Securing the safety net for working-age adults


Securing the safety net for working-age adults



Rising Food Prices – An Upside?

Editor’s Note: The Economist challenges its readers by proposing an Oxford-style debate on the global food crisis. Through a series of three statements—an opening, rebuttal, and closing—the proponent and opponent of the debate have the opportunity to argue their position and react to not only each others but also the readers’ comments and opinions. Homi Kharas, Senior Fellow at the Wolfensohn Center for Development, supports the proposition and makes his case against the opposition, Dr. Joachim von Braun, Director General of the International Food Policy Research Institute. The debate is moderated by John Parker, The Economist’s Globalisation Correspondent. The debate opens on Tuesday, July 29, 2008 and the winner will be announced on Friday, August 8, 2008.

To read and contribute to the debate, visit The Economist Web site »

The media sensationalises the impact of high food prices with images of hunger and civil unrest in far-flung places like Port-Au-Prince and Cairo.

But these images miss the point. The world needs more food and less poverty. In a market economy, higher prices provide the incentive to produce more.

Ever since Malthus there have been worries that exponential growth in global population will outstrip global food supplies. But Malthus was wrong. Only a small part of today’s demand for food is due to population growth, despite the fact that 90m people are being added to our planet every year. The bigger impact is felt from the rapid income growth in our $60-trillion global economy. Much of this growth today is in poor but populous countries, like China and India. As they become richer, they eat more food. A “chicken in every pot” is a realistic dream for billions of the world’s new middle class.

To produce this chicken demands an ever-increasing stream of feed-grains. The three drivers of demand for food—population growth, income growth and the shifting pattern of consumption towards meat—suggest that food output might need to be doubled in the next 30 years. This is the demand story.

For many years, food supply has kept up with and surpassed demand. Modern agricultural technology, based on cheap fossil fuels, delivered productivity gains. But for the last ten years, supply growth has faltered, and with high energy costs it cannot be put back on track. This was disguised for a time by running down mountains of grain stored in silos in the bread baskets of the world. But now it is clear that limits to agricultural expansion at the low prices of 2000/01 are being reached. The reality is that less than one-half of the world’s land area is suitable for agriculture and in net terms, the irrigated land area is falling. Soil erosion, salinisation, acidification and nutrient depletion contribute to declining land quality. Biofuel crops are taking away arable land from food. The world’s grain silos are emptying.

The good news is that higher food prices are exactly what is required to restore balance in the market. With rising demand and constrained supply the iron law of economics permits no other response. In a market economy, when demand exceeds supply, prices rise. Higher prices discourage consumption, but they also encourage more investment and enhance production.

Anyone who doubts the link between food prices and agricultural investment should take a close look at the stock price of the world’s largest producer of agricultural equipment, John Deere. While most US shares have taken a beating, John Deere’s share price has doubled and has split two-for-one in the last two years. High food prices are encouraging farmers to invest heavily in new equipment. This pattern is being repeated across the world, with investments in equipment, storage and land improvements.

More food is already being produced in response to higher prices: forecasts for cereals production in 2008 by the Food and Agriculture Organisation show a significant increase. This should come as no surprise. When prices fell steeply between 1997 and 2002, cereal production declined. Now that prices have risen back to the levels of the mid-1990s, cereal production has resumed its upward trend. Productivity is on the rise.

More profits for farmers does not mean a benefit to humanity. Some have argued that rising food prices hurt the poorest of the poor. The World Bank suggested that today’s higher food prices could push 100m more people into poverty.

Unfortunately, the World Bank’s flash estimate, which was based on an extrapolation from a nine-country study, has not stood up to scrutiny. The reality is that the impact of high food prices depends on each household’s income and consumption patterns. Beyond this, the impact also depends on what happens to labour, land and credit markets. As a further complication, domestic agricultural prices in most countries do not mirror world prices but also reflect government tax and subsidy policies. All these factors have to be taken into account to understand the impact of high food prices on household welfare.

The Asian Development Bank (ADB) has just completed a study including the three countries with the largest rural populations in the world: India, China and Indonesia.

Consider India, which has a long history of subsidising agricultural input and output prices. According to the ADB, this has led to a system which is “unproductive, financially unsustainable, and environmentally destructive; … (it) also accentuates inequality among rural Indian states.” Higher world food prices might be just the push needed by India, along with many other countries, to persuade it to reform its agricultural pricing system and provide new opportunities for its desperate farmers.

The ADB report also analyses China in some detail. It concludes that rural households in China should enjoy a significant reduction in the incidence of poverty as a result of high food prices. Although some urban households will be made worse off, these are the same households which have seen steady growth in wages in the last few years and have a middle-class living standard. In fact, a short while ago many analysts claimed that the greatest risk to China’s development was the growing gap between income levels in urban and rural areas. With today’s food prices, that problem has receded.

The outcome in Indonesia appears to be more mixed. Urban low-income and landless labourers would become poorer, while small and medium farmers would be better off. Indonesia has large numbers in both these groups, so many people would be affected. On average, the ADB simulations suggest that there would be about the same number of winners and losers, so average national poverty would remain unchanged.

It is surely true that high food prices will cause hardship to many. The suffering of those in Cairo, Haiti and much of Africa is real. The spectre of hunger is ugly. That cannot be denied and should not be forgotten. Nor should we leap to the conclusion that food prices at today’s levels are here to stay. But for the majority of the world’s poor, to be found among the 1.7 billion rural residents of India, China and Indonesia, the dream of a “chicken in every pot” is becoming more attainable because world food supply is rising again. That is the upside for humanity from today’s high food prices.