Rising food prices contributed to an acceleration of inflation across Asia in 2007, and in 2008, the further rise in food prices has reached alarming proportions. According to the latest paper by the Economics and Research Department of the Asian Development Bank, this accelerated inflation may be more structural then cyclical. This means that the repercussions of this situation may continue for more years.
The Problem
The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes--it hurts the poor the most. Concerns over high prices are mounting because inflation eats into real incomes and expenditures, and can undermine the gains from poverty reduction and human development that developing countries have achieved over the last decade or so.
Using unit-level household expenditure survey datasets of four countries (Bangladesh, India, Indonesia, and the Philippines), Rana Hasan, Maria Rhoda Magsombol and myself wrote the section on how the recent events are particularly problematic for the poor. The average share of food in total expenditure is inversely related to income across quintile groups: poorer population subgroups spend a larger share of their total expenditures on food than richer ones. As a result, the poorer population subgroups are more vulnerable to rising food prices.
As it turns out, the fact that the increase in food prices has been driven to a large extent by increases in the price of rice (more on this below) has a special significance for the poverty and distributional impacts of the recent increase in food prices in Asia. This is because of the large share of rice in expenditures--not just food expenditures, but also total expenditures--in Asian economies, especially among the poor.
And so the implication is obvious. The sharp rise in the price of rice, and food more generally, across Asian countries can be expected to wreak havoc among the lower-income groups. In particular, it can be expected to increase the misery of those who are already living below the poverty line. Worst, it can be expected to drive the nonpoor into poverty.
The Causes
Structural factors are fundamental in explaining what has happened to international rice and food grain prices in recent years. Falling global stocks of rice and other cereals are indicative of the fact that production growth has fallen below consumption growth for several years. In addition, the current steep increases in the price at which rice is traded in international markets reflect not only shortfalls in production relative to current consumption, but also reflect the attempt of economies to rebuild stocks themselves, putting even greater upward pressure on demand relative to supply.
Looking at the demand-side factors:
1. Growing world population and strong income growth in emerging economies around the globe. (The second factor is associated with dietary change toward higher-quality food such as mean and dairy products: production of these requires large amounts of grains in the form of livestock feed).
2. Competing use of food grain to produce ethanol as a substitute for oil (i.e., BIOFUELS). Biofuel demand is rising and is leading to diversion of grain, soybeans, sugar, and vegetable oil from use as food or feed.
Among the supply-side factors:
1. Urbanization and competing demand for land for commercial purposes, instead of agricultural.
2. Cropping patterns away from food to biofuels may also reduce the available supply of land devoted to food.
3. Most important, neglect of investment in agricultural technology, infrastructure, and extension programs (e.g., financial) is also to blame for the tepid growth in the supply of rice.
The Solution
In the long run, the notion of food security should move beyond the relatively static focus on food availability and access, to one of higher productivity. As the majority of the poor in developing Asia live in rural areas and depend on agriculture, higher agricultural growth will provide food security by increasing supply, reducing prices, and raising incomes of poorer farm households.
But yields of food crops in most of Asia remain low in comparison with other major producing countries, which is attributed to:
1. Poor crop management skills of farmers.
2. Use of cheaper (and low quality) seeds.
3. Lack of agricultural infrastructure and postharvest technologies to ensure high recovery of harvested grain.
4. Limited research and the gap between available research and practical applications.
5. Inadequate funding for research and development.
Much neglected agricultural sector reforms need to be put into place to promote the use of modern technmology, new seed varieties, and better financial systems.