Reinvesting in Agriculture to Reduce Poverty

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 opened 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 »

High food prices are the result of supply being unable to keep up with demand, given today’s costly technology.

They are an easy scapegoat but are not responsible for hunger and malnutrition in the developing world.

Government interventions and distortions in food markets have been with us for decades. So have the problems of hunger and malnutrition in the developing world. During a 30-year period of declining food prices from 1973 to 2002, these problems got worse, not better, in many countries.

The prolonged period of low food prices did very little to reduce poverty and hunger, especially in Africa where it is most intransigent. According to the United Nations, more than 20% of children under five were severely or moderately underweight (the UN’s indicator of hunger) in 2000-04 in most of sub-Saharan Africa and in several countries in Asia. There has been very little progress in Africa over the last decade.

Low international food prices were partly to blame. By the mid-1990s, rice production in Africa was being outstripped by population growth. Africa had to use scarce foreign exchange to import rice and household food consumption did not grow. African conditions were not suitable for high-yielding Asian hybrids and African high-yielding varieties were not developed and distributed. African food production per head has declined by 12% since 1980.

Falling production is the inevitable response when private producers are faced with falling prices. But governments also responded by cutting their investments in agriculture. As real food prices fell from 1975 onwards, the growth rate of public investment in agriculture fell in every region in the world. The fall in developed countries was most dramatic: from 1991 to 2000 real growth was negative. In Africa in the 1990s, it averaged just 1% per year. USAID support for agricultural science in Africa has been cut by 75% over the last two decades.

In an assessment of declining African food production, Joachim von Braun’s own organisation, the International Food Policy Research Institute, singles out “poor infrastructure, high transport costs, limited investment in agriculture, and pricing and marketing policies that penalized farmers”. That is code for saying that prices were too low. Low food prices meant that rates of return on proposed projects in roads, irrigation and marketing infrastructure were too low to justify investment. Africa’s poor farmers simply could not compete when international food was so cheap.

At today’s higher food prices, which correspond to the same real level as in the 1960s and 1970s, many new opportunities present themselves. The Gates and Rockefeller Foundations created an Alliance for a Green Revolution in Africa in 2006, with significant funding to improve seeds and soil. They are trying to replicate the successful Green Revolution which helped large parts of Asia defeat hunger in the 1970s. Writing about that success, Norman Borlaug, Nobel Laureate and the father of the Green Revolution, credits the Indian government’s decision to drop price controls on food to restore market incentives to a point where farmers would rapidly introduce the new varieties. It was high food prices in the 1960s and 1970s that helped initiate and sustain the Green Revolution and there is every reason to suppose that high food prices today can serve as a prologue for a similar revolution in Africa in the years to come.

While some of the recent increase in food prices can be traced to policies like the promotion of biofuels, most of the increase is due to higher input costs and the need for more supply. My opponent notes that with rising energy prices, farmers are paying much more for fertilisers, high-yielding seeds, livestock feed and transport. He is absolutely correct, but does not take his argument to its logical conclusion. In any business, when input prices go up substantially, output prices must also rise or bankruptcy results. If we accept this argument, as I believe we must, then it is inevitable that higher food prices must accompany higher energy prices. Surely no one suggests that we should return to a world with oil prices at $20 per barrel, with the destructive effects that these have had on our environment, yet that is the only logic for those vainly wishing for a return to the low food prices of 2001.

Mr. von Braun claims that because most small farmers in the developing world are net buyers of food they will lose from higher prices. That is a static argument. It does not incorporate the supply response that would surely follow. It is also a general statement that tries to aggregate together farmers facing very different market situations. I have already cited some academic studies that model the supply response in specific country circumstances and find that in several large countries the positive supply response on incomes dominates the negative impact on consumption of higher food bills. Here is another example of academic research supporting this viewpoint. The Carnegie Endowment for International Peace released a study this year on the impact of a 50% rise in world rice prices on India. It concludes that India’s rural population of 700m would benefit from this increase. The relative income of the poorest rural households would rise by 4.5%, while the most marginalised groups, like scheduled tribes, would have a 6.4% increase in real income.

Mr. von Braun deplores the change in the status quo that higher food prices represent. The real point is that the status quo of low food prices was itself the problem. The World Bank president, Robert Zoellick, called the hunger and malnutrition goal the “forgotten MDG”, a silent tsunami that threatened humanity. Now the alarm has been rung and misguided agricultural policies are being rectified. As Paul Romer, one of the leading economists of our generation has said on another occasion, “A crisis is a terrible thing to waste”. There is every hope that changes in trade policy, investment in agriculture and more agricultural science and technology—all of which are called for by Mr. von Braun—will result from high food prices. The World Bank has already announced $350m more in agricultural support for Africa next year. As we would expect, none of this happened when food prices were low.