to organize in a way which the rural poor did not have. Governments claimed to be supporting the poor but were interested in securing their own survival.
Most of the policy interventions came late and were ad hoc crisis responses. Price controls did not work in any of the countries reviewed. Removal of value-added tax (VAT) and short-term supply management did work in some cases. The interventions made were often costly. This was the case both in terms of fiscal costs (eg export bans, import tariffs and elimination of VAT), and also programme costs. In cases where programmes had not existed before the crisis, they were removed soon afterwards.
A careful political economy analysis of responses also shows clearly that governments are not unitary actors and that the decision-making was a response to conflicting arguments and debate within government. This is an important aspect for understanding policy and as is noting the time taken to reach decisions. Governments showed a high-level of path dependence – in other words, they responded to price rises in international markets in similar ways to earlier price spikes.
What can be done better?
Pinstrup-Andersen outlined some of the policy proposals which have emerged. These include the need to protect price signals and allow them to work. Better targeting of interventions and better risk management tools are required. Whereas governments concentrated on moderating food prices and compensating selected groups of consumers, a more considered response of promoting structural change in the agricultural sector would have been desirable. In future, reduction of fiscal costs of interventions and improvements to rural infrastructure are needed. Further findings indicate that the following steps are key if governments are successfully deal with food price policy crisis:
• Strengthening the policy-relevant evidence base
• ensuring appropriate use of trade policy and careful interference in price
• reducing the fiscal costs of short-term interventions
• investing to increase food supply elasticity
• creating effective risk management tools
• improving the management of public sector grain stocks (see more)
Guest of honour and key respondent Dr Bibek Debroy presented an energetic argument that liberalization in agriculture was a necessary task which was still ahead of India. Ashok Gulati called attention to the alarmist responses by international organizations and commentators (including the FAO, IFPRI and Jeffrey Sachs) and the high cost of storing huge grain supplies. He underlined the importance of allowing price transmission into the domestic market in India. Prabhu Pingali pleaded for a redefinition of food security, not as Indian domestic self-sufficiency, but rather as nutrition security to address one of the highest rates of child malnutrition in the world. Access to food in terms of capacity to buy in the market is not enough.
To the visiting observer, it was quite clear that the discussion had a strong domestic political flavour, underlining the importance of presenting research findings in the countries where the case studies have been conducted. Quite simply, a discussion of this kind in one of the focus countries in the global South has a quite different urgency from one in a European capital. The event has been filmed and will be made available on the UNU-WIDER website.