Increasing food prices: Increases poverty levels

PART II It is estimated that, 25,000 people world wide die from hunger related diseases and also that food accounts for half of the poor family’s expenditure, which therefore means that, any increase in food prices (leaving incomes constant-which is normally the case) pushes many people into poverty. It is equally estimated that, more than eight hundred million people in the world are directly affected by increasing food prices, while the World bank estimates that, such high prices will push as many as 100 million people into deep poverty, and that unless massive efforts is marshaled to reverse this problem, it would translate into seven years loss over the cause of fighting poverty.

PART II

It is estimated that, 25,000 people world wide die from hunger related diseases and also that food accounts for half of the poor family’s expenditure, which therefore means that, any increase in food prices (leaving incomes constant-which is normally the case) pushes many people into poverty.

It is equally estimated that, more than eight hundred million people in the world are directly affected by increasing food prices, while the World bank estimates that, such high prices will push as many as 100 million people into deep poverty, and that unless massive efforts is marshaled to reverse this problem, it would translate into seven years loss over the cause of fighting poverty.

However, given that a number of African countries had posted averages of 5.4% growth rates for a couple of years, means that such growth rates may not be achieved if high food price taken care of, both in the short and long-term. This is even more serious considering that, of the 36 countries now believed to be facing food crisis world wide, 21 are in Africa.

Food imports are expected to top more than US 1 trillion this year, and most economically vulnerable countries which import most of their food requirements will see costs rising between 40%-80% which as pointed out in the earlier article, will push these countries’ budgets off balance and re-orient them to food financing rather development financing.

Bad news is that, food prices are unlikely to return to their low levels mainly owing to the oil price effects.

Oil price which now stand at US $ 130 per barrel, are key input to the production of fertilizers.

This has seen the costs of fertilizers increasing to be between 30%-60% depending on the type.

The high cost of fertilizers are past on to farmers who also pass the same on to final consumers.

Developing countries in Africa will thus see cost of food inflation persisting for sometime now, until the pressure on price oil eases, which is not predicted in the short-run.

Nonetheless, the effect of food crisis on poverty has been highlighted in a number of empirical research done so far.

Available research indicates a high correlation between high food prices and poverty levels.  This evidence suggests that, a 10 percent increase in the prices of imported goods has the impact of rising poverty levels by 1.8 percentage points.

Further research indicates that, increasing the price of maize by 10 percent would raise poverty levels in Zambia and Malawi by 0.8 and 0.5 percent respectively in rural areas, and 0.3 percent in urban areas, and a further 0.5 percent nationwide in both cases.

When the prices of all staples increase by 10 percent, poverty rises by 0.6 and 1.1 percent in rural areas in Malawi and Zambia respectively.

The above empirical evidence are not mere numbers, but highlight the seriousness with which increase in food prices have to be taken, if developing countries are to avert poverty crisis associated with these increases.

Food crisis takes on a human face in the sense that, such increase in poverty levels will see many dieing of hunger, many children malnourished, and stunted growth ensues if no measures are immediately put in place.

Elsewhere, according to research done by Asian Development Bank, titled “Living with High Prices”, estimates that, recent increase in world food prices may cause an additional 5 peer cent of low income households in some pacific nation countries to slip into poverty in 2008.

In case of Africa, where statistics are either none-existent or politically loaded, the figures could higher.

In the meantime Agriculture and Trade ministers of ECOWAS (Economic Community of West African States) have meet to chart out a common policy framework to ensure that this crisis is tamed before it gets out hand.

Their counterparts in Eastern Africa could borrow a leaf from this move, since this  problem has taken on an international dimension which also requires international effort and should bring most trading blocs COMESA, SADC etc to harmonize their agricultural policies so as to ensure food security and safety.

This problem was not un expected when one considers that, many developing countries in Africa have under invested in Agricultural sector and multi-lateral and bilateral international institutions have not been helpful to this end.

As pointed out in earlier article, developing countries in Africa should assume their responsibilities when it comes to policy formulation and policy management and multi-lateral or bilateral institutions should only complement/supplement these efforts.

The failure of “Washington consensus” to induce development of Africa (though not a surprise) is a text book case of policy failure.

The Washington consensus has been premised on the belief that all economies are similar and, as such, should respond in a similar manner to the same policy prescriptions.

Experiences in developing countries of Africa has negated this flat assumption as there are no two similar countries, not even two similar regions of the same country; to warrant similar solutions.

Thus, markedly different policies and markedly different policy mix, is appropriate to different countries at different times.

This is true if policy intervention to be designed by different countries/multinational institutions targeting food crisis are to bear desirable outcomes for what may work in Rwanda, for instance, may not necessarily work in Kenya. 

This is important to the extent that economic agents especially in private sector respond to, and are influenced by policy designs and will take their actions after through analysis of implications public policy to their activities.

The time when African countries were directed in policy formulation (by way of one size fits all approach) by multilateral or bilateral international partners is way gone (was a period of total failure, failure acknowledged by even their own economists) nor can such African countries blame colonialists (as has been the escape goat) for policy failure.

It is therefore imperative that, food crisis and all its implication to their underlying economies be owned wholly by developing countries in Africa, and measures be put in place to mitigate it. 

What is interesting however is that, Nepad had prescribed that African countries invest at least 10 percent of their budgets in Agriculture, although none if any, has achieved this target.

AU pronouncements and various communiqués have amplified this too. COMESA’s CAADP (Common Agricultural Development Program) has been vocal on the above, but no progress has been made on this important arena of their development.

As pointed in the earlier article, the problem with policy failure in Africa has been due to three factors, all of them interrelated and critical.

First and perhaps most important, is lack or weak political will among the African political elite to pursue such policies.

Secondly, is the quality of human capital required to implement such policies which is wanting, and lastly is the lack of social capability to undertake such policies.

As long as these critical factors are lacking, (as they do in most African countries) we can only expect minimum policy out comes for some time.

Although some of the factors contributing to global food crisis were advanced in the previous article, it is worth highlighting yet others which put together will amplify the root cause of the problems against which policy measures can be designed.

One major problems that has contributed to this crisis is the nature of global trading system especially in agriculture which is seriously distorted through subsidies given by western governments to their farmers.

Although this has been one of the major hindrances to concluding Doha round WTO negotiations, it is nevertheless seen as the one of the cardinal factors that has lead to this crisis.

Western countries especially USA and some European countries have for some time now heavily subsidized their farmers and dump their surplus produce in developing countries especially in Africa, where these are then cheap substitutes of local products.

This has lead to de-motivation of local farmers who finds it expensive to produce similar products and have virtually withdrawn from the production of these agricultural products.

One world bank study estimates that, rich countries subsidies have costs poor farmers in developing countries approximately US $100 billion, and considering that development aid to these very countries was estimated to be slightly over US $ 100 billion, simplistically means that, developing countries were ‘aiding’ rich countries through tolerance of highly distorted global trading system in agricultural products.

It is thus estimated that, USA paid close to US $ 180 billion in farm subsidies over the last twelve years, where as European Union pays US $ 87 in farm subsidies under the EU’s common agricultural policy.

These subsidies have meant that, exports of such foodstuffs as corn, cotton from USA is approximately 70% subsidized which also means that, these prices under cut similar local products by the same margins.

European sugar has also been exported to developing countries in Africa under almost similar subsidized rates which under cuts prices of local produced sugar by the same margins.

All this has meant that, local African farmers cannot find markets for their produce unless such distortions are addressed.

The other factor also related to the previous factor is that, there has been underinvestment in agricultural industry in most developing countries based on the false assumption that, prices of imported foodstuffs would remain cheap, and as such agriculture was not made a priority sector worth committing both country budgets nor multilateral or bilateral donor funding. 

Coupled with the underinvestment in agriculture, is an even major problem of underinvestment in infrastructure which should link food production points to end users especially in urban areas.

This is a supply side constrains that needs to be a dressed especially in East-Africa where rural road networks last saw their pavement during colonial era.

As countries put in place measures to boost food supply, infrastructure challenges may challenge any measures designed in the short-run as these are costly both in monetary terms and period it takes to address them.

Yet addressing the linkage between production and consummation centers is crucial even in case of our country if this problem is to have a sustainable solution. In case of Rwanda, creating transparent marketing structures, communication and transport systems are key to solving this problem.

And although Rwanda overall, has unlike other countries, not encountered such a crisis, nonetheless pro-active measures need to be put in place to avoid its impact in the medium term especially through price complimentarity effect of imported food stuffs on local products.

Thanks to the pro-active measures of fuel subsidies put in place by our government for sometime now, such a crisis has been averted at least in the short-term, but given the nature and the volatility of commodity markets, being complacent would be catastrophic.

E-mail: mnshuti@yahoo.co.uk

 

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